The mortgage refinancing industry has been the latest victim to the coronavirus pandemic, which is impacting the entire economy on multiple fronts.
While the mortgage financing market has been running into more troubles over the last few weeks, the government has allowed certain purchase transactions to go through.
However, refinancing is a whole new problem. Since they’re uninsurable, the risk falls squarely upon the lenders. While purchase transactions enable ownership changes, making mortgage issuance an essential aspect of this process, a mortgage refinance is a non-essential process, which is causing problems for those looking to refinance their mortgages.
Here are three reasons why Canadians are finding it much tougher to refinance their mortgages:
1. Increased Scrutiny on the Employment and Income of the Applicants
Over 1 million jobs were terminated in March this year with more job losses and layoffs on the way. Lenders are concerned about the income stability of the applicants in the long run, which has forced them to adopt a more conservative stance. Lenders are coming up with more stringent requirements for people looking to refinance their home mortgages. Banking institutions are wary of taking unnecessary risks given the economic downturn and are being extra cautious in their approach. Although these job cuts may be temporary, the full impact of the pandemic on the economy remains to be known.
2. Appraisal Valuations Aren’t as High as Expected
Appraisers depend on actual sales data for coming up with property valuations in their reports. However, there’s been a steep decline in the sales figures since March, which means there’s a lack of sufficient data. While the government has deemed most sectors in the real estate market to be ‘essential’, only certain transactions are permitted right now. The industry is in a complete slump right now.
Additionally, an air of conservatism and pessimism is all around the real estate industry right now, causing appraisers to be cautious in their valuation reports. Low appraisal values are expected to derail the market further. With appraisal valuations falling down further, mortgage refinancing applications aren’t as beneficial anymore.
3. Lower LTV Ratio Lending Maximum Caps
Prior to the pandemic, private mortgage lenders were allowed to refinance over 80% of the property’s appraised value, which wasn’t possible for institutional lenders. However, the current situation means that lenders are wary of taking any more risks.
Certain small banks have announced their plans to cap refinancing to only 75% of the property’s appraised value. Other B-lenders are following suit as well in high-value urban areas.
Small cities and rural areas are likely to see a further decline in maximum LTV.
The mortgage refinancing industry is in for a significant upheaval in the next few months.
When you factor in the lower LTV ratios, tougher appraisals, lower property values, and loss of disposable income, mortgage refinancing is arguably a dangerous and risky game to be in right now. While some borrowers might still be eligible for certain refinancing options, things are never going to be the same again for the foreseeable future.