If your mortgage rate starts with a “1″ and you need more money, the last thing you want to do is refinance and lose that miracle rate.
Back in January, 2021, for example, people were snagging five-year fixed mortgages at rates as as low as 1.23 per cent. As we speak, refinancing that mortgage costs 6.14 per cent and up.
So, if you don’t have a line of credit and need to tap home equity for more funds, some methods are much better than others. Here’s a look at six options.
#1 - Break your mortgage and refinance
This is often the worst method, assuming you have lots of time left on your ultralow first mortgage rate.
Consider someone halfway through a five-year mortgage with a 1.99 per cent rate, a $400,000 mortgage balance and a 22.5-year remaining amortization.
Breaking that mortgage to refinance would cost over $40,000 in extra interest over the remaining 2.5 years of the original term – plus penalties. If you’ve got a sizable existing mortgage balance, you may be better off leaving your cheap first mortgage as-is and adding another mortgage behind it.
#2 - Blend and increase
A blend-and-increase is where you increase your existing mortgage, and the lender averages the old rate on your old borrowing with a new rate on your new borrowing.
“If it’s available and you qualify, a blend-and-increase is often the lowest effective rate you’ll find,” said Shawn Stillman, a mortgage broker and co-founder of Toronto-based Mortgage Outlet.
The key is to ensure there are no hidden penalties. Some lenders say they do no-penalty blends, but they actually charge you a penalty and build it into the new blended rate.
“Other than your current rate and mortgage amounts, some lenders don’t even disclose what went into their blended rate calculation,” said mortgage broker Ron Butler of Butler Mortgage in Toronto. Always ask for their math.
Also note that if your mortgage is default-insured, you generally can’t blend to refinance.
#3 - Add a new portion to an existing mortgage
Some lenders let you add new mortgage portions to an existing mortgage. This is common if you have a readvanceable mortgage, which is also known as a combined loan plan (CLP).
The benefit is that you can borrow more and not touch your existing low first mortgage rate. The rate you’ll pay for the new borrowing is likely in the 6-per-cent range as of today.
#4 - A prime HELOC in second position
Various lenders offer HELOCs that go behind other lenders’ first mortgages. Probably the best deal going right now is a promo from Simplii Financial. It offers prime rate (7.2 per cent) or even lower if the HELOC size is over $500,000.
The best part is that the set-up fee is just $150. I’m told Simplii may even waive that and the appraisal cost if the approved limit is high enough. Unfortunately, it’s not available in Quebec.
Assuming you qualify, you can get a revolving HELOC from Simplii or other banks for up to 65 per cent of your property value. If you have an existing mortgage, the mortgage and HELOC can total up to 80 per cent of your home value.
Note, however, that most mortgage contracts require you to ask your lender for permission before adding a HELOC or second mortgage behind their first mortgage. Few borrowers do that, but if the first mortgage lender finds out and decides it cares, it may not renew you.
#5 - Second mortgage
“We’re closing drastically more seconds today than one year ago because it’s financially punitive to break existing mortgages with historically low rates,” Mr. Stillman said. But seconds aren’t cheap.
Most second mortgages, up to 80 per cent of the home value, will cost someone with excellent credit 10 per cent interest or more. Albeit, some mortgage finance companies offer seconds to existing customers in the mid-to-high single-digit range.
If your credit and qualifications are so-so, expect to pay 12 per cent or more. And if your credit is terrible, your rate can be well into the teens.
One benefit of a second mortgage is that getting approved is much easier as long as you have enough equity and a marketable home. Many borrowers qualify without even proving their income.
“You can find private lenders with a parrot on their shoulder and a patch on their eye that don’t care about anything other than the value of the property,” Mr. Butler said. But you’ll pay for that flexibility.
Amortizations on institutional second mortgages can extend to 35 or even 40 years for lower payments versus 30 years at most banks. By contrast, private lenders offer interest-only options, albeit at higher rates.
#6 - A non-prime HELOC in second position
If you can’t qualify for a HELOC from a prime lender, lenders like Home Trust, Equitable Bank and First National offer non-prime credit lines with rates of 12 per cent and up.
These fully open loans can quickly eat up any savings from your lower first mortgage rate, so you don’t want to borrow from them for long.
Expect to pay 2 per cent or more in fees to set these products up. In exchange, these lenders are more flexible on debt servicing, meaning they’ll approve higher debt levels relative to your income. That’s not to say people should overleverage themselves, but sometimes folks with high debt loads just need a short-term solution to consolidate debt and get back on their feet.
The lenders offering these products are also much less worried about what you’ll use the money for. Some are happy to approve you, even if you’re using the money to pay off property tax arrears, a consumer proposal or CRA arrears.
The one benefit of a non-prime HELOC is that the lenders offering them have renewal options, Mr. Butler said. “I’d take one of these before I got a private mortgage. We’re seeing more private lenders say, “We’re not offering renewals. Give me my money back.’ ” That can leave a borrower with no good options on short notice.
The best strategy
To determine the best option for extracting equity, you have to answer questions like:
How qualified are you? (A 720-plus credit score, fully provable income, and reasonable debt-to-income get you more options.)
How big of a loan do you need relative to your home value? (Unless you’re well qualified, expect to pay more, especially if your total borrowing amounts to more than 65 per cent of your home value.)
What options does your existing lender offer?
Where are you located, and what kind of property do you own?
“Always contact your existing lender first or the broker who arranged your mortgage,” Mr. Stillman said. Borrowing from the same cookie jar is typically cheaper than sticking your hand in a new one.
And if you have no choice but to use a non-prime HELOC or private mortgage, have a plan to pay it off or get back to a low-rate institutional lender within 12 to 24 months. Otherwise, you’ll find yourself running on a hamster wheel of high rates – for years.
In short, if tapping more of your equity seems like a date with financial ruin, selling your home may be smarter. When managing payments gets too tough, renting for a while and wiping your debt slate clean isn’t the worst answer.
Hot inflation on Tuesday could threaten mortgage rates
The lowest nationally-advertised five-year fixed rates were mostly stable this week.
We did see very slight easing of default-insured fixed rates, however, after bond yields plunged following the attacks in Israel.
Bond investors often buy government bonds for safety during times of turmoil, which keeps a lid on mortgage rates, but it’s too early to say if the crisis in the Middle East will keep rates down for any appreciable amount of time.
The bigger picture also isn’t pretty with U.S. inflation coming in hotter than expected and weak U.S. bond auctions on Thursday. As often happens, American problems pressure Canadian yields higher. And rates on both sides of the border remain in a longer-term uptrend.
Tuesday is going to be a nail-biter. The Bank of Canada gets a reality check with the much anticipated September inflation report. It likely won’t look any prettier than today’s ugly U.S. data.
That’s bound to put the BoC in a corner, facing a tough decision on whether to hike rates again at its Oct. 25 meeting. If oil prices rebound higher in any significant way, that could be inflationary and drive up inflation expectations – potentially leaving the BoC with little choice.
Rates were sourced from the MortgageLogic.news Canadian Mortgage Rate Survey on October 12, 2023. We include only providers who advertise rates online and lend in at least nine provinces. Insured rates apply to those buying with less than a 20 per cent down payment or switching a pre-existing insured mortgage to a new lender. Uninsured rates apply to refinances and purchases over $1 million and may include applicable lender rate premiums. For providers whose rates vary by province, their highest rate is shown.