Refinancing, renewing mortgages all the rage as rates drop

HistoricaLLY LoW

Real estate markets might have experienced a temporary freeze in April and May, but mortgage brokers across the country are reporting some of their busiest months ever due to a surge in inquiries on mortgage renewals and refinances as Canadians rush to take advantage of historically low interest rates that show no near-term sign of rising.

“It was the perfect storm of COVID-19, Fed action in the U.S. and central back action in Canada to push rates to a historic low, and so we saw a lot of clients whose rates were on the higher end rushing to refinance,” said Reza Sabour, an independent mortgage broker in Vancouver and director of the Canadian Mortgage Brokers Association of British Columbia.

“On average, if a client’s mortgage was above three per cent, then it made sense to pay the penalty to break the mortgage and refinance. We’ve been seeing that category of clients look to take advantage of lower rates.”

Mortgage renewal inquiries rose by 78 per cent and refinance inquiries rose by 182 per cent when rates first dropped in March due to COVID-19, according to data from Ratehub.ca, an online rate comparison service.

Mortgage rates crept up in April and May, despite the central bank maintaining low borrowing rates, because of the pressure Canadian banks felt amid the uncertainty of the pandemic. But rates decreased again in June, and Ratehub.ca data showed renewal and refinance inquiries rising by 18 and 35 per cent, respectively.

“Rates are historically at the lowest point ever, so, naturally, you will see a surge in refinances and also debt consolidation as people access equity to improve their homes,” said James Laird, cofounder of Ratehub.ca. “And then on the renewal side, if you have renewal coming up in the next few months and you see your rates are low, then you start to inquire about transferring lenders.”

Lowestrates.ca, a competitor to RateHub, also released data recently that found the number of requests for refinancing quotes surged by 389 per cent in March, compared to February. On a yearover-year basis, the total rise in refinancing mortgage quotes in March was 156 per cent. Jason Davenport, a mortgage broker at a Meridian Credit Union branch in downtown Toronto, said refinances have increased, but the number of people taking out new mortgages has dropped during the past few months.

“But the people who do come in and say they want a mortgage are very serious about getting into the market,” he said. “In a way, the inquiries on purchases that are coming through are panning out and translating into applications.”

Davenport said one of the trends he’s observed is the growing number of people accessing construction mortgages, which he believes is unique to the pandemic.

“Because rates are low, they want to tap the equity they have built up on a home and use it for renovations,” he said.

Sabour, meanwhile, has had clients inquiring about how to use the existing equity in their homes to lower their monthly consumer debt obligations.

“We saw people saying, ‘I would like to refinance because I want to pay off a high interest loan,’ like credit card debt,” he said. “And that’s a really great strategy right now, especially if you have not lost your job due to COVID-19 and your expenses are low.”

Alongside the increase in renewals and refinances, government data show that overall residential mortgage credit increased during the three months ending April 2020, which encompasses about a month and a half of the pandemic.

The most recent data from the Office of the Superintendent of Financial Institutions (OSFI) show that residential mortgage credit as of May 2020 had grown by six per cent, year over year, but growth had already begun to pick up in the last three months of 2019.

“The large Canadian banks saw solid growth in real estate secured lending, so they saw growth in mortgages and home equity lines of credit,” said Robert Colangelo, senior vice-president at DBRS Morningstar. “I somehow suspect that this growth has continued just based on home sales activity in the month of June in Toronto and Vancouver.”

On a year-over-year basis, home sales were only down 1.4 per cent in Toronto in June and grew a whopping 17.6 per cent in Vancouver, according to their respective real estate boards.

“Because there are some competitive five-year mortgage terms available in the marketplace and demand is still quite strong for housing in Canada, I wouldn’t be surprised if Canadian banks see a continuation of this trend in the high single-digit range, despite a lockdown,” Colangelo said.

In light of the growth in mortgage credit despite historically high unemployment rates, Canada Mortgage and Housing Corp. in early June announced changes to the eligibility rules for mortgage insurance.

The federal agency lowered the amount of debt an applicant for an insured mortgage could carry and set a higher credit score (680) for someone to qualify for CMHC insurance.

Genworth MI Canada Inc. and Canada Guaranty Mortgage

Insurance Co. declined to adopt the same rules, which Sabour believes will, overall, negate the CMHC’s move on tightening requirements.

“I have not seen a dip in first-time homebuyer clients,” he said. “Had other insurers followed suit, it would have been a much bigger story.”

But Laird cautions against rushing into the mortgage market, even to renew or refinance, just because rates are at a historic low.

“Rates are low, but, really, they have been low since 2009. In a way we are splitting hairs when looking at the difference between 2.29 per cent for a five-year mortgage, and 1.99 per cent,” he said.

“My advice is always: If you weren’t thinking of buying at 2.29 per cent, you shouldn’t be thinking about buying at 1.99 per cent, because your mortgage payments are not that different.”

GETTY Government data show that residential mortgage credit increased during the three months ending April.