How Covid-19 Impacts Rates
Rates for home loans are based on a variety of factors. One of the biggest being the price that lenders themselves have to pay to borrow money.
For fixed-rate Canadian home loans, the rates are based on the five-year Government of Canada bond. The price of bonds usually increases when people are feeling fearful, such as in the current climate with this coronavirus.
At the beginning of 2020, the yield on the five-year Canadian government bond was about 1.7%. As of April, it dipped to just above 1.3. A 40-point drop in such a short time is a big deal. The effects are filtering into the mortgage market.
Already, the Bank of Canada has cut interest rates three times. But we probably won’t see any more drops according to what the central bank said in a release.
If you have a variable rate mortgage, this is good news for you. If you’re in a fixed rate mortgage, consider refinancing to decrease your current rate. Depending on the time left to maturity, you may find that a penalty is offset by the amount of money you will save with a lower rate.
Mortgage payment deferrals
Canada’s big banks delivered a joint announcement that they will be offering mortgage payment deferrals for those impacted by the COVID-19 crisis. Dozens of other lenders have followed suit.
Deferral agreements are unique between you and your lender. Typically, the agreement states that you will pause your payments for a certain amount of time. But be warned, the temporary relief could cost you more in the long run and could impact your credit score.
At the end of the agreement, your mortgage payments return to normal and the interest that hasn’t been paid during the deferral period continues to be added to the outstanding principal of your mortgage. You will also have to repay the skipped payments.
Mortgage Financing and refinancing
Mortgage financing has been challenging due to Covid-19. Most of the purchase transactions already committed to during the early days of the virus have gone through, fortunately. However, mortgage refinancing is becoming increasingly rocky.
For one thing, lenders are scrutinizing applicants’ income and employment much more than in the past. Canada lost a record one million jobs in March 2020 according to BBC News. It’s not hard to understand why lenders are being extra careful in assessing their applicants.
In addition, many homes have lower appraisal valuations than expected. Appraisers rely on recent sales of comparable properties in order to make their appraisal reports. Yet now, there are fewer properties to compare to.
Not to mention, actual resales values are beginning to drop. Current estimates say the median GTA home value is down to $740,000. That’s a 6% drop from the February peak of $789,000.
Many sellers are worried that prices will get worse so they are taking whatever they can get now.
What’s next?
With the changes in the real estate market and the hesitancy in approving loans and appraising properties, we are in a new era. The cash-out deals to solve debt problems are mostly now a thing of the past. It may take a couple of years to see anything to do with mortgages return to normal.
How have these changes impacted you? Please share in the comments.
Mary Chapman
Graduated from the University of Toronto with an Honors BA English Specialization and has completed several publishing courses at Ryerson University. She is a proofreader, editor, and content writer based in London, Ontario.