Mortgage rates have fluctuated quite a bit since the beginning of the COVID-19 outbreak. On March 27, the Bank of Canada announced a cut to the target overnight rate of 0.5 per cent. This was the third such cut in March, after a scheduled cut on March 4 and an unscheduled cut on March 14, leaving the target overnight rate at 0.25 per cent.
Several of the big banks have passed on these rate cuts by dropping their prime rates, although some rates did rise between the two emergency rates cuts in March. These cuts, which pushed the prime rate from 3.95 per cent to 2.45 per cent, have made variable rates lower and mortgages more affordable.
Liquidity is a key issue for the federal government right now. In mid-March, the government announced changes to help provide “stable funding and liquidity to financial institutions and mortgage lenders” to support continued lending to Canadian businesses and consumers. But, as the government notes, every bank is different—their rates depend on their balance sheets.
With new mortgage deferral rules and less people working, the banks have seen a decrease in deposits, putting added pressure on cash flow and forcing an increase in fixed rates.
Six of Canada’s largest banks—including RBC, TD, BMO, Scotiabank, CIBC, and National Bank—are now allowing mortgage payment deferrals of up to six months and relief on other credit products.
Many smaller mortgage providers are also offering mortgage deferrals. If you haven’t already, contact your lender to find out what they are offering during this time.
Taking advantage of a mortgage deferral isn’t something to be shy about. In fact, at the beginning of April, more than 500,000 requests for mortgage deferrals had been processed.
A deferral isn’t to be confused with a forgiven or eliminated payment. There are no additional fees or costs associated with this type of deferral, aside from the interest calculation. You don’t have to worry about a hidden agenda by lenders here—although each lender has their own version of the interest calculation and resulting amortization, it should not have a material impact on the overall interest paid on the life of your mortgage.
Because this is a relief effort in light of the pandemic, the government has put a lot of pressure on lenders to not scrutinize homeowners who choose to take advantage of mortgage deferrals. For example, rental property mortgages are now eligible for this program.
With the majority of lenders, you’ll be asked to answer two or three questions to prove your eligibility, such as: have you been financially impacted; has someone in your family been financially impacted; has your employed been impacted? You won’t be required to present documentation prior to the authorization.
Because this is a fluid situation, lenders are constantly changing their tone and processes for approving deferrals. Plus, with so many homeowners eager for answers, they’re overrun with inquires, so remember to pack your patience.
If your mortgage is tied to a bank, try contacting your branch representative first or visit the branch in person if you’re able to. If that fails, brew a pot of coffee (or pour a stiff drink), dial 1-800 line and be prepared for a long wait.
Lower advertised rates tend to tease homeowners a little. It’s easy to see a lower rate and assume you will save money in the long run—but it’s not just about comparing rates. The conversation is much more involved than that.
There are always costs associated with breaking your current mortgage, so you should work with a broker to evaluate those costs in relation to the long-term savings of that lower rate.
You should be asking questions like: Will I be saving in the long term to break my current mortgage terms and secure a lower rate? If I restructure my existing high-interest debt and roll it into my mortgage, will I be able to pay down my debt faster and more effectively?
In all cases, the answer to whether or not you should switch or refinance your mortgage is entirely dependent on your unique financial situation. The best step forward is to sit down with a trusted mortgage advisor and weigh the costs and benefits before making any changes.
Given the current uncertainty, it’s only natural that lending requirements become a little more stringent for those who have been impacted financially by the pandemic.
Lenders are still qualifying based on confirmation of income. So, whether you are a first-time buyer or you’ve been through the process before, lenders will want to make sure you’re actively employed and your broker will need to prove longevity and continuance of income. If you have been temporarily laid off and are collecting CERB this may impact your application.
If you are self-employed, your broker should work with you to gain an understanding of how your industry is being impacted by the current circumstances—have you moved your service offering to a platform where you are able to continue to generate income, for example?
The same is to be said for Home Equity Line of Credits (HELOCs). While a HELOC offers great opportunities for clients to tap into equity and savings in their home, securing a HELOC in the current environment often requires that you qualify at a higher rate. Lenders are doing a bit of additional due diligence in preparing for the financial climate post-COVID by ensuring that clients aren’t overleveraging themselves.
It’s important to remember that lenders are qualifying clients on a case-by-case basis. Working with a mortgage broker to build a business case for your unique situation is your best bet. It may require a bit more documentation, such as confirmation of net worth and asset fallback. But you would still be qualified based on your income.
No matter what your situation, when shopping for a mortgage during these unprecedented times it’s more important than ever that you’re working with a mortgage broker to provide clarity on what the requirements are.
In order to have peace of mind during the conditional period, you’ll want to work closely with your broker to ensure all conditions of the mortgage commitment are satisfied before you waive your financing conditions. You can’t put a price on peace of mind—especially in times like these.
Because of the fluidity of this situation, things are changing every day. Moving forward, we need to ensure there is a focus on keeping Canadians in their homes, which means there may need to be additional supports and adjustments for long-term mortgage rules, post deferral program. However, it’s unclear when and how those changes might take shape.
If you have questions about how COVID-19 will impact your affordability, your best option is to get in touch with a mortgage broker you trust. Remember, everyone’s financial situation will be impacted different—there is no “one size fits all” approach!
This blog post is written by guest blogger, Rakhee Dhingra, CEO Mortgage Broker, Mortgage Savvy.
Rakhee Dhingra started Mortgage Savvy in 2015, making it her mission to challenge the transactional nature of the mortgage industry and focus on relationship building instead.
Rakhee and her team can be reached at 416.720.7295 or find her online https://www.msavvy.ca
