Refinancing in the age of COVID-19

A survey was conducted on April 6 by TransUnion on the current financial status of 1,035 Canadian adults in the wake of COVID-19. The results released showed that 68% are concerned over their ability to pay loans and bills, and that the average respondent will fall behind on monthly debts in 6.4 weeks. The survey also found that 63% of Canadians have been negatively impacted financially, with 25% due to job loss and 10% being small business owners who have had to slow down or completely close operations.

During this time of financial disruption people are looking for alternative solutions.

A popular option in the past has been to refinance homes to either take advantage of lower interest rates or to pull out equity as a source of extra funds. But in an unprecedented situation like the one we’re now dealing with, the refinancing landscape can look quite different for investors.

Does the option to refinance property work the same for me today?
The short answer: It depends. Everyone’s situation and circumstances are different, but qualifying is not as easy as it was before. In the wake of the COVID-19, refinances have been tougher for Canadians for a few reasons.

Due to declining employment, lenders are more wary when it comes qualifying income. With record job losses in March and the grim outlook of Canada’s future unemployment rate, lenders are digging deeper into current employment status and the stability of future income. Most lenders will want to see all income documents upfront and will take into consideration the “essential service” status of the employment. If an applicant does not work in one of the essential service sectors, lender’s may require further proof of their employer’s plan to continue paying their salary.

If a borrower is self-employed they may also need to provide a description of their business, its current status, and reasonable proof that it can withstand the effects that will come with COVID-19. In addition, lenders will not use any temporary government benefits towards qualifiable income, but they recently started considering Child Tax Benefit as qualifiable income, which can be very helpful.

Another reason refinancing has become more difficult is due to the current unstable property values. Residential sales volume is down drastically for obviously reasons, which provides less sale history data for appraisers to use as price comparisons. Appraisers are still providing reports despite the restrictions on inspecting properties by using alternative methods such as requesting picture and video content from the clients and driving by. But with no real evidence that change is coming to the market any time soon, appraisers are exercising more caution and providing more conservative values.

Lenders are also cutting back on their maximum loan-to-value ratios in order to decrease their lending risk in relation to uncertain property values in the future. We are seeing cuts from banks and B lenders from their max of 80% down to 75% and even lower outside of the GTA or in rural areas.

While private lenders are also being cautious by lowering LTV ratios or requiring interest pre-paid for all or part of the term, they are also providing much needed solutions to buyers and homeowners during this difficult time. I have recently experienced a few cases where job loss or change in property value has prevented a bank from proceeding on a new mortgage. Short-term private financing provided the best solution.

Although it is currently challenging to get new mortgages approved, banks are working to ensure that the majority of their existing purchase approvals are getting funded, with some lenders requiring all new loans to be insured. But refinances and mortgages with amortization periods over 25 years are uninsurable, making the risk greater for lenders.

Rates are low, should I be locking into a fixed rate?
The BoC lowered its target rate an unprecedented three times in March alone to provide support to the economy from the impact of the pandemic. Banks have followed suit, dropping prime to 2.45%. But fixed rates have gone up. Why is that?

Simply put, the banks have liquidity concerns due to mortgage payment deferrals and the overall fear of clients’ not being able to pay their loans. In response, banks have increased their spreads or offer less reduction in discounts, sometimes cancelling out the Bank of Canada’s rate cut altogether.

BoC has announced programs on the federal and provincial level that will inject liquidity back into the economy. Things will change and rates will adjust as we make our way through the effects and outcomes of this pandemic. Still, at this time, I would not suggest locking into a fixed rate when variable rates are historically at an all-time low. If you are looking to lower your monthly mortgage payment a better solution may be to contact your financial institution and request to extend the amortization period of your existing mortgage.

What other equity take-out options do I have?
HELOCs offer a lot of flexibility and come with few shortfalls, but banks are using the same qualification methods as with a first mortgage refinance, and those have become extremely stringent during the pandemic. Alternatively, private lenders also offer HELOCs of up to 75% LTV at higher rates and fees but with more flexible qualification standards.

For those looking to take out even more equity there are private short-term financing solutions, specifically second mortgages at a one-year term. Before COVID-19, private lenders offered second mortgages of up to 90% LTV; today the majority have dropped to about 75%, with some still lending up to 80-85%. Rates may be higher, but in most cases payments are interest only, which makes monthly payments lower. For those dealing with loss of income there is also the option to pre-pay monthly interest for part, or all, of the mortgage term from the loan advance. This depends on the amount of equity in your home, but essentially the new second mortgage amount could cover the lending fees and mortgage payments for the term while also putting some cash in hand. Make sure to discuss this option with an experienced mortgage broker to plan ahead for the next steps when this mortgage matures.

While the world is changing and adjusting on a daily basis, the best approach to your financial decisions is to continue to educate yourself. Stay on top of the economic changes and programs available to you. Contact your mortgage broker for the best advice on financing your real estate assets. Most importantly do not let your financial decisions be influenced by stress, anxiety or fear.