With mortgage rates bottomed out, it's time for homeowners to take advantage
For most people, their home is by far their largest expense. So when the coronavirus pandemic arrived, that’s where Canadians needed the most help.
To soften the financial blow, the Bank of Canada slashed its key policy rate three times in March. It’s held steady at this “effective lower bound” ever since.
The current predictions that rates will stay this favourable for up to two years, based on Bank of Canada trends.
At the same time, she says, there’s no reason to wait around for a better deal: “I would be surprised if they lowered much more than a quarter point.”
If there’s ever been a time for homeowners to refinance, it’s now.
What is the point of refinancing?
Whether you’re looking to save on interest over the coming years or reduce your payments now, refinancing can help.
When you refinance, you open a new, better loan and use it to pay off your existing mortgage. You’ll have to pay a penalty for breaking your old agreement, but this single financial move can make a huge difference if you’re struggling to pay your bills.
Refinancing is not a free-for-all where you tap into your equity and live large, he says; it’s more about creating a new financial plan that will help you save and succeed.
How do I know if I should refinance?
If your mortgage rate is higher than 3 per cent — or 0.75 per cent higher than the rates you can get now — you’ll definitely want to calculate your potential savings.
Let’s imagine you have a $500,000 mortgage with a 4 per cent fixed rate and an amortization of 20 years. The total interest you’d pay over a five-year term would be $90,634.
The interest for that same mortgage at 2.69 per cent would be $60,374. So by refinancing, you’d save $329 per month, $6,392 per year and $31,960 over the full length of your five-year term.
That extra financial wiggle room can free up cash for an emergency fund or help you afford the essentials while the economy — and maybe even your own job security — remains uncertain.
Unfortunately, anyone who has lost their job due to the coronavirus lockdown will struggle to qualify for refinancing. Since you’re opening a totally new loan, you have to provide evidence that you can make regular payments.
If you’re denied, you’ll need to look elsewhere for support. Lenders are allowing homeowners to defer their mortgage payments during this trying time, but it’s not a perfect solution. In most cases, those loans will continue to generate interest while on pause.
When is refinancing a bad idea?
Penalties can cost up to 4 per cent of a fixed-rate mortgage or three months of interest payments in a variable contract, but you’ll have to check with your lender about your particular case.
And remember that if you want a great deal, you’ll probably need a credit score of at least 660. You can check your credit score for free online; if your score is low, it’s a good idea to try to boost your numbers before you lock in a new rate.
How do I choose the best option?
When buying a home or refinancing, you need to think about both your income and your financial comfort zone.
Conservative personalities will prefer a fixed rate and pay a bit more for peace of mind and a predictable monthly budget. If the prime rate rises during your term, you won’t pay a penny more.
If you want the best bargain possible, a variable rate tends to be the better choice.
From a purely math perspective, variable is the way to go right now and has generally been the product that wins the tug-of-war” when you look at trends over time.
If you’re flirting with a variable rate, remember that you can ask about converting to a fixed rate in the future. If interest rates start to increase during your term, you can make the switch without penalties or extra costs.
Major banks are offering variable rates as low as 2.25 per cent right now, while fixed-rate mortgages start at 2.54 per cent. Other lenders are going even lower.
To find the best money-saving option, be sure to compare rates from multiple lenders.