A string of interest rate cuts by the Bank of Canada to help offset economic shocks from the coronavirus pandemic have made variable mortgage rates more enticing.
There’s been a massive surge of interest in refinancing mortgages. According to rate comparison site LowestRates.ca, the total rise in refinancing mortgage quotes through its site in March 2020 compared to February 2020 was 389%.
Prior to the interest rate cuts, fixed-rate mortgages offered lower rates. According to another rate comparison site, Rates.ca, the lowest nationally advertised uninsured 5-year fixed rates are down 20 bps, from 2.84% to 2.64%. The lowest nationally-available uninsured variable rates are down 59 bps, from 2.89% to 2.30%.
Rob McLister, mortgage expert at Rates.ca, says fixed-rates could drift lower but refinancing now can make sense for people who want to lower rates or payments, consolidate debt, add a home equity line of credit (HELOC), or take out equity for a valid purpose. He says crunching the numbers should be the first step before getting the ball rolling.
“Check how much you can save over your existing term by moving to a lower rate, see how much you can save by rolling in debt, subtract any early breakage penalties, subtract roughly $1,000 of closing costs and add back any cash rebates from the lender or broker,” McLister told Yahoo Finance Canada.
He says penalties are generally 3-months' interest on variable-rate mortgages and the greater of 3-months' interest or the interest rate differential (IRD) on fixed-rate mortgages.
Once you’ve decided to pull the trigger, be aware that the process won’t necessarily be easy. McLister says banks are prioritizing new purchases and refinancing applications. They could also ask you to verify employment, which for millions of Canadians is precarious because of COVID-19.
“If you want a prime mortgage at good rates you'll need a 680-720 credit score minimum, provable income in an industry that's not at risk, a reasonable debt ratio (your monthly obligations divided by gross monthly income must be less than 40-44%) at least 20% equity plus enough equity for any debt you want to roll in or cash you want to take out,” said McLister.
Despite lowered interest rates on credit cards, a HELOC offers drastically lower rates — making them a useful source of funds if used responsibly. But McLister has a warning for anyone refinancing to get a HELOC.
“We commonly see people making the mistake of adding a HELOC and using it to overspend, taking out equity and blowing it, not being able to handle their new payments after an equity take-out and paying off high-interest debt only to rack up their plastic again.”
Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.