As the country continues to respond to the economic fallout caused by the COVID-19 pandemic, there has already been an "unprecedented" rise in Canadians looking to refinance their mortgages following the Bank of Canada's latest emergency rate cut.
On March 27, the Bank of Canada announced for the third time it would be cutting its key interest rates by half a percentage point in response to the outbreak, bringing the key interest rate down to 0.25% — its lowest level since 2010.
READ: Should You Break Your Mortgage to Take Advantage of Lower Rates?
In the weeks to follow, LowestRates.ca, an online rate comparison site for insurance, mortgages, loans, and credit card rates in Canada, said it saw an unprecedented rise in mortgage refinancings through its mortgage quoted, indicating Canadians are trying to save money anywhere they can.
After noticing the spike in numbers, LowestRates.ca examined its data to compare the number of mortgage quotes in February and March of this year, as well as the number of quotes generated in March 2020 compared to March 2019.
As explained by LowestRates.ca, a mortgage “quote” can be defined as "a consumer who has used the LowestRates.ca mortgage quoter to compare rates and has filled in their information to request a formal offer from one of the banks or brokers LowestRates.ca compares on its website."
Here's a look at what they found:
“The latest rate cut has led to some of the best refinancing deals we’ve seen in years,” said Justin Thouin, Co-Founder and CEO of LowestRates.ca.
“There’s some uncertainty about whether these deals will continue to last, but in the meantime, we’re seeing a flood of Canadians trying to take advantage of them. Being able to refinance to a lower rate can save you thousands of dollars a year.”
LowestRates.ca., says refinancing can lead to major savings. For example, say you have a $480,000 fixed-rate mortgage at 3.09%, with a 25 year-amortization and a five-year term locked in for another four years. Right now, your monthly payments are $2,294.
However, if you can refinance to 2.39% as a result of the recent rate cuts, your monthly mortgage payment now falls to $2,124. That's a monthly decrease of $170. Over the remaining four years of your term, that means you save $8,160 on your mortgage.
But remember, in order to refinance, you're going to have to break your current mortgage, which may come with penalties.
According to mortgage broker, Scott Brown from Ultimate Mortgage and Finance Solutions Inc., there are two types of penalties: three months interest, and loss of interest.
The first is the lesser penalty, while the second can be a much larger one. Variable-rate mortgages always have a three-month interest penalty, whereas fixed-rate mortgages take the greater of three months interest or loss of interest. You can find out more about these two types of penalties here. Big banks tend to levy steeper penalties. Brown’s advice is to call your lender to find out which one applies to you.
If you can save more than the cost of the penalty before your term ends, breaking your current mortgage is worth considering. If you can’t, you’ll end up paying more in the long run, even with a lower interest rate.
With files from Nicola Brown.
