With the 2019 pandemic, a few economists believed home sales would fall in BC however, that has not been the case. The housing market in BC is growing and demand is outweighing supply with no end in sight.
The pandemic has certainly changed how we are living. Unfortunately, many people have lost their jobs or had their hours reduced. Cash flow is more important than ever. With interest rates dropping to all-time lows many homeowners are now considering refinancing to lower their mortgage rate and also consolidate some high-interest rate debt into one low monthly payment.
The question many people are asking, “is it worth it for my family to remortgage?”. Here are some important points to help you decide if your family should call a mortgage broker to refinance your home.
Everyone always talks about prime rate but what does prime actually mean to you? The Bank of Canada meets 6 times a year and sets Prime. This is the rate the banks are charged when they borrow money from the government. Financial institutions then set their Prime which is the rate their consumer lending is based on. Currently, the Bank of Canada Prime is 0.25% and the “bank” prime is 2.45%. These rates are the lowest anyone can remember. Prime is generally used for Lines of Credit, variable-rate mortgages, and demand loans.
It is important to keep in mind your mortgage is not only about the mortgage rate. There are many different options that make up a mortgage including the ability to defer a payment, the penalty cost to leave your mortgage early, and how the lender monitors rates for you – this is especially important when choosing a variable rate.
There are two different types of mortgage rates you can choose for your mortgage. A fixed or variable rate.
A fixed-rate is priced based on the bond market. The rate is fixed for the term. Terms generally range between 6 months and 7 years. A 10-year term is also available. The most popular term is 5 years.
A variable rate is priced as a discount from bank Prime and will change when prime changes. While it may look scary that the rate can change, the rate generally does not move at a fast pace. The primary advantage of a variable rate mortgage is flexibility. At any time you can convert your variable rate mortgage to a fixed-rate product. There is no cost to do this. You cannot convert a fixed-rate mortgage to a variable rate product.
It’s also important to understand what you may run into if you lock in a variable rate.
All mortgages will charge a penalty for breaking the mortgage before your term is up. The standard penalty is 3 months interest or Interest Rate Differential (IRD), whichever is greater. In the last couple of years as fixed rates have dropped the major banks changed how they calculated the IRD. Now they look at the discount you received from their posted rate when you started the term. This has increased penalties substantially. The penalty to break a variable rate mortgage is always a 3-month interest penalty. No IRD.
Today, if your family has a fixed-rate mortgage above 3% it is worth looking at breaking your mortgage early and taking advantage of the historically low-interest rates. The interest savings alone will more than cover the cost of your mortgage penalty. While saving money is important to your family there may be other reasons you want to look for a new mortgage.
The best part about considering refinancing your mortgage is that a second opinion is free. Talking to a mortgage specialist about your options will not cost you any money. You also do not have to refinance with the same bank or lender you originally signed your mortgage with. To get a better understanding of your options here is an article on the difference between a bank and a monoline lender.