Coronavirus and refinancing your mortgage
The COVID-19 pandemic and looming recession actually makes this a wise time to look at refinancing your mortgage. Here's what you need to know.
We’ll continue updating this page with resources and information as new details emerge on how Canadian leaders and businesses are responding to COVID-19.
Anything you can do to save money right now will protect you from the worst economic effects of coronavirus. If you have a mortgage, refinancing (which means switching) to a new, better mortgage could save you a lot of money and help you get your biggest debt under control.
Here are three reasons to think about refinancing now and some tips on how to do it in the middle of a pandemic.
Rates are very low… for now
It’s simple: a lower interest rate means lower repayments. The Bank of Canada has lowered the official policy interest rate by 0.50% three times in the month of March alone. This has driven interest rates on variable rate loans down to historically low levels.
Fixed rate loans are also incredibly low now, with offers from some lenders going as low as 2.59% to 2.84%. In short, there has never been a better time to refinance your mortgage.
Coronavirus and its economic effects are a big driver behind the lower rates, but even if the pandemic ended tomorrow refinancing may still make sense.
Here’s an example. Let’s say you haven’t looked at your mortgage for a while and your interest rate is 3.49%. Let’s say that was the lowest you qualified for in March 2019. Fast forward to March 2020 and you can find variable rates as low as 2.59%. That’s a huge difference.
Scenario: how to refinance and save $2,880
- Loan amount: $500,000
- Amortization period: 30 years
- Interest rate: 3.49%
- Monthly repayment = $2,235.44
- Loan amount: $500,000
- Loan term: 30 years
- Interest rate: 2.59%
- Monthly repayment = $1,995.45
Your monthly saving by refinancing in this scenario is about $240, or $2,880 a year. That’s money you can save or even use as extra repayments to pay off your loan faster (or put it into an offset account for the same effect).
An interest offset mortgage will save you money and act as a buffer
Economic uncertainty and growing unemployment are major effects of the coronavirus pandemic, but your mortgage could be one way you protect yourself financially.
Is your current mortgage an interest offset mortgage? If so, you’re already in a good position. If not, consider switching to one.
An interest offset mortgage is basically an open line of credit for your mortgage. Every dollar payed onto the line of credit temporarily offsets your loan principal, and interest on the line of credit balance is calculated daily. So if your outstanding loan balance is $200,000 but you put $10,000 on your loan, your lender will charge interest based on the offset amount, or $190,000.
So you pay less interest over time. But if you need money suddenly, because your income has fallen or you’ve lost your job in a recession, you can borrow from the line of credit as needed to cover your expenses. Be aware that because interest is calculated daily, you’ll start getting charged interest on the same day you borrow from your line of credit.
It could be time to rethink your strategy
Coronavirus is wreaking economic destruction. Now more than ever, it’s vital that you look at your mortgage, your home and your property strategy. This is true for everyone but especially for investors.
Some borrowers opt for interest-only loans. This lowers their mortgage payments in the short term to potentially redirect cash flow to more lucrative investments.
But with the coronavirus shutting a lot of things down, it looks like many investments aren’t going to bounce back and offer big returns for a while. If you’re in this situation then refinancing to a principal and interest loan will help you pay off your actual debt and own more of your property. This acts as a buffer if housing prices drop heavily or you’re unable to find a tenant.
This is just one example, and even in this situation you might judge that the interest-only option is still better for you. But now is the perfect time to take stock, read up on the market and make sure your mortgage matches your property strategy.
How to compare, apply and switch
Refinancing requires a whole new mortgage application. There’s paperwork involved and lots of documents to sign. It’s at least a few hours’ work but the savings are well worth it. Here are the basic steps to refinance:
- Compare rates. You’ll have to find a lender that can offer you better rates than what your current lender is offering. To do this, you can request quotes from providers individually or you can contact a mortgage broker who will do the heavy lifting for you.
- Submit an application. Once you’ve found a lender that’s willing to give you a mortgage, you’ll need to submit a formal mortgage application. You’ll usually need to do a credit check as part of this process so that the new lender can assess your creditworthiness.
- Negotiate the details. You’ll want to negotiate the terms of your mortgage contract in the beginning. This can include specifying what interest you’ll pay, how often you make your monthly payments and whether or not you can pay your mortgage out early.
- Provide a payout statement. Once you’re approved by your new lender, you’ll need to request a payout letter from your old lender. This document will state how much you owe on your mortgage as of your renewal date.
- Pay your fees. The last step in switching your mortgage over is to meet with your new lender to pay any fees that might be due. Your new lender will then pay out your mortgage with your old lender and issue you a new mortgage.
Online home loan applications during coronavirus self-quarantine
Getting a mortgage requires a lot of face-to-face contact with brokers, lending specialists at bank branches and even a conveyancer. But personal contact is very hard to do when self-isolation is in effect.
Going with an online lender makes a lot of sense during coronavirus. With these lenders you can input almost all your details online and get support by phone and email. They often have the cheapest rates on the market too.
However, most lenders and brokers are abiding by physical distancing guidelines and have strong phone and online support as well. But keep in mind that even with the most tech-savvy digital lenders, you’ll likely still need to physically print and sign some forms and have them witnessed. These processes are all harder to complete thanks to coronavirus.
Compare competitive rates and refinance today
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