Mortgage 101 – Ins and Outs of Mortgage Refinancing

Todd Veinotte and Clinton Wilkins discuss the return of high-ratio insured refinances, the importance of timing refinances during renewals and the complexities involved, such as zoning and financial incentives.

Todd Veinotte
All right, Mortgage 101—your guide to home ownership. I got a mortgage one year ago, and ownership with Clinton moving to myself, Todd, Merry Debtmas style. What do you think, Clinton?

Clinton Wilkins
January is typically a quieter time of year, especially in the real estate business, you don’t think as many houses are being bought and sold. It’s a very busy time for us because of refinance and renewal. There are still purchases happening. Don’t get me wrong. That’s still happening every day, but it’s a very busy time for refinance. In our first segment, we said that one of the big goals that Canadians have as a New Year’s resolution is financial health and wellness. We’re going to talk about what a refinance looks like.

Todd Veinotte
Okay, and of course, the political moves and changes to the law. What can you tell us?

Recent Mortgage Rule Changes

Clinton Wilkins
Yeah, there’s been a lot of changes to the mortgage rules, some that happened in December, and some that are happening here in the middle of January. So in December, the big news is for anyone buying a home. I think it’s really important to understand this, any first-time home buyer, when they’re buying a home, can now get a high ratio insured mortgage. So that’s from, the Canadian Mortgage Housing Corporation, Sage and or Canada guarantee, with amortization up to 30 years, as well as any borrower, newer or existing that’s buying a new construction property, can get a high ratio insured mortgage up to a 30-year amortization. The other thing that you’re going to want to know is the limit for a high ratio insured mortgage used to be 999,000 and now has been increased to 1.5 million.

Todd Veinotte
Okay, so tangibly, is this making a difference in business and people in getting into products that they wouldn’t otherwise have?

Clinton Wilkins
The 30-year amortization is making a difference for us. We don’t have that many borrowers that are buying at 1.5 million that are putting down less than 20% I think that’s quite rare, but I think that’s gonna have an impact in larger markets, like in Toronto or Vancouver. I think that’s gonna help first-time homebuyers, but I’m excited about the 30-year. I get excited about mortgage lending. I think it’s kind of fun. We like talking about it, and hopefully our listeners like hearing about it too. But it will make a big difference for first-time homebuyers. They will be able to qualify for a larger mortgage. And typically, first-time homebuyers are usually younger people, so 30 years, I’m not that concerned about it. And most borrowers that take a 30-year amortization paid off in 2520 or less. Usually, borrowers pay their mortgages off shorter than the initial amortization that they take. The other big rule change that’s coming into effect here in the middle of January is a high ratio of insured refinances up to 95% or 90% coming back. So you can refinance your home up to 90% of the value was 80, right? Was 80, and it always had to be conventional. So now we’ll be insured by the Canadian Mortgage Housing Corporation or one of the other insurers, but the purpose needs to be to add a secondary unit. So it’s very, very specific the constraints, but it’s a step in the right direction, and I think, a move from the federal government to help motivate housing. So housing stuff which we need, yeah, which we need.

Todd Veinotte
But it’s quite complex. Is it not to add a unit you’ve got the municipality, they’re all zoning rules. There’s zoning that you’re dealing with contractors. It’s not for the faint of heart, though, right?

Clinton Wilkins
It is not for the faint of heart, and it takes a lot of money, yeah. So this 90% refinance, I’m excited about it, but I think you need to go in with your eyes wide open on what the cost is going to be to add that additional unit. I think it’s great. I can see it working for, you know, maybe aging parents, you know, finding getting a housing unit for your offspring, or maybe another family member. I can see that working well. There are a lot of good reasons why someone would want to add a secondary suite. In Atlantic Canada, we don’t have a lot of finished basements. A lot of our properties have been built kind of above grade, so a lot of people have unfinished basements. So I think there’s an opportunity there. And I think even if people did have a finished basement, you know, doing that refinance to be able to make it into a secondary suite, you know, there are some things that you need, and there are other financial incentives.

Todd Veinotte
I do believe I’m kind of winging it here, but I think the province is offering some money. I’m not sure, but I guess the point is, do your homework.

Secondary Suites and Financial Incentives

Clinton Wilkins
Yeah, do your homework, and it’s something we’re gonna talk more about throughout this year. We need to get this program launched. It’s not even launched yet. I can’t even tell you the constraints or what the program looks like. We’re gonna know more after January 15th, maybe we’ll bring one of our friends from the stage and in again on the show, and then we’ll have more information for our listeners at that time. But this is something certainly to stay tuned to, and we certainly have a lot of borrowers already reaching out to us wanting to add secondary suites and wanting to take advantage of that program. So I think it’ll be huge.

Todd Veinotte
Okay, so when, when you’re renewing your mortgage renews. Is that a good time? That’s probably the optimal time if you’re going to amortize and refinance, that’s probably the best time to do it.

Clinton Wilkins
I think the best time to do a refi is at renewal. It’s not always the time that people do it, though. Todd, I think the best time to refinance is the best time for you. And everybody’s situation is different. I’m going to talk a little bit about both the mechanics of a refi. You can refinance conventionally, up to 80% of the market value of your home. The reason that somebody may refinance is to consolidate, a consumer debt. Maybe they want to refinance, pull up some equity, buy a secondary property or a rental property, put a roof on the house, maybe do some improvements to the property, exactly, and the other reason is maybe for investment purposes. So there’s a wide range of reasons why people refinance. I think one of the reasons that we don’t talk about that much is sometimes people refinance just to extend the amortization, to bring down their borrowing costs. That’s a big one right now, especially with consumers that are coming out for renewal, and we talk about this renewal cliff, I’m not sure it’s going to happen, but 60% of Canadians have their mortgage coming up for renewal this year and next year, and those Canadians are having it typically if they had a fixed rate and interest rate that’s lower than where the rates are today. Yes, I do believe the rates are going to go down. Who knows what’s going to happen in the US and how that’s going to impact us? And we need to remember that the fixed rates are tied to the bond market, and the bond market has been increasing lately. The one thing that I’m ratching is the Bank of Canada, we had more decreases last year than we thought that we were. But I think we’re going to still see some further decreases this year. Our economy is not strong. In Canada, the GDP is low. I’m watching the Canadian dollar, and I’m confident that we’re going to see some more cuts from the Bank of Canada. I think they want to spur some spending from Canadians, and they want businesses to borrow, and they want consumers to borrow, even though consumers are at really all-time highs of consumer debt.

Todd Veinotte
What about employment in general? I mean, people look, if you’re renewing, if you’re up for renewal and you want to refinance, you need to continue your employment situation. Employment is important. It’s certainly your credit situation as well, right?

Employment and Credit Importance

Clinton Wilkins
Credit Employment is very important. The assets are important. The value of the property is important. All of these things come into play and I think when we’re thinking about a refinance, it’s 80% of the market value. The market value is what you could sell that home for. So for example, if the market value of the property is 500,000 which is a pretty average home here in Halifax, you can do total financing of 400,000 and then would need to pay out your existing mortgage or any other secured debts, like a home equity line of credit, and the remainder is the amount that you’re gonna be able to use for either those consolidated debt payouts, renovations, investments, or buying another property. I think sometimes people are confused about how refinance works. You can’t just refinance to infinity, because the home is the bank security, and they need to know that if something goes wrong, they can collect the money that they’ve let you.

Todd Veinotte
I guess, I guess. What I’m getting at is that if you’re going to renew and you’re in a good financial position, and conversely, if you’re not, perhaps, then you may end up just having to take the renewal that is offered to you.

Challenges with Existing Lenders

Clinton Wilkins
Yeah, sometimes you need to renew your existing lender, right? The one thing that I need to urge everyone is, oftentimes the existing lender, they’re like the cell phone company, jack it up high. They’re not going to give the best deal to an existing right. Why would they?

Todd Veinotte
I guess what I’m getting at is that if you can avoid that, and you’re going to have to get your taxes and your income and your notice of assessments and all that jazz, then make it worthwhile. If you’re going to go through that and get your best rate.

Clinton Wilkins
You want to get the best deal. And I think that’s where it’s so, so important. I see so many consumers that kind of come and see me kind of after the fact, or they’re doing another transaction like I renewed a year ago. I messed up whatever, and they were just, they just took what they were given. It was they didn’t have any advice. They just took a five-year fixed and they’re gonna have a hefty penalty to get out of that term. If you break a fixed rate early, you’re either gonna pay an interest rate differential or three months interest, which is even higher and you know what the bank is like the casino… they don’t lose.

Todd Veinotte
Speaking of all this, we got our guests coming up.

Clinton Wilkins
We have Tina Powell coming on from MNP, and she’s gonna talk to us about things that a trustee would talk about. We’re gonna talk about consumer proposals and bankruptcies and how those work, and really what you can do if you can’t refinance perfectly.

Todd Veinotte
Mortgage 101, we’ll be back.