How Will Mortgage Refinancing Change In Canada For The Next While?

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It doesn’t really get easier with the real estate market during this pandemic. Less homes on sale, lower prices, and this latest to name a few! But what makes it more complicated with refinancing? They are uninsurable, so the lending risk sits squarely with the lenders; whereas purchase transactions facilitate changes of ownership, and the associated mortgages are a necessary and essential part of that process. Mortgage refinances are arguably a non-essential process.

Tougher Auditing of Applicants’ Income and Employment

Lenders are understandably worried about income stability in the current economy. It’s not whether you have sufficient income today, but also whether your employment is safe and you will continue to have an income in the months ahead.

Canada lost a record one million jobs in March 2020 according to BBC News, and you can expect more layoffs and job losses as the full impact of COVID-19 becomes known. The Conference Board of Canada said on April 6^th that a combined 2.8 million jobs may have been lost during March and April, equal to nearly 15% of total employment.

Even though many of these job losses may prove to be temporary, no one knows.

If you are in the business of lending money to people, you are going to be looking very carefully at all applicants’ employment income – both for what it is now, and what it might become when the current stay-at-home policy runs well past the month of April, as many experts feel it will.

What this means is that even if you had sufficient income to qualify for the desired mortgage amount two months ago, that might not be the case now, and as such, lenders have become more conservative and risk averse.

Mortgage Lenders Now Want to See All Income Documents Upfront.

If the borrower’s income and employment cannot stand up to scrutiny, there is no point going further. What are lenders saying now?

One Chartered Bank Says:

“For any application using self-employed (BFS) income, in addition to standard income documents, the broker must provide us with a description of the business, when established, number of employees, and its current status (e.g., operating, shut down).

Note: we may request additional income documents or conduct additional due diligence at our discretion to verify current income/employment status.

Additional due diligence will be required to assess the viability of the business post COVID-19. To assist in the assessment, please consider asking your client for their most recent financial reporting, i.e., interim tax reporting.“

One Monoline Lender Says:

“If a borrower has been laid off, we will not use their income to service the file unless an exception is granted by us and the mortgage insurer (if required). Neither EI nor the Government of Canada Emergency Response Benefit are eligible for inclusion in qualifying income.“

One Credit Union Says:

“As we all work through this challenging time together, we will be reviewing the income sources of all applicants in relation to the Essential Service workplace published by the Ontario Government. https://www.ontario.ca/page/list-essential-workplaces

As you would expect, if your applicants do not work in one of these essential service sectors, we will require additional confirmation of their employer’s commitment for continued pay during the COVID lockdown.

We will not utilize any temporary Canada Emergency Response Benefits in qualifying calculations.“

Appraisal Valuations Are Coming In Lower Than Expected

Appraisers rely on recent sales data to come up with comparable properties for their appraisal reports. But sales are down so much since mid March there are fewer to compare to. As reported in the Globe and Mail, Carolyn Ireland on March 31, 2020, wrote:

“Ontario remains under a state of emergency, and while the provincial government deemed most of the real estate industry “essential,” it did so in order to permit transactions to close – not to allow the industry to carry on with business as usual.”

And there is no incentive for appraisers to go high on their estimates – in the teeth of so much pessimism and conservatism. I think we will start to see more and more transactions fall off the rails because of low appraisal values.

Anecdotally, I’m seeing behavioural changes among appraisers that will lead to more values coming in lower than would have been expected a short while ago.

For example, some appraisal values are being submitted with a low, medium and high value. The other day a colleague had a mortgage amount cut back with a major chartered bank. The low was $1.5 million; the medium value was $1.6 million and the high value was $1.7 million. The bank had to take the medium value and the loan was cut back by 130k.

Actual Resale Values Are Starting to Drop

A realtor recently said, “A couple of my sellers are nervous that things are going to get worse, so they’re taking what they can get.”

The fact is listings are down dramatically, and there are no open houses anymore. Buying a home for many is a luxury to be deferred till things settle down.

So the net is, it appears appraisers are being more cautious today, and there is nothing on the horizon that’s likely to change this. No one knows how fast buying activity will pick up when the dust settles from COVID-19, so cautious valuations are probably the new normal.

Lower Loan-to-Value Ratio Lending Maximums

Before COVID-19, only private mortgage lenders could refinance higher than 80% of the appraised value of a property. It’s against the rules for institutional lenders. Mind you, there are not many brave souls who want to lend over 80% these days.

One small bank has quietly announced they will only refinance to 75% of the appraised value. And many B-lenders, on their own volition, have already cut their maximum loan to value (LTV) to 75%, and that is in densely populated urban areas.

Their maximum LTV is less in rural areas and smaller cities. This percentage will face further downward pressure in the coming months.

And right now, private lenders are also exercising more caution than usual, pulling back on their maximum LTV. The individual retail lender has already gotten cold feet and isn’t at all happy over 50% LTV. Mortgage Investment Corporations (MICs) remain open for business at decent LTVs, but many are expecting higher overall returns on their capital.

These lower loan-to-value ratios, coupled with declining appraisal values, are shrinking the number of fundable mortgage refinance transactions.

Is There a Bright Spot for Refinances?

There’s an old adage that lenders like to give loans to people that don’t need it. That is probably more true today than ever, including for refinances.

In the United States, mortgage rates have already begun to fall quickly, especially for terms of 10 and 15 years, and there is rising interest among many to take advantage of a once-in-a-lifetime opportunity to refinance for a lower rate and radically reduce the remaining term of their mortgage. If you have sufficient equity that a light valuation doesn’t matter, and secure income, this could be a really great time to refinance.

This hasn’t happened yet in Canada, but could be the next phase for us as well. And, in general, if you have good enough income, have lived in your home for a while, and haven’t borrowed against your growth in equity, you may still be a good candidate for refinancing. (I’ll write more about this in a future article).

Real estate agent with client or architect team checking a housing model and its blueprints digitally using a tablet

What’s to come

The world for mortgage refinancing has now completely changed compared to this spring. Factoring together loss of income, lower real estate values, tougher appraisals, and lower loan-to-value ratios, it’s not hard to understand why the landscape for mortgage refinances has cooled considerably.

Some refinances for specific types of borrowers will still be possible, but most of the typical cash-out deals we’ve seen for the last several years using home equity to solve debt problems, or large cash needs, are going to be fewer, and much harder to do.

In the words of veteran Ron Butler, “Nothing will be the same for maybe the next two years. The old world of lending is gone.”

*With thanks to candianmortgagetrends.com and Ross Taylor.