Refinance Your Mortgage & Win in Today’s Rental Market
Rent prices have fallen drastically in Ontario and Landlords have felt the hit hard. Many rental units are on the market for prolonged periods of time while they remain vacant. According to Renters.ca December 2020 Rent Report Toronto’s rents were down 20 percent, year-over-year, in November 2020. Let’s look at these numbers in detail and see what options Landlords have when they refinance the mortgage.
Let’s take an example where a Landlord purchased a condo for $525,000 four years ago and put down 20%. Last year they were renting the condo unit for $2,200 a month, but it’s now vacant for 2 months. They are potentially holding out for a higher rental amount. Their mortgage and overall carrying costs might look something like the graph below:
Landlord: Refinance the mortgage & have a few options
Let us look at three examples. Firstly, refinance at a lower interest rate and pay off their mortgage quicker. Secondly, refinance with low-interest rates and reduce the monthly out-of-pocket carrying costs. Lastly use built-up equity from refinancing and take advantage of the low-interest rates.
Refinance the Mortgage Scenario
At the beginning of last year, this Landlord was only out of pocket $339 a month. But was probably banking that the property value would go up and the out-of-pocket amount would go to the principal.
Now with the new market, things have changed drastically. They’re paying the same carrying costs but their new expected rental income is $1,760 (20% lower than last year). When the Landlord rents the unit out, the Landlord is out of pocket $779 a month. A difference of an extra $440 a month or $5,280 a year. For argument’s sake, let us say the new Condo value is $600,000 after these four years. With the current market inventory of condos, the landlord would probably take a loss if they were to sell now.
Option 1: Refinance the Mortgage & Pay-off Quicker
This option is where the Landlord has owned the unit for four years and could now take advantage of the lower interest rates. That is to say, reduce their monthly carrying costs while being mortgage-free 1 year sooner.
The landlord will be mortgage-free 1 year earlier which saves tens of thousands of dollars. Meanwhile, still have a lower out-of-pocket amount of $226 a month which would save $2,712 in the first year. Furthermore, more would go towards the principal and reduce the amount paid towards interest.