Thinking of refinancing your home at today’s low rates? Think again.

Big bank lending guidelines have tightened in Canada and home values are down. If you bought your home or locked into a fixed rate from variable in the last 3 years, you are probably paying over 5% for your mortgage and some closer to 6%. Now with rates hovering at all-time lows around 4% for 5 year fixed term mortgages, you can’t help but to consider refinancing, right? “Well, you might want to consider a few things first” says Mike Averbach of Averbach Mortgages, and independent broker firm in Vancouver. “If you’ve purchased your property at 10% down or less or refinanced between 90 and 95% of the value of your home in the last couple of years, you’re out of luck”, claims Averbach. Every day we are contacted by our clients or others that want to take advantage of the lower rates available now and the first two questions we ask them are; “what is your mortgage amount and what is the value of your home? It’s pretty simple to figure out from there whether a refinance is even possible. It really seems to hit home (pardon the pun) when clients realize that the property they purchased a year or so ago is now worth 10 or 15% less today. Certainly it’s scary to consider that some of these homes are now essentially financed at 110 or 115% if a buyer put no money down when CMHC was insuring them at 100% of the purchase price and are now in negative equity.”

If you happen to be one of the lucky ones that bought before the peak of the market with at least 15% down, you will have to consider whether or not it’s feasible to break your current mortgage contract and pay a penalty. Add in a top-up of your CMHC insurance premium and new legal costs for registration and it could amount to thousands of dollars more than the actual savings. “There’s no point in getting our clients all excited about greater savings when in fact it would cost them more to break their current terms!” Your mortgage lender reserves the right to charge you the greater of 3 months interest or the interest rate differential otherwise known as an IRD. The IRD amount is a compensation charge that may apply if you pay off your mortgage principal prior to the maturity date. The IRD amount is calculated on the amount being prepaid using an interest rate equal to the difference between your existing mortgage interest rate and the interest rate that the lender can now charge when re-lending the funds for the remaining term of the mortgage.

Many consumers end up disappointed to find out that the penalty is too great and the interest savings of refinancing do not outweigh the costs or they simply don’t qualify for the lower rates because they may have originally snuck in under the 40 year amortization which was discontinued while their incomes have not increased. “There are too many salesman brokers and bankers out there and not enough independent consultants giving good, honest advice” Averbach says angrily. Averbach Mortgages has been contacting all of their clients whom may qualify for lower rates and have found that only 2 out of every 10 mortgages where the numbers actually work. “We would ask our clients to contact their current lender to find out the penalty for breaking their mortgage and only then can we determine if it makes sense.”

More and more homeowners are faced with the fact that they are stuck in their mortgage because they put little or no money down. With new CMHC guidelines in place, one can no longer refinance beyond 90% of the value of their home. Home values are based on the comparison approach used by the CMHC computer appraisal system called “Emily” that assesses the subject property with recent sales in the area. “Emily seems to be losing a lot of friends lately” jokes Justin Blacklock, manager of Averbach Mortgages. More often than not we have found that the 2009 BC Assessment amount is either bang on, or even above the value assigned by Emily. “No longer can you look at your assessment and say it’s worth more because it’s not” says Blacklock, “it’s a sad fact that our clients must wrap their heads around.” What’s even worse is to think about how many jobs have recently been lost in BC and the rest of Canada, and how many of those people are homeowners. Combine that with those that are in a negative equity situation and it makes for a scary formula.” “Defaults and foreclosures will rise”, says Averbach. “No doubt about it. It’s a part of the cycle” Having little or no equity in a home may make the decision easier for some owners to give back their keys. “The 40 year amortization and zero down mortgages were brought in to make qualifying more affordable in a hot market but all the affordability products in the world won’t help when you don’t have the income to support the debt anymore.”

Conversely, the low rates combined with the slower market have been great for first-time home buyers looking for a bargain. “If history tells us anything, the market will rebound eventually and if you have faith in your job security and income and you have at least 5% to put down, there are some good deals to be found” Averbach says defiantly. “It’s a buyer’s market right now and we try and give our clients the best independent advice we can based on the knowledge we have.”

Averbach claims that those that were pre-qualified and wanting to buy a home with 10% for a down payment in the 2007 and 2008 markets can buy that same home today for much less and thus saving thousands in interest and smaller mortgage principle requirements. “This could also save the consumer thousands in insurance premiums that CMHC adds to the gross mortgage amount.

Their initial 10% down payment is going much further than it would have just one year ago!”  When you add in the fact that rates are more than 1.5% lower than they were in February 2008, it has rarely been a more affordable time to buy and a strong numbers argument can be made for purchasing as opposed to renting.

“As long as our clients are looking at purchasing as a long-term investment and the literal meaning of a home rather than a commodity they plan to flip in 3 to 6 months for a profit, we think that’s a good plan! We may not have hit the bottom yet but to try to predict when that is if not now is like trying to look into a crystal ball. One thing we can be sure of is these low rates won`t be around forever. Once this economy reaches some type of normalcy, you`ll be paying more for your mortgage and likely your new home.”

Have any questions or comments?  We’d love to hear from you!

This entry was posted on Friday, February 20th, 2009 at 2:44 pm and is filed under Mortgage Advice. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.