There were many changes to the mortgage rules in the last 7 years and in January, 2018, in particular. One of the rule changes was regarding refinancing your home.
In The “Old” Days
About 10 years ago, you could refinance your home all the way back up to 95% of its current value. Many borrowers could basically use their home as a giant ATM machine and pull out equity easily and quickly. The problem with using all the equity in a home is that sometimes the real estate markets will decline. Sellers can not sell their property for the amount that they owed. Many home owners were stuck either living in their current houses, keeping it as a rental or taking a loss on the sale and finding new money for a down payment on a new property. That rule changed so that you could get up to 85% of value and is now at 80% of the appraised value available for a refinance. This was hard to get used to but, in the long run, is better for home owners.
Until January, 2018, lenders were insured by the government for the new refinanced mortgages. The Banks and monoline lenders were happy to refinance clients to 80% of the value of their properties. January 1, 2018, this all changed. Welcome to 2018 and today you can still refinance your home to 80%. However, the government not insure a refinanced mortgage now.
What does that mean for the average consumer?
First, it means that lenders do not offer the same rate for insured mortgages (purchases and switches – in some cases) as they are for refinances. Refinance clients now pay, on average, .30% higher interest for 5-year fixed rates and .55% higher for variable compared to a purchase or switch/transfer mortgage. Compound this with recent increases in mortgage rates. Qualifying for the full 80% value is getting more difficult – especially if you are on a fixed income.
Secondly, because refinancing is no longer insured by the government, lenders have made the criteria harder to qualify. My experience in the last few months has been that Beacon scores have to be above 700. Also, many lenders are no longer refinancing clients that have had a bankruptcy discharged in the last 6 years .
Third, to add to this extra cost, the new rules of qualifying at 2% over the interest rate you will pay (stress test), applies to refinancing.
Overall, the changes make it tougher to refinance and forces Canadians to seek alternative options to take equity out of their homes. In many cases this will mean looking to the private sector at higher rates (8% – 15% plus fees) when they need that money.
With the new complications of the mortgage industry, getting good advice from a Mortgage Broker is even more important. If you have any questions about refinancing, contact me at 613-551-0639 or www.jmacdonald.ca