The COVID-19 pandemic hasn’t just affected millions of Canadians financially, but it has also sent the global economy spiraling. Many Canadians have already lost their jobs and the housing market has taken a major hit, which has led to concerns that the mortgage process will be affected, too.
Now more than ever, people are rushing to refinance their mortgages and provide themselves with a bit of a safety net. But is mortgage refinancing during COVID-19 really the right move?
The answer is that it strongly depends on each individual’s circumstances.
Here’s a breakdown of whether you should refinance your mortgage now and a few of the benefits of mortgage refinancing during COVID-19.
What Does It Mean to Refinance a Mortgage?
Mortgage refinancing is the process of breaking out of your current mortgage term and starting a new one, either with the same lender or a new lender.
Typically, your old mortgage will be paid off by the new mortgage, which gives you the chance to change some of the conditions in your original contract or borrow some extra cash in the process.
You’ll likely be charged a penalty for breaking your mortgage contract early, which could end up costing you approximately three months’ worth of interest on both a variable-rate mortgage and a fixed-rate mortgage.
If your mortgage is coming up for renewal, refinancing is generally less expensive, and you’ll incur a lower penalty. The more time you have left on your current contract, the greater the penalty to refinance will be.
For some people, however, the penalty is worth it.
Reasons to Refinance Your Mortgage Now
There are a few reasons why Canadians tend to refinance their mortgage. With everything going on with COVID-19, mortgage refinancing has become a popular option; however, things aren’t always black and white.
Reason #1: To Lower Your Interest Rate
One of the most common reasons to refinance your mortgage is to get a lower interest rate, which could save you money on interest in the long run. If those savings will be more than the penalty to break out of your current mortgage contract, it could be worth it.
In normal conditions, interest rates are always changing, and it’s not uncommon to find lower interest rates with other lenders. That’s why many people are eager to refinance right now in the hopes of lowering their monthly mortgage payments and saving some much-needed money.
Yet, mortgage refinancing during COVID-19 is a little complicated.
Although the Bank of Canada’s overnight lending rate is hitting record lows, it doesn’t mean low mortgage rates are available. With so much economic uncertainty and potential for further job losses, lenders are now tacking on a risk premium in order to protect themselves. This means that rates aren’t as low as one would expect right now.
So, what does this mean?
It means that it’s unlikely that you’ll find a better mortgage rate right now that would justify paying a penalty to end your current contract early.
Reason #2: To Access Equity in Your Home
Equity is the part of your home you actually own. It’s calculated by taking the market value of your home and subtracting the remaining mortgage balance you have on it.
For instance, if your home is worth $500,000 and you currently have a $260,000 mortgage balance, it means you have $240,000-worth of equity in your home.
If you’ve built up enough equity in your home, you might be eligible to get a loan using the equity as collateral, also known as a home equity line of credit (HELOC).
Some mortgages double as HELOCs. This means that your lender will give you a loan for your mortgage, but as you make payments over time, you are actually building equity that you can tap into should you need it.
Many people are considering refinancing their mortgage during COVID-19 and getting a HELOC, so that they can pull out equity in their home due to fears of potential job losses or property value reductions.
Reason #3: To Consolidate Debt
The third reason why you might consider whether you should refinance mortgage now is to consolidate debt. With economic uncertainty, many people are worried that they may not have the money to pay off their debts if things get worse financially.
Opting to refinance your mortgage during COVID-19 could actually help you free up some cash. Since mortgages are secured loans, they tend to have lower interest rates than credit cards or a line of credit.
When refinancing, you can take out a larger mortgage than you need and use the extra money to pay off your debts. By consolidating your debt, you make one payment each month, likely at a lower interest rate, instead of making multiple payments at various rates.
This is an enticing option for people who are cash strapped right now.
Mortgage Refinancing during COVID-19: Who Should Refinance Now?
At the end of the day, should you refinance your mortgage now?
Before you decide, it’s important to consider your options and your personal circumstances.
If you need cash during the pandemic, but aren’t in dire financial straits, mortgage refinancing during COVID-19 might be the best option for you. Also, if the Bank of Canada continues to lower their overnight lending rate and the potential interest savings outweigh the penalty to refinance, you might want to consider refinancing.
However, if you’ve lost your job or can’t make your mortgage payments due to the COVID-19 pandemic, now is not the right time to refinance. Keep in mind that you’ll need to requalify when you refinance, and if you do not have steady employment or proof of an income, you may not qualify for a new mortgage.
Whether you should refinance your mortgage now is something you should discuss with a qualified mortgage professional. They can help you weigh your options and calculate the costs of mortgage refinancing during COVID-19.
Contact Zinati Kay for Mortgage Refinancing Options
If you’re thinking about mortgage refinancing during the COVID-19 pandemic, the experts at Zinati Kay – Real Estate Lawyers can help. We are a full service residential real estate law firm that provides fixed closing costs to our clients when they buy, sell, mortgage, or title transfer their property. Since refinancing a mortgage can bring about various legal issues, working with Zinati Kay – Real Estate Lawyers is a huge benefit. If you need peace of mind and assistance with refinancing your mortgage during COVID-19, give us a call and we will be ready to help you. You can reach us at (416) 321-8766 for more information.