The No-Nonsense Guide to Mortgage Refinancing in Canada

Are you ready to save some serious money on your mortgage?

Keep more of your hard-earned cash where it belongs-with you.

This guide will show you how, without the fluff found in other mortgage refinancing guides. At EveryRate, we're committed to providing clear, straightforward advice to help you navigate the mortgage refinancing process in Canada.

With careful planning, expert advice, and thoughtful decisions, mortgage refinancing can be a game-changer.

Now, your inner voice is probably asking, "Can I actually save thousands of dollars?" Or you might be wondering if refinancing your mortgage is the right move. Maybe you want to tap into your home equity for a major expense or consolidate your debt under a lower interest rate.

Every situation is unique-including yours.

You could save more, or you might save less.

Even small changes in your mortgage terms can add up. Over time, these savings can compound, significantly impacting your finances.

Whatever your reason, we're here to help.

How EveryRate's Guide Stands Out

At EveryRate, we do more than just outline steps we empower you to ask the right questions to discover the mortgage product that truly fits your unique financial situation.

This tailored guide for Canadian homeowners is packed with practical, actionable insights, featuring realistic and relatable scenarios you can apply to your own life. This valuable information could potentially save you thousands over the duration of your mortgage.

Designed to help you understand every aspect of the refinancing process, EveryRate's guide takes you from assessing your current mortgage all the way to navigating legal implications and expenses. Our goal is to equip you with the knowledge you need to secure the best possible refinancing terms, leading you toward financial success.

Chapter 1: Understanding Mortgage Refinancing - Learn the fundamentals of mortgage refinancing, including how it works, the key benefits, and the critical differences between refinancing and renewing your mortgage.

Chapter 2: Real-World Mortgage Refinancing Examples - Explore practical case studies of homeowners who refinanced, demonstrating how smart decisions can lead to substantial savings and improved financial stability.

Chapter 3: Navigating the Canadian Mortgage Landscape - Understand the variety of mortgage lenders in Canada, from banks to private lenders, and learn how to choose the right one to maximize your savings and secure better terms.

Chapter 4: Defining Your Financial Goals - The First Step to Smart Mortgage Refinancing - Establish clear financial goals before refinancing to make informed decisions. This chapter will help you determine whether you're looking to lower monthly payments, access funds, or plan for future expenses.

Chapter 5: Know Your Numbers to Prepare for Successful Refinancing - Assess your financial health, including income, expenses, and current mortgage terms. This chapter guides you in evaluating your readiness for refinancing and identifying the best options.

Chapter 6: Step-by-Step Mortgage Application for a Successful Mortgage Refinance in Canada - A detailed guide to the refinancing process, from gathering necessary documents to navigating lender requirements, ensuring a smooth and efficient experience.

Chapter 7: Risks and Considerations When Refinancing a Mortgage - Identify and manage the risks of refinancing, such as increased debt, potential negative equity, and prepayment penalties, to make informed decisions.

Chapter 8: How Using a Mortgage Broker to Refinance Can Save You Money - Discover how mortgage brokers can streamline the refinancing process, provide access to better rates, and offer expert advice tailored to your needs.

Chapter 9: Yes, You Can Negotiate Mortgage Rates. Here’s How to Do It - Learn effective strategies for negotiating lower mortgage rates during the refinancing process, ensuring you secure the best possible terms for your financial situation.

Chapter 10: Now Get Out There & Make Refinancing Work for You! - In this final chapter, wrap up everything you've learned about mortgage refinancing and how it applies to your financial goals. Whether you're aiming to lower your interest rate, access home equity, or consolidate debt, the key is making informed choices. You'll be equipped to take action confidently, unlocking savings and ensuring refinancing aligns with your financial journey.

Chapter 1: Understanding Mortgage Refinancing

You've already got a mortgage on your home. Refinancing simply means you're taking out a new loan to replace your current mortgage. Often, that includes new terms and interest rates. In most cases, refinancing allows you to borrow up to 80% of your home's appraised value.

Refinancing your mortgage can lead to significant savings. It may sound simple, but in reality it's a fairly complex process. If it were easy, you wouldn't be reading this impressively helpful guide.

What you may not realize is that refinancing costs money-choosing the wrong mortgage product for you and your needs can lead to some pretty expensive mistakes.

So, why would you want to borrow more money on top of the money you've already borrowed? There are far too many reasons to list here. And yes, there are just as many reasons why it's probably not a great move.

Let's look at some of the essential points to help you navigate this potentially money-saving journey.

The Benefits of Refinancing

• Lower interest rates
• Longer repayment periods
• Access to home equity

Refinancing vs. Renewing

The difference between refinancing and renewing your mortgage are important to know:

• Renewing: You extend your current mortgage with the same lender, typically at the end of your term.

• Refinancing: You break your existing mortgage and take out a new one, possibly with a different lender. You can incur prepayment penalties, but it can also secure better terms or a larger loan.

Key Questions to Consider Before Refinancing

• What is my current mortgage rate versus the current refinance rates in my area?
• What are my legal and closing costs?
• Do I need to consolidate high-interest debt?
• What are the penalty costs for breaking my mortgage?
• Will refinancing improve my overall financial health and lifestyle?

When Refinancing Might Not Be the Best Option

Refinancing can be a great move, but it's not always your best option. There are several costs involved in refinancing that are often forgotten or overlooked—costs that could ultimately cause you to reconsider your decision.

For instance, if you consider refinancing at a lower interest rate, but the penalties to break your current mortgage are too high, it would likely make more sense to wait until the end of your term before shopping for a better deal.

Similarly, you can refinance by extending your amortization period, which would lower your monthly payments. However, it would also increase the total amount of interest paid over the lifetime of your loan.

We cover these and other scenarios in this guide so you know you're making the right decision for your unique situation.

Chapter 2: Real-World Mortgage Refinancing Examples

Feeling overwhelmed by the refinancing process? You're not alone. But there's a bright side: it's incredibly empowering learning about the successes of others who have navigated this path.

This chapter offers several realistic (but fictional) situations involving common refinancing cases, ideally to provide you with a clearer understanding of how to apply these strategies to your circumstances.

These examples will highlight how small, but smart, decisions can lead to substantial savings. They will also help demystify the process, highlighting key considerations and demonstrating the potential outcomes of different refinancing options.

Why This Might Be Helpful: Real-life examples can be incredibly valuable when explaining how different refinancing strategies work, ideally by providing tangible insights into their benefits and drawbacks.

What You'll Learn in This Chapter: Different refinancing scenarios, reflecting real-world applications of the information and recommendations in this guide, are presented here. By establishing a solid knowledge base, you'll have the confidence needed to make smart refinancing decisions that align with your financial goals.

So, let's dive in and explore these success stories. Hopefully, they will provide you with the insights and inspiration needed to make your refinancing journey as smooth and beneficial as possible.

Can you apply any of these situations to your own refinancing journey?

• 1 - Michael Breaks His Mortgage to Secure a Lower Rate
• 2 - Amanda & Brian Extend Their Amortization to Reduce Monthly Payments
• 3 - Sarah & Aideen Use a HELOC to Fund Renovations and Education Costs
• 4 - Mark & Lisa Refinance to Consolidate Debt & Free Up Cash Flow
• 5 - Robert & Emma Add a Second Mortgage Without Losing Their Low Rate
• 6 - Alex & Ming Use a Second Mortgage to Manage Education Costs & Debt

Example 1. Michael Breaks His Mortgage to Secure a Lower Rate

Meet Michael, a homeowner in his early 30s living in Edmonton. With mortgage interest rates dropping, Michael noticed that the rate he secured two years ago when he bought his home is now higher than those currently available. Michael would like to know if breaking his mortgage early to lock in a lower rate would help him save money in the long run.

His Situation: Michael's current mortgage is $250,000 with a 3.99% fixed interest rate, and three years left in his five-year term. His monthly mortgage payment is $1,315. After seeing mortgage rates as low as 2.89%, Michael contacted a mortgage broker to explore his options.

• Key Points:
  • $250,000 mortgage balance
  • 3.99% interest rate with three years left in a 5-year term
  • Breaking his mortgage would incur a penalty of $5,000
  • New mortgage rates are available at 2.89%

Michael's broker explains that while breaking his mortgage will come with a penalty, the savings from a lower interest rate might outweigh the upfront costs.

His Refinancing Option: Michael decides to break his current mortgage, pay the $5,000 penalty, and refinance at a lower 2.89% interest rate with a new five-year term. Here's how the numbers work out:

• Total Actual Costs:
• New mortgage: $250,000 at 2.89%, 5-year term, 25-year amortization
• New monthly payments: $1,167.67
• Monthly savings: $147.33
• Total savings over three years: $5,303.88
• Upfront penalty: $5,000
• Principal remaining after three years: $231,758.41

Total monthly payments: $1,167.67

How It Worked Out: Michael calculated that, despite the $5,000 penalty, he would save just over $300 in the first three years by breaking his mortgage early. Beyond those three years, he would continue to save nearly $150 per month at the lower interest rate. By working with a mortgage broker, Michael felt confident that this was the right decision for his financial future.

Key Takeaway: Breaking a mortgage can be a smart choice if the savings from a lower interest rate offset the penalty. Working with a broker can help you with the calculations to determine if it's worth it, as in Michael's case, where he saved in both the short and long term.

Example 2. Amanda & Brian Extend Their Amortization to Reduce Monthly Payments

Meet Amanda and Brian, a couple in their early 40s living in Montreal. With 20 years remaining on their mortgage, they are facing an increase in their monthly expenses due to daycare costs for their two young children. After reviewing their budget, they realize they need to lower their monthly mortgage payments to make ends meet.

Their Situation: They have $350,000 remaining on their mortgage at a 3.75% fixed interest rate, with monthly payments of $2,070. They've been paying their mortgage for a few years and initially secured this favourable rate. Fortunately, current interest rates have come back down to around 3.75%, matching their existing rate. With their income stretched thin, they need a solution that reduces their monthly payments without increasing their interest rate.

• Key Points:
• $350,000 mortgage balance
• 20-year amortization remaining
• Seeking to reduce monthly payments

After speaking to a mortgage broker to explore their options, Amanda and Brian discover they can refinance their mortgage and extend their amortization period to 30 years. Since interest rates have returned to 3.75%, they can refinance at the same rate they currently have, which reduces their monthly payments immediately.

Their Refinancing Option: Brian and Amanda decide to extend their amortization period to 30 years at their existing interest rate of 3.75%. This allows them to lower their monthly payments at their current interest rate.

• Total Actual Costs:
• $350,000 mortgage: 3.75% fixed rate, 30-year amortization
• New monthly payments: $1,620.99
• Monthly savings: $449.01
• Principal remaining after the 3-year term: $335,453.10

Total monthly payments: $1,620.99

By extending the amortization period, Amanda and Brian achieve their goal of lowering their monthly payments by nearly $450. Though they will pay more interest over the life of the mortgage, they feel the short-term financial relief is worth it.

How It Worked Out: Amanda and Brian's decision to extend their amortization period provided them with the breathing room they needed in their monthly budget. By working with a mortgage broker, they were able to find a solution that maintained their favourable interest rate while adjusting their monthly payments to fit their current financial situation. This helped them avoid dipping into savings or taking on high-interest debt to manage their expenses.

Key Takeaway: Extending your amortization can be a smart option if you're looking for lower monthly payments without having to refinance at a higher interest rate. It's important to weigh the long-term costs, but for families like Amanda and Brian, this strategy can provide immediate financial relief.

Example 3. Sarah & Aideen Use a HELOC to Fund Renovations and Education Costs

Meet Sarah and Aideen, a couple in their late 40s living in Toronto. They've owned their home for 12 years and have built up a substantial amount of equity. They have a fixed-rate mortgage with a favourable interest rate. They're happy with the terms. However, they have some financial goals and upcoming expenses that need to be addressed.

Recently, they decided to renovate their kitchen. As well, their daughter Emma is starting university in the fall, which means they have to pay her tuition for the next four (or more) years.

Their contractor estimated the kitchen renovation will cost $50,000. Emma's university tuition and other related expenses will likely require approximately $40,000.

Sarah and Aideen have been clients of the same bank since they bought their house 12 years ago. At that time, they went directly to their local bank branch, one of the big five in Canada. Since then, they've renewed their mortgage twice, both times directly with their bank. Two years ago, their second renewal, they locked in a 2.89% five-year, fixed-rate mortgage. They have $300,000 remaining on their mortgage with 13 years left on the amortization schedule.

Should Sarah and Aideen refinance their entire mortgage? Because their current mortgage interest rate will remain low for another three years, refinancing their entire mortgage would mean losing their current favourable interest rate and potentially incurring a three-month interest penalty. Moreover, they determined that they won't need all the funds at once because Emma's education expenses are spread out over the next few years.

What are Sarah and Aideen's options? To understand their available options, they should examine their current situation and their desired future direction.

• Key Points:
• Low interest rate on current mortgage
• Current bank can facilitate multiple mortgage components, like a second mortgage or HELOC
• Require funds at different times in the future
• Comparable mortgage rates are 5.19%, 2.3% higher than their existing mortgage

Using this information, Sarah and Aideen consider three possible solutions.

OPTION ONE: Refinance the Entire Mortgage

• Total Actual Costs:
• $390,000 mortgage: 5.19% 3-year fixed rate, 25-year amortization
• Total interest paid over three years: $58,259.50
• Total principal paid over three years: $24,923.03
• Total cost: $83,182.53
• Principal remaining at the end of the 3-year term: $365,076.97

Total monthly payments: $2,310.63

Given the higher interest rate, Sarah and Aideen decide that refinancing the entire mortgage does not sound like a suitable strategy. What is their next option?

OPTION TWO: Add a Second Mortgage from the Same Bank

Sarah and Aideen got a mortgage from their bank that combines multiple mortgages into one charge. Some lenders allow you to register a second mortgage and offer products that support having multiple mortgages.

They could take the $90,000 out in a new 3-year, fixed-rate mortgage at 5.19%.

• Current Mortgage:
• $300,000 mortgage: 2.89% 3-year fixed rate, 13-year amortization
• Monthly payments: $2,306.74
• Total interest paid over three years: $23,392.61
• Total principal paid over three years: $59,620.20
• Total cost: $83,042.21
• Principal remaining at the end of the 3-year term: $240,349.80

• Plus the additional mortgage:
• $90,000 mortgage: 5.19% 3-year fixed rate, 25-year amortization
• Monthly payments: $533.22
• Total interest paid over three years: $5,751.47
• Total principal paid over three years: $14,219.29
• Total cost: $19,195.97
• Principal remaining at the end of the 3-year term: $84,248.53

Total monthly payments: $2,2306.74 + $533.22 = $2,839.96

Sarah and Aideen consider this option, but realize they don't require all the money at once. They would want to avoid any unnecessary costs incurred for borrowing money they don't need.

OPTION THREE: Add a HELOC

Instead of refinancing their mortgage, Sarah and Aideen decide to keep their current mortgage and add a Home Equity Line of Credit (HELOC).

Their property appraisal is valued at $800,000. Considering their current remaining mortgage balance of $300,000, they have $500,000 in available home equity. Their bank approves a HELOC for up to 80% of their home equity, amounting to $400,000. However, Sarah and Aideen decide to withdraw just $90,000 to cover their renovation and Emma's future education costs.

For the kitchen renovation, they draw $50,000 from their HELOC. The interest rate on the HELOC is variable but lower than a personal loan or credit card rate. As well, they only pay interest on the $50,000 they've withdrawn. The remaining $40,000 is left available for when Emma starts university, giving them the flexibility to withdraw the exact amounts needed for tuition each semester and, more importantly, minimizing interest payments.

• Current Mortgage:
• $300,000 mortgage: 2.89% 3-year fixed rate, 13-year amortization
• Monthly payments: $2,306.74
• Total interest paid over three years: $23,392.61
• Total principal paid over three years: $59,620.20
• Total cost: $83,042.21
• Principal remaining at the end of the 3-year term: $240,349.80

• Plus funds withdrawn from their HELOC:
• $50,000 HELOC: 6.95%
• Monthly payments: $289.53
• Total interest paid over three years: $10,425
• Total principal paid over three years: $0 without additional payment (free to make as many payments as you wish against the principal)
• Total cost: $10,425
• Principal remaining at the end of the 3-year term: $50,000

Total monthly payments: $2,306.74 + $289.53 = $2,596.27

Overall Savings Review: While the monthly payments on all three strategies are somewhat similar, the HELOC option clearly saves the most money for Aideen and Sarah. At the end of the three-year term, they will have paid the most principal on their mortgage while still having the flexibility to do their kitchen renovation and fund their daughter's education.

How It Worked Out: Sarah and Aideen renovate their kitchen without interrupting their current mortgage, which means they still benefit from the low fixed rate, while avoiding prepayment penalties. The new kitchen increased their home's value and their ability to properly entertain their family and friends. With the HELOC, they're managing Emma's university expenses as they arise, and only paying interest on the funds they use. This allows them to better manage their monthly budget and avoid unnecessary interest costs. Using the HELOC instead of high-interest credit cards or personal loans also saves them money on interest payments.

Key Takeaway: A HELOC is an excellent option for homeowners who want to access their home equity for immediate and future expenses, without refinancing their entire mortgage. It offers lower interest rates and the ability to pay interest only on the funds used, making it a flexible and versatile mortgage product.

Example 4. Mark & Lisa Refinance to Consolidate Debt & Free Up Cash Flow

Meet Mark and Lisa, a couple in their early 50s living in Vancouver. They've been homeowners for more than 10 years. In this time, they've accumulated significant equity in their home. They are considering their financial options to consolidate some high-interest credit card debt and possibly to remodel their outdated kitchen and bathrooms.

Their Situation: Lisa is between jobs. With just Mark's income, they need some relief from the monthly debt repayments that continue to accumulated as a result of their single income and the higher interest they are paying on their credit card debt.

Their current remaining mortgage balance is $200,000 at a 4.34% fixed interest rate, with three years remaining on their current mortgage term. They've been with the same lender, for the entirety of their mortgage. Their current monthly payments are $2,053.66 for the mortgage and $900 per month for credit cards, totaling $2,953.66 per month.

Mark and Lisa's builder estimates the renovation cost at $100,000. Additionally, they have $30,000 in high-interest credit card debt. They're exploring ways to leverage their home equity to cover these costs and improve their overall financial health.

• Key Points:
• 25-year amortization period
• Need funds for debt repayment and renovations
• Lender does not offer multiple mortgage components
• Comparable mortgage rates are at 5%, which is 0.66% higher than their current mortgage

Let's examine the three potential solutions for Mark and Lisa.

OPTION ONE: Refinance the Entire Mortgage

By refinancing, Mark and Lisa replace their existing mortgage with a new one for $330,000 (the original remaining $200,000 balance plus the $130,000 equity withdrawal). The new mortgage has a fixed interest rate, which is slightly higher than their old rate but still much lower than their credit card interest rates.

• Total Actual Costs:
• $330,000 mortgage: 5% 3-year fixed rate, 30-year amortization
• Monthly payments: $1,761.18
• Total interest paid over three years: $47,901.84
• Total principal paid over three years: $15,500.61
• Total cost: $63,402.45

Total monthly payments: $1,761.18

Monthly payment difference: By accessing $130,000 in equity, at an interest rate of 5%, Mark and Lisa improve their cash flow by $1,192.48, leading to a cash flow savings of $42,929.28 over three years.

OPTION TWO: Add a Second Mortgage from Another Lender

Because their lender does not provide a secondary mortgage product, Mark and Lisa approach one of the big five banks to apply for a second mortgage. With this option, they can retain their existing low-interest mortgage while having access to additional funds, at a (slightly) higher rate, for their renovation and debt consolidation.

• Current Mortgage:
• $200,000 mortgage: 4.34% 3-year fixed rate, 10-year amortization
• Monthly payments: $2,053.66
• Total interest paid over three years: $51,269.24
• Total principal paid over three years: $22,662.61
• Total cost: $73,931.85
• Principal remaining at the end of the 3-year term: $148,730.76

• Plus The Second Mortgage:
• $130,000 mortgage - 5% 3-year fixed rate, 30-year amortization
• Monthly payments: $693.80
• Total interest paid over three years: $6,106.30
• Total principal paid over three years: $18,870.41
• Total cost: $24,976.71
• Principal remaining at the end of the 3-year term: $123,893.70

Total monthly payments: $2,053.66 + $693.80 = $2,747.46

Although this option allows Mark and Lisa to pay more principal, they end the three-year term with a mortgage balance of $272,623, compared to the previous $314,499 remaining principal. However, for Mark and Lisa, lower monthly payments are still the priority.

OPTION THREE: Add a HELOC

Mark and Lisa's current lender would approve the addition of a $130,000 HELOC behind their current $200,000 mortgage. This option provides them with greater flexibility, allowing them to withdraw funds as needed and pay interest only on the amount borrowed. However, the HELOC's higher interest rate can result in higher overall costs if not actively managed.

• Current Mortgage:
• $200,000 mortgage: 4.34% 3-year fixed rate, 10-year amortization
• Monthly payments: $2,053.66
• Total interest paid over three years: $51,269.24
• Total principal paid over three years: $22,662.61
• Total cost: $73,931.85
• Principal remaining at the end of the 3-year term: $148,730.76

• Plus funds withdrawn from HELOC:
• $130,000 HELOC: 6.95%, interest only variable rate
• Monthly payments: $752.91
• Total interest paid over three years: $27,105
• Total principal paid over three years: $0 (interest only, free to make as many payments as you wish against the principal)
• Total cost: $27,105
• Principal remaining at the end of the 3-year term: $130,000

Total monthly payments: $2,053.66 + $752.91 = $2,806.57

HELOC Pros: Using their lower-interest HELOC to pay off their high-interest credit card debt significantly reduces their monthly interest expenses-which falls under their short-term priorities. The HELOC also provides the entire amount needed to fully fund and complete their home renovations with minimal financial strain. As well, their uninterrupted fixed-rate mortgage is predictable, which helps with monthly payments and further budgeting.

HELOC Cons: The new $330,000 mortgage balance means more interest paid over the course of their livesincluding, potentially, beyond their current mortgage amortization schedule. However, it makes sense for shorter-term cash flow needs. While the fixed interest rate mortgage is lower than their credit card rates, it is higher than their previous mortgage rate (prior to the addition of a HELOC).

How It Worked Out: Mark and Lisa successfully completed their home renovations, significantly increasing the value and enjoyment of their home. By paying off their high-interest credit card debt with funds drawn from their HELOC, they improved their financial health and saved on monthly interest charges. The lower monthly mortgage adjustment was manageable for their budget, and the predictability of the fixed-rate mortgage provided peace of mind.

Key Takeaway: Refinancing and pulling out equity in one lump sum can be an effective strategy for homeowners looking to fund major expenses and consolidate high-interest debt. It offers the benefits of immediate access to funds and predictable monthly payments, though it may result in higher monthly mortgage payments. When comparing this option to a HELOC, the lump sum provides stability and eliminates the risk of variable interest rates, making it a suitable choice for those who prioritize financial certainty.

Example 5. Robert & Emma Add a Second Mortgage to Expand Their Home Without Losing Their Low Rate

Meet Robert and Emma, a couple in their late 30s living in Calgary. They've owned their home for 10 years and built considerable equity. Two years ago, they locked in a low fixed interest rate of 3.4% on their primary mortgage ($250,000), with 20 years remaining on their amortization schedule. They are very satisfied with the terms of this mortgage, but they're exploring their options to finance the construction of an addition onto their home.

Their Situation: Robert and Emma want to add a new bedroom and a home office to accommodate their growing family and remote work needs. Their contractor estimated the cost of the addition at $75,000. Their preference is not refinancing their entire mortgage to avoid losing their current low interest rate and potentially facing a higher rate.

• Key Points:
• Built up significant equity in their home.
• Low interest rate on their existing mortgage.
• Current bank can facilitate multiple mortgage components.
• Require funds all at once.
• Comparable mortgage rates are at 5%, which is 1.6% higher than their existing mortgage.

Let's explore three scenarios to determine the best option for Robert and Emma.

OPTION ONE: Refinance the Entire Mortgage

To refinance their entire $250,000 mortgage, Robert and Emma would lose their current low interest rate. As well, their current monthly payments are quite manageable for them, which means this option appears to cost more in the long run.

• Total Actual Costs:
• $325,000 mortgage: 5% 3-year fixed rate, 30-year amortization
• Monthly payments: $1,734.49
• Total interest paid over three years: $47,176.06
• Total principal paid over three years: $15,265.75
• Total cost: $62,441.81
• Principal remaining at the end of the 3-year term: $309,734.25

Total monthly payments: $1,734.49

OPTION TWO: Add a Second Mortgage from the Same Provider

Robert and Emma decide to add a second mortgage from their current lender, which allows them to retain their existing low mortgage rate while obtaining the additional funds needed for the addition onto their house. By keeping the primary mortgage intact, they avoid the higher interest rates associated with refinancing the entire mortgage.

• Current Mortgage:
• $250,000 mortgage: 3.4% 3-year fixed rate, 20-year amortization
• Monthly payments: $1,434.04
• Total interest paid over three years: $27,641.63
• Total principal paid over three years: $23,983.85
• Total cost: $51,625.48
• Principal remaining at the end of the 3-year term: $222,358.37

• Plus The Second Mortgage:
• $75,000 mortgage: 5% 3-year fixed rate, 25-year amortization
• Monthly payments: $436.20
• Total interest paid over three years: $4,914.43
• Total principal paid over three years: $10,788.90
• Total cost: $15,703.33
• Principal remaining at the end of the 3-year term: $70,085.57

Total monthly payments: $1,434.04 + $436.20 = $1,870.24

With only $135 a month difference between this and option ONE, Robert and Emma end the three-year term with more than $18,000 more principal paid down when compared to option ONE.

OPTION THREE: Add a HELOC

Robert and Emma consider adding a HELOC behind their current $250,000 mortgage. This option provides the flexibility to withdraw funds as needed and only pay interest on the amount borrowed. However, the HELOC's variable interest rate can fluctuate increasing their monthly payments over time.

• Current Mortgage:
• $250,000 mortgage: 3.4% 3-year fixed rate, 20 year amortization
• Monthly payments: $1,434.04
• Total interest paid over three years: $27,641.63
• Total principal paid over three years: $23,983.85
• Total cost: $51,625.48
• Principal remaining at the end of the 3-year term: $222,358.37

• Plus funds withdrawn from HELOC:
• $75,000 heloc: 6.95% variable rate, interest only
• Monthly payments: $434
• Total interest paid over three years: $15,637.50
• Total principal paid over three years: $0 (interest only, additional payments allowed)
• Total cost: $15,637.50
• Principal remaining at the end of the 3-year term: $75,000
• Total principal remaining after the 3-year term: $297,358.37

Total monthly payments: $1,434.04 + $434 = $1,868.04

Even though the monthly payments in option THREE are similar to option TWO, using a HELOC, Robert and Emma finish the term with less principal remaining on their mortgage. Option TWO saves them around $5,000 over three years.

The Solution: Adding a Secondary Mortgage with Their Existing Lender (Option Two)

Robert and Emma's home, valued at $600,000, has a remaining mortgage balance of $250,000. After considering their options with their existing lender, they decide to leverage their home equity and add a secondary mortgage for $75,000.

Advantages of Securing a Second Mortgage with the Same Lender

• Avoid disrupting their first mortgage, paying penalties and losing a lower interest rate.
• Simpler application and approval process because the lender has all information.
• Relationship and expertise build trust, ensuring Robert and Emma receive the most suitable mortgage solution.
• Maintain their current low interest rate on their primary mortgage.

How the terms and interest rates compare: Although the second mortgage's fixed interest rate is higher than the primary mortgage, it's still affordable. The loan term of the second mortgage is for three years, which allows Robert and Emma to renew both mortgages at the same time. This setup ensures that their monthly payments remain manageable and within their budget for the next three years.

How It Worked Out: Working with their current lender, Robert and Emma successfully secured the second mortgage and used the funds to complete the addition to their house. The new bedroom and home office significantly improved their living space and increased the value of their property. The streamlined process with their existing lender saved them time and effort, and the competitive terms of the second mortgage made the project financially feasible.

By adding a second mortgage, they preserved the favourable terms of their original low-rate mortgage, while accessing the additional funds at a reasonable interest rate. The fixed-rate of the second mortgage provided predictable monthly payments, which helped maintain their financial stability.

Key Takeaway: Adding a secondary mortgage with an existing lender can be a practical and efficient way to finance major expenses without refinancing your entire mortgage. It offers access to home equity and competitive terms. This option is ideal for homeowners who need additional funds but want to preserve their existing mortgage arrangements, especially when they have a locked-in low-interest rate.

Example 6. Alex & Ming Use a Second Mortgage from a Non-Bank Lender
to Manage Education Costs & Debt

Meet Alex and Ming, a couple in their mid-40s living in Ottawa. They have owned their home for 12 years and have built up substantial equity. Two years ago, they refinanced their mortgage to secure a low fixed interest rate, which they want to retain. The couple needs additional funds to finance their two children's university tuition and pay off some high-interest debts. Alex recently opened his own business, so their monthly household income is tight, which is causing stress about meeting their monthly payments. Alex forecasts his return to a higher income bracket in two years, so they need a temporary solution to get by.

The Situation: Alex and Ming need $150,000 to cover their two children's upcoming university tuition and to consolidate $90,000 in personal loans and credit card debt. Their current mortgage lender won't approve a second mortgage due to their debt-to-income ratio (see chapter 6).

Current Mortgage: $200,000, three years remaining, 3.69% fixed interest rate, 15-year amortization remaining.

• Funds Needed:
• $60,000 for children's university tuition
• $90,000 for credit card debt and Alex's business loans

• Key Points:
• Low interest rate on their current mortgage
• Inability to qualify for secondary mortgage with traditional lenders
• Strong exit strategy within two years
• Require funds all at once

Following are three options presented to Alex and Ming by their mortgage broker.

OPTION ONE: Refinance the Entire Mortgage with a Non-Bank Lender

This option involves breaking their existing mortgage and moving into a one-year term with higher rates. The lender charges a fee (1% of mortgage) to start the mortgage. Although this results in higher monthly payments, it consolidates all debts into a single loan, simplifying their financial management.

• Total Actual Costs:
• $360,000 mortgage: 6.39% 1-year fixed rate, 30-year amortization
• Monthly payments: $2,229.84
• Total interest paid over one year: $22,584.33
• Total principal paid over one year: $4,173.76
• Lender fee (1%) (added to the loan amount): $3,600
• Total cost: $30,358.09
• Principal remaining at the end of the 3-year term: $355,826.24

Total monthly payments: $2,229.84

OPTION TWO: Add a Second Mortgage from a Non-Bank Lender

This option retains their first mortgage at the same low rate while adding a second mortgage from a non-bank lender who charges a fee and offers a higher interest rate. This approach maintain their existing favourable terms while addressing immediate financial needs.

• Current Mortgage:
• $200,000 mortgage: 3.69% 3-year fixed rate, 25-year amortization
• Monthly payments: $1,445.72
• Total interest paid over one year: $10,194.77
• Total principal paid over one year: $7,153.92
• Total cost: $17,348.69
• Principal remaining at the end of the 3-year term: $189,805.23

• Plus The Second Mortgage:
• $160,000 mortgage: 11% 1-year fixed rate, interest only
• Monthly payments: $1,466.66
• Total interest paid over one year: $17,600
• Lender fee (added to the loan amount): $3,000
• Total cost: $20,600
• Principal remaining at the end of the 3-year term: $160,000

Total monthly payments: $1,445.72 + $1,466.66 = $2,912.38

Although these monthly payments are slightly higher, Alex and Ming like that they can retain their first mortgage's low 3-year interest rate and, year after year, they pay down more principal on the mortgage.

OPTION THREE: Add a HELOC with a Non-Bank Lender

Alex and Ming consider a HELOC from a non-bank. They do need the money now and intend to use the full amount, a non-bank HELOC might cost more. This option provides flexibility in accessing funds as needed, but it comes with higher interest rates and fees.

• Current Mortgage:
• $200,000 mortgage: 3.69% 3-year fixed rate, 25-year amortization
• Monthly payments: $1,445.72
• Total interest paid over one year: $10,194.77
• Total principal paid over one year: $7,153.92
• Total cost: $17,348.69
• Principal remaining at the end of the 3-year term: $189,805.23

• Plus a HELOC:
• $160,000 HELOC: 13% 1-year fixed rate, interest only
• Monthly payments: $1,733.66
• Total interest paid over one year: $20,800
• Lender fee (added to the loan amount): $5,000
• Total cost: $25,800
• Principal remaining at the end of the 3-year term: $160,000

Total monthly payments: $1,445.72 + $1,733.66 = $3,179.38

Despite the need to access all the money at once, the higher interest rate and extra fee make the HELOC's flexibility less appealing to Alex and Ming.

Considerations Before Getting a Second Mortgage from a Different Lender

When considering a second mortgage from a different non-bank lender, there is often the potential for increased complexity. For example, Alex and Ming need to ensure that both lenders are aware of each other's involvement to avoid any legal or administrative issues. Coordination between lenders is crucial to streamline the process and prevent miscommunication and oversight.

Another consideration is the terms and interest rate. The second mortgage's interest rate from the new lender is higher than their primary mortgage, but lower than the rates on their credit card debt. This makes it a cost-effective solution for debt consolidation and to fund their children's university tuition. However, they must be prepared for an exit strategy, because maintaining this second mortgage beyond the first term is not a sound financial plan.

How the Terms and Interest Rates Compare: The secondary mortgage comes with a fixed interest rate that is higher than the primary mortgage but still manageable for the forseeable future. The term for the second mortgage is one year, with no renewal fee, allowing Alex and Ming to anticipate an exit with potential higher income in the next two years. The rate is significantly lower than their high credit card interest rates, providing substantial savings over time.

How It Worked Out: By securing a second mortgage from a different non-bank lender, Alex and Ming were able to access the $150,000 they needed without losing their favourable existing mortgage terms. They used $60,000 to pay for their children's tuition and $90,000 to pay off their high-interest credit card debt, thus improving their financial stability and reducing their overall monthly interest expenses.

Their mortgage broker streamlined the process by coordinating with both lenders and ensuring all necessary paperwork was completed accurately and on time. This support was invaluable in navigating the complexities of dealing with multiple lenders.

Key Takeaway: Obtaining a second mortgage from a non-bank lender can be a viable solution when your current lender won't approve additional financing. It allows you to leverage your home equity without altering your primary mortgage. While the terms and interest rates may be higher than those of your first mortgage, they can still be lower than other financing options like credit cards. Working with a mortgage broker can help streamline the process and ensure all parties are properly coordinated. This strategy is particularly useful for homeowners who need additional funds but want to preserve their existing mortgage arrangements and avoid higher refinancing rates.

Chapter 3: Navigating the Canadian Mortgage Landscape

Is it time for you explore your refinancing options, but you're unsure of where to start that journey? Understanding the Canadian mortgage landscape is a crucial first step towards making informed, money-saving decisions. This chapter will break down and explain the various types of lenders and mortgage products available out there. Let's simplify the mortgage maze and uncover the best options for your financial goals.

Why this Chapter is Important: This isn't just about taking out a loan; it's about finding the best loan and lender for your unique situation. Knowing the differences between banks, credit unions and mortgage brokers can save you a significant amount of money and stress. By exploring all of your options, you can secure better rates, terms and conditions. Remember, understanding your choices today will pay off in the long run.

What you'll learn in this chapter:

• Key differences between banks, credit unions and monoline lenders
• Comparing multiple mortgage options to find the best overall value
• Typical mortgage closing costs to expect

Understanding the Differences: When it comes to refinancing, not all lenders are created equal. Banks, credit unions and monoline lenders each have their strengths and weaknesses. Canadian banks are well-known and trusted institutions but are often limited in their product offerings. Credit unions, on the other hand, might offer more personalized service and competitive rates, especially if you're a member. Monoline lenders, which operate solely through mortgage brokers, often provide some of the lowest rates but usually have very rigid qualification criteria.

Unlike banks that can only provide their own products, mortgage brokers have access to a wide range of lenders and can help you find the best deal. They can also negotiate on your behalf, ensuring you get the most favourable terms.

Presenting Multiple Options: The most common mistake homeowners make when seeking to refinance is neglecting to shop around for other options. By comparing multiple options side-by-side, you can clearly see the best overall value. Examine the rates, fees and terms offered by each lender. A slightly lower interest rate can save you thousands of dollars over the life of your mortgage, so it pays to compare.

For example, imagine Lender A offers a 2.5% interest rate but includes high fees, while Lender B offers a 2.7% interest rate with no fees. By calculating the total cost over the life of the mortgage, you might discover that Lender B's offer is actually more affordable. This illustrates that sometimes opting for a slightly higher interest rate with lower fees can be the wiser choice.

Mortgage Lenders in Canada

Navigating Canada's landscape of mortgage lenders can feel like a confusing and daunting task, but if you want to make the most informed refinancing decisions, it's essential to understand the different types of lenders. Let's break it down.

Prime Lenders: Prime lenders, such as major banks and large financial institutions, typically offer the most competitive rates and terms. These lenders cater to borrowers with excellent credit scores and stable incomes. Some well-known prime lenders include:

• Bank of Montreal (BMO)
• Canadian Imperial Bank of Commerce (CIBC)
• Laurentian Bank of Canada
• National Bank of Canada (NBC)
• Royal Bank of Canada (RBC)
• Scotiabank
• Toronto Dominion (TD)
• Monoline Lenders

Monoline Lenders: Monoline lenders specialize solely in mortgage lending. They do not offer other banking services. Because they focus exclusively on mortgage products, monoline lenders can provide competitive rates and terms, particularly for borrowers who may not qualify with prime lenders. They might also have more flexible borrower criteria for unique financial situations. Lender examples include:

• First National
• MCAP
• Nesto
• Pine
• Street Capital
• True North Mortgage

Subprime Lenders: Subprime lenders cater to borrowers showing less-than-perfect/lower credit scores, income instability or other financial challenges that might disqualify them from prime lenders. While these lenders offer more flexible criteria, their interest rates and fees are generally higher to compensate for the increased risk. Examples include smaller banks, alternative lending institutions and private mortgage companies, like:

• Home Trust Company
• Equitable Bank
• B2B Bank
• First National Financial
• Haventree Bank

Private and Syndicate Lenders: Private lenders are individuals or groups lending their own funds, often for limited short-term loans or specialized scenarios. Syndicate lenders pool financial resources from multiple investors to offer loans. Typically more flexible with borrower criteria, these lenders can provide solutions for unique situations, such as renovations or investment properties. However, they usually charge higher rates and fees, and their loan terms can be more stringent.

When considering refinancing, explore various lender options and weigh the pros and cons of each based on your financial circumstances. A knowledgeable mortgage broker can help you source and compare all available options to determine the best fit at the most competitive rate.

Mortgage Refinance Products in Canada

Refinancing your mortgage opens up several options, each tailored to different needs and financial goals. The lenders outlined above, from prime lenders to private lenders, offer a variety of refinancing products, each with their own terms, rates and conditions. Here's a brief overview of the main products available in Canada.

Traditional Refinance: Traditional refinancing involves breaking your current mortage and replacing it with a new loan. It's typically used to secure a lower interest rate, or access home equity.

For example, if you've been paying off your mortgage for a few years, interest rates have dropped, or your financial situation has improved, and you want to explore getting a better deal, refinancing lets you do just that.

You apply for a new mortgage and, if approved, the new mortgage pays off your old one. Now, you start making payments on the new mortgage, ideally with better terms.

Alternatively, if your home has increased in value and you've paid off a good portion of the mortgage, you might refinance to pull out some of that equity in cash, which you could use for renovations, paying off high-interest debt, or other big expenses.

Home Equity Line of Credit (HELOC): A HELOC, or Home Equity Line of Credit, is a flexible loan option that lets you borrow money based on the equity you've built up in your home. In Canada, if you've been making mortgage payments on your house, you're gradually increasing the amount of the house that you own outright this is your equity.

A HELOC allows you to take advantage of that equity, essentially turning it into a revolving line of credit. Instead of getting a lump sum like with a traditional loan, you get a maximum credit limit you can borrow against, whenever you need it. You can withdraw money, repay it, and borrow again as needed, similar to how a credit card works, but usually at a much lower interest rate.

For example, if your home is worth $400,000 and you've paid off $150,000, you have $150,000 in equity. Depending on the lender, you might be able to get a HELOC for a portion of that equity, say $100,000. You can then use this money for various purposes like paying for school tuition, starting a business or making home improvements. You only pay interest on the amount you borrow, not on the entire credit limit.

However, because the loan is secured by your home, if you can't pay back what you owe, the lender can take ownership of your house to recover the debt. So, while it's a useful tool, the HELOC also comes with significant responsibilities.

When considering these refinancing options, seek the help of a knowledgeable mortgage broker or lender who can guide you through the process, explain the pros and cons of each product and help you secure the most favourable terms based on your unique financial situation and goals.

Mortgage Brokers

In Canada, licensed mortgage brokers act as intermediaries between borrowers and lenders. They help clients secure the best mortgage by comparing rates and terms from multiple lenders. Mortgage brokers do not lend money directly; instead, they facilitate the borrowing process by providing access to a wide range of mortgage options.

The differences between a mortgage agent and a mortgage broker involve their experience, licensing requirements, and what they're allowed to do. These distinctions can vary slightly in each province.

General Information Across Canada: Mortgage agents are often entry-level professionals in the mortgage industry. They help you find and apply for a mortgage by working under a licensed mortgage broker. Agents are required to be licensed, which means they've completed specific education and training mandated by their province.

In some provinces a mortgage broker is more experienced and has a higher level of authority. Brokers must also be licensed and can supervise mortgage agents. A licensed mortgage broker can do everything a licensed mortgage agent can do, but they can also act as the principal broker for a brokerage, overseeing other agents and brokers.

Ontario: These levels ensure that agents have the appropriate training and experience to handle more complex mortgage products and lender types.

• Since April 2023, Ontario has introduced different levels of mortgage agent licenses:
• Mortgage Agent Level 1: Can work only with certain types of lenders, typically institutional lenders like banks and credit unions.
• Mortgage Agent Level 2: Can work with a wider range of lenders, including private individuals and mortgage investment companies.

British Columbia: In British Columbia, the licensing structure includes:

• Submortgage Broker: This is the entry-level license in BC, similar to a mortgage agent in other provinces. Submortgage brokers can deal in mortgages but must be registered and work under a registered mortgage broker. They are required to complete the Mortgage Brokerage in British Columbia Course and pass the exam administered by the University of British Columbia's Sauder School of Business.
• Mortgage Broker: To become a mortgage broker in BC, an individual must have substantial experience as a submortgage broker. Mortgage brokers can manage a mortgage brokerage and supervise submortgage brokers. They must complete the Mortgage Brokerage in British Columbia Course (if not already completed as a submortgage broker) and meet additional experience and education requirements set by the BC Financial Services Authority (BCFSA).

The Role of a Mortgage Broker

• Assessing your financial situation: evaluating income, credit history and other financial details to determine borrowing capacity.
• Shopping for the best rates: accessing multiple lenders, including banks, credit unions and private lenders, to find and present the best mortgage rates and terms.
• Providing expert advice: recommending suitable mortgage products based on your financial goals.
• Handling paperwork: gathering necessary documentation and assisting with loan applications.

Is Your Mortgage Broker Legitimate?

In Canada, mortgage brokers and agents must be licensed to operate legally. Licensing ensures brokers meet professional standards and adhere to regulatory requirements.

Licensing and Regulation: Mortgage brokers in Canada are regulated both provincially and federally. Key regulatory bodies include:

• Federal: Office of the Superintendent of Financial Institutions (OSFI)
• Provincial: Mortgage Broker Regulators' Council of Canada (MBRCC)
• British Columbia: B.C. Financial Services Authority (BCFSA)
• Alberta: Real Estate Council of Alberta (RECA)
• Saskatchewan: Financial and Consumer Affairs Authority of Saskatchewan (FCAA)
• Manitoba: Manitoba Securities Commission (MSC)
• Ontario: Financial Services Regulatory Authority of Ontario (FSRA)
• Quebec: Autorit des marchs financiers (AMF)
• New Brunswick: Financial and Consumer Services Commission (FCNB)
• Newfoundland and Labrador: Service NL, Government of Newfoundland and Labrador
• Nova Scotia: Service Nova Scotia and Municipal Relations (SNSMR)
• Prince Edward Island: Financial and Consumer Services Division

How to Check if a Canadian Mortgage Broker is Licensed: To confirm if your mortgage broker is licensed, the regulatory body in your province usually provides online access to their database. By entering their name, you can verify their license and if it's in good standing. You can also check for any disciplinary actions or complaints against the broker.

• To ensure your mortgage broker is trustworthy:
• Verify their license: confirm the broker's valid license and good standing.
• Check for disciplinary actions: ensure there are no past, current or forthcoming disciplinary actions.
• Review their record: look for any suspensions, conditions or restrictions on the broker's license.

Bank Mortgage Representatives vs. Licensed Mortgage Brokers - Bank mortgage representatives might receive training from the bank, but they are not licensed brokers. While banks in Canada are heavily regulated and safe, individual bank representatives do not have the same breadth of options or regulatory oversight as licensed mortgage brokers.

Limitations of Bank and Credit Union Representatives - Banks and credit unions do not publish details about disciplinary actions against their employees. Complaints can be escalated to bodies like the Ombudsman for Banking Services and Investments (OBSI) or private arbitration companies, but these processes, which are often much lengthier, usually lack transparency.

By using a licensed mortgage broker, you are working with a professional who is subject to strict regulatory oversight, which protect your interests and provides a high level of trust and transparency.

Conclusion

Understanding the different types of mortgage lenders and refinancing products is crucial to making informed decisions that align with your financial goals. By familiarizing yourself with prime lenders, subprime lenders, private lenders and monoline lenders, you can consider a wide range of options that fit your unique situation. Additionally, knowing the ins and outs of traditional refinances and HELOCs empowers you to choose the most appropriate solution for your specific needs, whether you're looking to lower your interest rate, access home equity or manage ongoing expenses.

Ready to take the next step? Let's continue this journey towards smarter refinancing decisions and unlock the savings you deserve.

Chapter 4: Defining Your Financial Goals-
The First Step to Smart Mortgage Refinancing

The key to successful, money-saving refinancing lies in knowing exactly what you want to achieve. Your financial goals dictate the type of mortgage product and terms that suit you best. This chapter will help you define your objectives so you can make informed decisions that set you up for financial success. The first step towards smart refinancing is clarity.

Why This Chapter is Crucial: Understanding your financial goals is the foundation of any successful refinancing strategy. Whether you're looking to access funds quickly, plan for the future or reduce your monthly payments, defining your goals can help you choose the right path. This clarity should guide every decision you make throughout the refinancing process, ensuring that your actions align with your financial dreams. Taking the time to clearly understand your needs will save you money.

What You'll Learn in This Chapter: You'll explore how to identify and prioritize your immediate financial needs, plan for long-term expenses, and determine if lowering your monthly payments is the right strategy. Most people considering refinancing will fall under one of the following three statements:

• I/We need cash funds today.
• I am/We are anticipating and preparing for future expenses.
• I/We should reduce monthly payments with a longer amortization.

By the end of this chapter, you will have a clearer understanding of your financial goals and how they impact your choice of refinancing strategy. You will be better prepared to take the next steps sensibly, knowing that you're making informed decisions that align with your financial aspirations.

Immediate Financial Needs: Refinancing for Quick Access

In some cases, you may require immediate access to funds for pressing financial needs. Refinancing can provide a solution by tapping into your home's equity, providing the necessary capital to address these urgent matters.

Paying Off and Consolidating Debt: One common reason to refinance is consolidating high-interest debts-such as credit card balances or personal loans-into a single, lower-interest mortgage. This strategy can help you save money on interest charges and streamline your monthly payments, improving your overall financial health.

Example: Sarah accumulated $25,000 in credit card debt with an average interest rate of 19%. Managing this debt was challenging because of the high interest costs. By refinancing her mortgage, she was able to secure a much lower interest rate of 4%. This difference between 19% and 4% allowed her to save thousands of dollars in interest.

Using the Money for an Investment or New Business Opportunity: Refinancing can provide the funds needed to support a new business venture or take advantage of an investment opportunity.

Example: John and his partner were planning to open a small business. By refinancing their home, they were able to access the necessary capital to purchase equipment, renovate the space and have access to working capital for the first few months of operations.

Financing a Vehicle Purchase: Using home equity to finance a vehicle purchase can be an attractive option, as mortgage rates are typically lower than traditional auto loans.

Example: Karan wanted to buy a $30,000 car. He had two financing options-he could either take out a home equity loan at 4% interest over five years, which would cost him a total of $33,652, or he could go with a traditional auto loan at 6% over the same period, costing him $34,860. By choosing the home equity option, Karan ended up saving more than $1,200 in interest charges.

Future Financial Planning: Refinancing for Long-Term Expenses

Refinancing can be a valuable tool for anticipating and preparing for future financial needs. By accessing your home's equity through products like a Home Equity Line of Credit (HELOC), you can secure the funds necessary to cover upcoming expenses while maintaining financial flexibility.

Emergency Fund: Establishing an emergency fund is crucial for financial security; a HELOC can serve as a backup source of contingency funds. Determine an appropriate amount required for your emergency fund based on your current living expenses and potential unexpected costs, such as medical bills or unexpected home repairs.

Example: Concerned about the recent rise in basement flooding, Naomi set up a $50,000 HELOC as an emergency remediation and repair fund. Now she can rest assured that she has immediate access to funds, without having to deplete her savings or resort to high-interest credit cards.

Future Large Expense: If you anticipate a significant upcoming expense, such as home renovations, education costs or major travel plans, a HELOC can provide access to the necessary funds while offering the flexibility to borrow only what you need, when you need it. This can be a more cost-effective option compared to credit cards or personal loans, which may have higher interest rates and inflexible repayment terms.

Example: The Johnsons are planning a $100,000 home renovation project in two years. By securing a HELOC now, they have access to the funds, as needed, during the renovation process, rather than borrowing the entire amount upfront and paying interest on the full sum from the start.

Reducing Monthly Payments: Mortgage Refinancing to Lower Bills

High monthly mortgage payments can strain household budgets, making it difficult to achieve financial stability. Refinancing can help reduce these monthly obligations, freeing up cash flow for other financial goals or necessities.

Before exploring refinancing options to lower your monthly payments, it's essential to understand the factors contributing to your current high monthly payments. These may include a high interest rate, a shorter amortization period or a combination of both.

Extending the Mortgage Amortization Period: By extending the amortization period (the length of time to pay off a mortgage), you can lower your monthly payments by spreading the principal and interest over a longer timeframe. However, while your monthly payments may decrease, it's important to note that this option may result in paying more interest over the life of the loan.

Example: The Van der Veens' current mortgage has a remaining amortization of 20 years at a 5% interest rate, with monthly payments of $1,500. By refinancing to a new 30-year term at a lower 4% rate, their monthly payments could drop to $1,200, which is $300 in monthly savings, but with more interest paid over the duration of the newly extended amortization.

Securing a Lower Interest Rate: Another strategy to reduce monthly payments is to refinance to a new mortgage with a lower interest rate. This can be achieved by taking advantage of changing market conditions or improving your credit score to qualify for better rates.

Example: The Brown family's current mortgage interest rate is 6%. By refinancing to a new 4.5% rate, their monthly payments could decrease by $150, even without extending the amortization period.

Conclusion

Start by defining your financial goals this is a crucial first step in the refinancing process. Focus on what you need now, where you plan to go, or how you can reduce your monthly expenses. Use this to align your refinancing strategy with the right mortgage product and terms. This chapter provided you with the knowledge to craft a refinancing plan that fits your financial journey. So, how will you take action with these insights?

Chapter 5: Know Your Numbers to Prepare for Successful Refinancing

With your financial goals now defined, it's time to gain a clear understanding of your current financial situation. Begin by mapping your financial health—evaluate your income, expenses, and credit profile. Knowing where you stand will empower you to make smart refinancing decisions and avoid costly mistakes.

Next, we'll dive into decoding your current mortgage terms. Understanding the details of your existing mortgage interest rate, remaining balance and potential prepayment penalties is crucial. This information will help you choose the best refinancing options tailored to your needs.

Why This Chapter is Crucial: Refinancing isn't just about finding a lower interest rate it's about finding the best rate for your unique situation. To do that, you need to fully understand both your overall financial health and your current mortgage terms. This chapter will help you get a clear picture of your current position, which is essential for making informed decisions and avoiding potential pitfalls. Take the time to understand your current position to help you save money and secure the best refinancing deal possible.

What You'll Learn in This Chapter: We'll start with an in-depth look at your financial health, including your income, expenses and credit score. Then, we'll move on to the finer details of your existing mortgage, breaking down terms, and examining interest rates and payment schedules. Finally, we'll guide you through assessing your property's equity and market value.

By understanding your financial health, including decoding your mortgage terms and assessing your property equity, you'll be well-prepared to make smart refinancing decisions.

Different rates will always apply to different situations, which is why knowing your starting point is essential. The knowledge you gain in this chapter will enable you to confidently move forward and secure the best possible terms for your refinance.

Upon completion of this chapter, you'll have a comprehensive understanding of your financial landscape, setting you up for a suitable and successful refinancing journey.

Mapping Your Current Financial Health

Refinancing your mortgage is a significant financial decision, so understanding your current financial health is crucial. This involves taking a comprehensive look at your finances to ensure you're making the best choices for your situation. You don't need to examine every detail right away—a quick "back-of-the-napkin" calculation can provide a rough idea, and you can adjust and refine the details later.

Financial stability and creditworthiness significantly influence your refinancing options, as well as the terms you can secure. An evaluation of your financial health is also essential if you need to know how your finances have changed since first obtaining your original mortgage. By mapping your financial health, you can save money, avoid potential pitfalls and ensure a smoother refinancing process.

Here's what you need to know and why it's important:

Quick Financial Health Check: Start with a quick overview of your financial situation to get a rough idea of where you stand. This can help you decide whether refinancing is worth pursuing before diving into the finer details. You should look at:

• Income and employment verification: Lenders want to see consistent, reliable income. Can you provide proof of income, such as pay stubs or tax returns?

• Credit profile: A higher credit score can get you access to better rates and terms. Review your credit report for any issues that might need clarification or any actions required to improve your credit score.

• Current monthly expenses and debt: List your current monthly expenses and debt, such as car payments, personal loans and credit card balances. These numbers will be used to calculate your debt service ratios, which are critical for refinancing.

Even if you aren't refinancing today, doing this work now can help you identify areas of improvement, ideally to strengthen a future application. Knowing how the system works allows you to start making improvements right away.

Understanding Debt Service Ratios: Lenders use two key metrics to assess your ability to manage debt, Gross Debt Service (GDS) and Total Debt Service (TDS) ratios. Both are used in their risk assessment process.

• Gross Debt Service (GDS): This should be around 39% of your monthly household income. To calculate, add your mortgage payments (principal plus interest), property taxes, heating expenses and half of any condominium fees. Divide this total by your gross monthly household income.

• Total Debt Service (TDS): This should not exceed 44% of your monthly household income. Add your GDS costs to any other monthly debts, such as car payments and credit card balances. Divide this total by your gross monthly household income.

These ratios help lenders assess your ability to handle new mortgage payments alongside your current debt obligations.

Let's take a look at how these ratios work in practice.

Meet Priya and Arjun: A young couple living in Toronto, they're considering buying their first condo in the north end of the city. They've been pre-approved for a mortgage, but before finalizing anything, their lender wants to assess their Gross Debt Service (GDS) and Total Debt Service (TDS) ratios to ensure they can manage the new mortgage alongside their existing debts.

Gross Debt Service (GDS): Priya and Arjun's combined monthly household income is $10,000. To calculate their GDS, they add up their expected monthly mortgage payment of $2,200, property taxes of $400, heating expenses of $150 and $200 in condominium fees. This gives them a total of $2,950.

They divide $2,950 by their gross monthly income of $10,000, resulting in a GDS ratio of 29.5%. Since this is well below the 39% guideline, they're on solid ground here.

Total Debt Service (TDS): Next, to calculate their TDS, they start with their GDS costs of $2,950, then add their other monthly debts: $500 for car payments and $300 for credit card payments. This brings their total monthly debt to $3,750.

Dividing $3,750 by their $10,000 income gives them a TDS ratio of 37.5%. This is comfortably within the 44% limit, which shows that Priya and Arjun can handle the new mortgage along with their existing debts.

Conclusion: Based on these calculations, Priya and Arjun's lender is confident that they can manage the new mortgage. Their GDS and TDS ratios are within the acceptable ranges, which means they're in a good position to take on the mortgage and move forward with buying their first condo.

Credit Score and Existing Debt: Your credit score plays a crucial role in securing favourable refinancing terms. Lenders review your credit report and existing debts to gauge your creditworthiness and financial obligations. Improving your credit score before applying for a mortgage can lead to better interest rate offers and better terms. If you have high levels of existing debt, consider strategies to reduce it before refinancing. This can improve your debt service ratios and overall financial profile.

By thoroughly mapping your financial health including your income, expenses, credit score and existing debt obligations you position yourself for successful refinancing. Not only can preparation help you secure the most favourable terms, it can also lead to monthly savings in the long run. Take the time now to understand your current financial status it will certainly pay off when it comes time to refinance.

Assessing Your Property Equity

When it comes to refinancing, a crucial step is knowing how much your property is currently worth and the equity you have available. This section is not a substitute for a professional property appraisal-it is meant only to give you a solid starting point in understanding your financial position. This knowledge can empower you to plan better and make informed decisions.

Why It's Important: Understanding your property's current value, and the equity you have in it, can significantly impact the amount you can borrow and the terms you might receive. A property assessment and your existing equity can help you negotiate better deals, avoid surprises and help make strategic decisions about when and how to refinance.

Estimating Your Current Property Value

To get a rough idea of your property's value, consider these methods:

Comparative Market Analysis (CMA): A real estate professional can help you with this estimate by comparing your home to recent property sales in your area.

Online Valuation Tools: Many real estate websites offer tools to estimate your home's value using algorithms and publicly available data. These can provide quick estimates, but they might not account for unique factors affecting your property. In some provinces there is one dedicated website; in others this is managed at the municipal level.

• Alberta - Municipal Level Management
• British Columbia - BC Assessment
• Manitoba - Manitoba Assessment Online
• New Brunswick - NB Property Assessment
• Newfoundland & Labrador - Municipal Assessment Agency
• Nova Scotia - Property Valuation Services Corporation
• Ontario - Municipal Property Assessment Corporation
• Prince Edward Island - Property Assessment
• Quebec - Municipal Level Management
• Saskatchewan - SAMAView
• Yukon - Property Tax and Assessments
• Northwest Territories - Property Assessment and Taxation
• Nunavut - Taxation and Insurance

Professional Appraisal: For the most accurate assessment, a hired professional appraiser will evaluate your home's size, condition, location and recent comparable sales in the area to determine its market value.

Calculating Your Home Equity

Home equity is calculated by subtracting your remaining mortgage balance from your home's estimated market value. For example, if your home's market value is $500,000 and your mortgage balance is $200,000, your home equity is $300,000. Higher equity can lead to better refinancing terms because lenders view it as lower risk.

Leveraging Home Improvements and Renovations: If you've made significant improvements or renovations to your home, factor these into your value assessment. Upgrades to kitchens, bathrooms, landscaping or the installation of energy-efficient systems can increase your home's market value and, consequently, your available equity for refinancing.

Understanding Market Trends: Keep an eye on local real estate trends. Housing supply and demand, interest rates and economic conditions can all impact your home's value. Monitoring these trends can help you determine the best timing and terms for refinancing.

The Importance of Appraisals: Lenders require professional appraisals to ensure the loan amount does not exceed the property's value, protecting both their investment and yours. An appraisal is different from a home inspection, which assesses the condition of the property but not its market value.

Impact on Refinancing Options: Higher home equity can improve your refinancing options and terms. More equity can mean a larger loan amount, lower interest rates and better conditions. Conversely, lower equity might limit your borrowing power and result in less favourable terms.

By taking the time to understand your property's value and your available equity, you can better plan for refinancing. This process helps you make informed decisions, secure favourable terms and ultimately save you money. Even if you're not ready to refinance today, knowing where you stand can help you improve your financial health and strengthen your future application.

Decoding Your Current Mortgage

To secure the best refinancing option, it's crucial to have a thorough understanding of your existing mortgage's terms and conditions. This knowledge will directly impact your refinancing options, help you avoid potential pitfalls and ensure you negotiate the most favourable terms.

Your mortgage broker will need to understand key details of your mortgage, such as how long you've owned the property, how long you've been paying the mortgage, and the remaining balance. You should have a copy of your current mortgage agreement with you.

Knowing the answers to the following questions about your current mortgage is essential:

• What type of mortgage do you currently have (fixed, variable, etc.)? This determines if switching mortgage types is advantageous to you.

• How many years remain in your current amortization period? This impacts refinancing options and penalties.

• What is your current interest rate? Compare this to current market rates to see if you can get a lower rate.

• What is your remaining mortgage balance? This is needed to calculate costs and loan amounts.

• Are there any prepayment penalties or restrictions? This could impact costs and influence your decision to refinance.

• What was your initial down payment and loan amount? This helps calculate how much home equity is available for you to utilize.

Brief Explanations

Before diving into more details, let's quickly explain the basics to give you a solid understanding of common terms and concepts.

Mortgage Term: This refers to the length of time your mortgage contract is in effect, covering the interest rate and other conditions. Terms can range from a few months to five years or longer. Understanding your mortgage term is crucial when refinancing because it determines how long you are committed to the current interest rate and conditions. For example, if you have a 5-year mortgage term, at the end of those five years, you will be expected to renew your mortgage at the current market interest rates. Refinancing prior to the end of your current term can lead to securing a lower interest rate or adjustments to other terms to better suit your financial goals.

Amortization Period: The amortization period is the total time it takes to pay off your entire mortgage, typically up to 25 or 30 years. If you don't change anything, your original amortization period the one you started with is the amount of time it will take to clear your mortgage debt completely.

How it works: If you have a 25-year amortization and you've been paying your mortgage for 10 years, that means you have 15 years left to go. Each year you pay your mortgage, you're counting down from the original amortization period.

Now, let's talk about what happens when you refinance. Sometimes, homeowners choose to extend their amortization when they refinance. Let's use a simple example:

If you started with a $500,000 mortgage on a 25-year amortization, at an interest rate of 5.10%. Your original monthly payment would be $2,952.16. After 10 years of paying down portion of your mortgage, you're left with a balance of $370,867.91.

If you decide to start over with a brand-new 25-year amortization, and the interest rate stays the same at 5.10%, your new monthly payment would be $2,189.72. This is lower than what you were paying before because you're spreading the remaining mortgage balance over a new 25-year period.

While this refinancing method can reduce your monthly payments, making them more manageable, keep in mind that extending your amortization also means you paying more interest over time.

Prepayment Penalties: A prepayment penalty is a fee that lenders charge if you pay off your mortgage early. However, not all penalties are the same. There are two common types of penalties you should be aware of.

• Making extra payments above your annual limit. Many closed mortgages let you pay a certain percentage of the principal each year without any fees. But if you go over that amount, you'll get hit with a penalty. This is how lenders protect their interest income from being reduced too quickly.

• Breaking your mortgage and paying off the entire balance before the term ends. This could happen if you sell your home or refinance. This penalty is usually much higher, especially if you break the mortgage in the first few years.

Lenders often calculate it using the interest rate differential (IRD) or a set number of months' interest.

Before you refinance, check your current mortgage terms to see if these penalties apply. If they do, you might want to wait a few years, some lenders drop or reduce the penalty after three to five years. Knowing about these penalties upfront can save you from unexpected costs and help you make smarter decisions.

If you refinance a (fixed) closed mortgage before the term ends, you'll likely face a prepayment penalty based on your lender's interest rate differential (IRD). A closed mortgage usually offers a lower interest rate but limits your ability to make extra payments or pay off the loan early without penalties.

The IRD is a way for lenders to recover some of the interest they'd lose due to your early repayment. This penalty can vary between lenders, but it often ends up being higher than anything you'd encounter with an open or variable-rate mortgage.

On the other hand, prepaying a variable-rate mortgage generally comes with a less severe penalty-usually around three months' interest. Some lenders even allow you to roll prepayment penalties under a certain amount into your new mortgage, which can make refinancing a bit easier to manage.

Listing the details this way can help you see the impact of each choice, whether you're dealing with a closed mortgage or considering your options with a variable rate.

How Much Are Mortgage Prepayment Penalties? For closed, variable-rate mortgages, the prepayment penalty is usually three months' interest on the amount you paid early. Some lenders calculate this penalty based on your mortgage rate, while others use their prime rate.

The more you exceed your prepayment limit the amount you're allowed to pay annually the higher your penalty will be. For example, if you have a 5% variable-rate mortgage and you exceed your annual prepayment limit by $10,000, your penalty might be a few hundred dollars. But if you decide to pay off the remaining $450,000 on your mortgage with several years left in the term, you could be looking at a penalty of $6,000 or more, depending on how your lender calculates it.

For closed, fixed-rate mortgages, the prepayment penalty will likely be either three months' interest or an amount calculated using the interest rate differential (IRD). Here's a simplified explanation of how the IRD calculation generally works:

First, the lender finds a mortgage product with a term length similar to the remaining term of your current mortgage. If you have a five-year fixed-rate mortgage with three years left in your term, they will look at their current three-year fixed-rate mortgages.

Next, they calculate the IRD rate by subtracting your original mortgage rate from the current posted rate for a similar term. For instance, if the current posted rate is 3.6% and your original rate was 5.0%, the difference (IRD rate) is 1.4%. Then, they calculate the monthly penalty. The IRD rate is multiplied by your remaining mortgage balance and divided by 12 to get the monthly amount owed. For a $400,000 remaining balance, the calculation would be:

• $400,000 x 1.4% = $5,600 per year
• $5,600 12 = $467 per month (approx.)

Finally, to find the total prepayment penalty, the monthly amount is multiplied by the number of months left in your term. With 36 months remaining, the calculation would be:

$467 x 36 = $16,812

Understanding these examples can help you determine the potential costs involved in breaking your current mortgage early so you can plan accordingly.

The Principal Paid Off and Equity Available: Your payment history impacts your refinance options because it shows how much of the principal you've paid down. A consistent history of on-time payments can positively impact your refinancing terms and chances of being approved.

Knowing your original down payment helps calculate how much home equity is available for you to utilize. Typically, you can borrow up to 80% of the appraised value of your home when refinancing, but you'll have to use a portion of what you borrow to pay off any remaining amount on your current mortgage. What's left over can be used for other purposes aligned with your financial goals.

By thoroughly understanding your current mortgage, including the terms, prepayment penalties and equity situation, you can make informed decisions and set yourself up for successful refinancing.

Conclusion

In this chapter, we've explored the importance of understanding your current mortgage, financial health and home equity when considering refinancing. By decoding your existing mortgage terms, evaluating your income, expenses, credit score and debt obligations, and by accurately assessing your property's value, you can make informed decisions that align with your refinancing goals. This comprehensive evaluation is essential for securing the best mortgage option, maximizing your financial resources and ensuring long-term financial stability and success.

Chapter 6: Step-by-Step Mortgage Application
for a Successful Mortgage Refinance in Canada

Refinancing can be a game-changer, but if you haven't yet figured it out based on the previous chapters of this book, the secret to its success is all in the preparation. It not only saves you time but also positions you to negotiate the best possible terms. This chapter is all about equipping you with the knowledge and tools you need to tackle refinancing with confidence and precision.

Why Preparation Matters: When you're well-prepared, the refinancing process becomes significantly smoother and easier. It allows you the time to think things through instead of scrambling around at the last minute. Knowing what documents you need, understanding lender requirements and having a clear picture of the process can help you avoid delays and surprises. Additionally, thorough preparation allows you to save money by identifying and addressing any weak spots in your financial profile.

What You'll Learn in this Chapter: You'll be guided through the essential steps and documentation needed to ensure a smooth refinance process. By understanding and gathering the necessary information, you'll be ready to move quickly and efficiently when the time comes. Here's what we'll cover:

• Necessary Documentation: Learn about the key documents you needed, such as identification, proof of income and property details. Being organized will prevent delays and help you respond promptly to lender requests.

• Understanding Lender Requirements: Each lender may have slightly different criteria, but we'll provide a comprehensive list to prepare you for any situation.

• Navigating the Stress Test: Understand the importance of the federally regulated stress test, ensuring you can manage payments at a higher interest rate.

• Improving Your Financial Profile: If you're not refinancing immediately, discover steps you can take now to strengthen your financial situation, making future approval easier and potentially securing better terms.

Key Takeaway: Proper preparation is the key to a successful mortgage refinance. By having all your documents ready and understanding the process, you can avoid common pitfalls, expedite the approval process, and secure favourable refinancing terms. This chapter will arm you with the knowledge and tools needed to confidently navigate your mortgage refinance, ensuring you get the best deal possible.

So, let's dive into the details and get you fully prepared for a smooth refinancing journey. Whether you're ready to refinance now or just planning ahead, this chapter will set you up for success.

Necessary Documentation

Gathering the necessary documentation is the first step in preparing for a refinance. Not all lenders have the same requirements, so it's important to talk to your mortgage professional before meeting with them. The more prepared you are, the easier and faster your mortgage application can be started.

Identification: Lenders require two pieces of identification for every named applicant on the mortgage. Acceptable forms of primary identification include:

• Driver's license
• Canadian Passport or passport from your country of origin
• Certificate of Canadian citizenship
• Canadian Armed Forces identification
• NEXUS Card/FAST Express Card
• Canadian Perminant Residency Card
• Any Canadian or provincial government-issued document with a photo and signature

Acceptable forms of secondary identification include:

• Birth certificate issued in Canada
• Certificate of Indian Status
• Old Age Security Identification card
• Signed bank card or credit card
• Social Insurance Number (SIN) card

Credit Authorization: Each borrower must sign a document authorizing the lender to check credit reports via Equifax and/or TransUnion. If you're not already familiar with your credit history and score, we strongly recommend getting this checked beforehand through services like Borrowell and Credit Karma.

Proof of Income: Providing proof of income is essential for lenders to assess your ability to repay the mortgage. This section details the various documents accepted, each serving to verify different aspects of your financial situation.

• Notice of Assessment (NOA): Mailed annually by the Canada Revenue Agency (CRA) after you file your taxes, indicating your annual income, taxes paid and any outstanding taxes or refunds.
• Pay Stubs: Your most recent pay stub (within the last 30 days) showing year-to-date figures and deductions.
• Letter of Employment: Dated within 30 days, including your start date, position, pay rate, employment status (full-time, part-time, etc.) and whether your hours are guaranteed.
• T4 Slip: Shows your earnings before deductions. Request one from your employer or access it through the CRA website.
• T4A Slip: For commission, pension or other income, provided by your employer or administrator.
• T1 Income Tax Return: For self-employed individuals, providing a comprehensive view of your income.
• W-2 Forms: Used to report wages and salary information from US contract work.

Property Details: Accurate property details are crucial for a lender to understand the current status and obligations associated with your property. This section outlines the necessary documents that detail your mortgage, tax status and any additional fees.

• Mortgage Statements: For any property with a mortgage, showing the lender's name, mortgage number, interest rate, payment, balance and maturity date.
• Property Tax Statements: Provided annually by the city, it shows your property tax bill and payment status.
• Condo Board Letter: For properties with strata fees, it shows the monthly fees.

Information about Other Assets: To strengthen your application, provide a list of other assets, such as investments (registered/non-registered), cars, cottages/cabins or boats. This can be provided in a bulleted list or spreadsheet, or an online applicationwhichever is most convenient. The lender might ask for more details or a recent bank statement, so you should have these accessible and available to save everyone time.

Understanding Lender Requirements

This section will detail the key criteria lenders use to assess your mortgage refinance application.

We'll cover the Debt-to-Income Ratio including the Total Debt Service (TDS) Ratio and Gross Debt Service (GDS) Ratiohow they are calculated and acceptable levels. We'll look at the importance of your credit score, how it affects mortgage terms, and steps to improve it. We'll explore employment and income stability, detailing necessary documentation for both employees and self-employed individuals. Finally, we'll provide insights into the property appraisal process, outlining what to expect and how to handle low appraisals.

1. Debt-to-Income Ratio

Understanding Debt Service Ratios:

When you apply for a mortgage, lenders look at two key numbers to figure out if you can comfortably manage your debtGross Debt Service (GDS) and Total Debt Service (TDS) ratios. These help assess whether you can handle a new mortgage on top of everything else.

GDS Ratio: This is the percentage of your gross (pre-tax) monthly income that goes toward housing costs, like your mortgage payments, property taxes, heating, and half of any condo fees. Most lenders want this number to stay under 39%.

TDS Ratio: TDS takes things a bit further by looking at your housing costs plus any other debt, like car loans or credit card payments. Lenders like to see this at 44% or lower.

When it comes to qualifying for a mortgage in Canada, it's not just about your current interest ratelenders have to stress-test your mortgage to make sure you could afford to pay it if rates go up.

How it works: To calculate your GDS ratio, instead of using the interest rate you're offered, lenders will use the higher of two options.

• 1. Your offered interest rate plus 2%; or
• 2. The OFSI Stress Test Rate

For example, if you're offered a 4.64% mortgage rate, the lender will calculate your mortgage payments as if the rate was 6.64%just to see if you could handle higher payments down the road. This stress-tested payment is what lenders use when calculating your GDS ratio.

So, while the stress-test doesn't change how GDS is calculated, it bumps up the mortgage payment used in the calculation, which can make it tougher to qualify. It's a safety check to ensure you can manage your mortgage if interest rates rise in the future.

Example Calculation: Samantha and David are refinancing a mortgage they've had for five years. Their annual household gross income is $120,000. They live in a townhouse valued at $700,000 and have $535,000 remaining on their mortgage. They pay a monthly strata fee of $250 and $1,800 annually in property taxes, which breaks down to $150 per month. Their strata fees do not cover heating, so based on their home's size, they estimate $100 per month for utilities.

Stress-Test Calculation:

• GDS Ratio - Total monthly housing costs: $3,899.16
• Mortgage Payment (stress-test 2% + 4.64% = 6.64%, 25-year amortization)
• Monthly payments: $3,399.16
• Strata fees: $250
• Property taxes per month: $150
• Utilities: $100
• Gross monthly income: $10,000

GDS ratio: 38.9%

At 38.9%, Samantha and David are right near the top end of the recommended Gross Debt Service (GDS) ratio, which is generally capped at 39% by most lenders.

TDS Ratio = Housing Costs + Any Other Debts: Samantha and David have $6,000 in credit card debt, with a minimum monthly payment of $180. Their housing costs (mortgage, strata fees, property taxes and utilities) total $3,899.16.

To calculate their TDS ratio, we add their monthly housing costs ($3,899.16) to their credit card payment of $180, giving a total of $4,079.16 in monthly debt obligations.

• TDS Calculation:
• Total Monthly Debts: $4,079.16
• Gross Monthly Income: $10,000
• TDS Ratio: $4,079.16 $10,000 = 40.8%

TDS ratio: 40.8%

At 40.8%, Samantha and David are comfortably below the maximum TDS ratio of 44%, meaning they should still qualify for the mortgage. However, they're approaching the upper limit, so they'll need to manage their debts carefully.

2. Credit Score

A higher credit score can secure better interest rates and ensure you qualify for your mortgage. Check your credit report for accuracy and take steps to improve your score if needed. A credit score of at least 680 is considered high enough to access the best mortgage rates. Each borrower should have well-established credit with at least two open credit facilities (like a credit card or a line of credit) that are regularly used. If you're trying to improve your credit score, make sure you haven't exceeded 50% of the available credit limit on each borrowing facility. On-time payments are essentialset up automatic payments on all of your accounts to ensure the monthly minimum is always paid off.

3. Employment and Income Stability

Lenders prefer borrowers with steady employment histories and stable income. When you're employed, the lenders look at your gross monthly income before taxes; when you're self-employed, they look at the net income you reported, excluding any write-offs you made. This places self-employed borrowers at a disadvantage, which may require them to consider alternative products more suited to their needs.

For employed borrowers: Salaried or guaranteed income can be used to show what you earn, based on a letter of employment and most recent pay stub.

For self-employed borrowers: To qualify, a two-year tax history is required to assess net income over the two-year period.

4. Property Appraisal

A property appraisal is an unbiased estimate of your home's market value, which lenders use to determine how much they're willing to lend.

Why Appraisals Matter: Appraisals ensure that the loan amount reflects the true value of your property, protecting both you and the lender. This is especially important if the market value is lower than the sale priceultimately, a lender will only fund based on the appraised value.

Key Players in Property Appraisals: Always verify your appraiser is an AIC-Designated Appraiser, granted by the Appraisal Institute of Canada (AIC), and licensed in your province. The following are professional property appraisal designations, grant to professionals who have undergone the mandated training and knowledge to provide accurate and reliable valuations:

• CRA (Canadian Residential Appraiser)
• AACI (Accredited Appraiser Canadian Institute)
• EA (valuateurs Agrs du Quebec)
• DAR (Designated Appraiser Residential)

What Happens During an Appraisal? An appraisal is far more than just a quick walk through your house and around your backyard; it's a detailed inspection of your entire property.

Inspection: The appraiser will inspect both the interior and exterior of your home, taking note of its physical characteristics, finishes and any outbuildings, which are structures not attached to the main house. This process typically takes 20-40 minutes, depending on the size and condition of your property.

Data Collection: They'll gather detailed information, such as room layout and any recent improvements. Photos will be taken to visually support the data in the report.

Market Analysis: The appraiser will compare your property to recently sold homes in the area to determine its market value. This involves analyzing between three and 10 comparable properties.

Final Report: The completed appraisal report is sent to your lender. This report includes a thorough analysis of your property's value, based on the inspection and market comparisons.

What You'll Need: Be prepared to provide the appraiser with information about your property, such as the original construction date, and details of any major renovations.

Handling Low Appraisals: Sometimes, appraisal findings are lower than expected. If this happens, you have a few options:

• Dispute the Appraisal: Your mortgage broker can provide additional comparables or information to the appraiser.
• Get a Second Opinion: You can seek another appraisal.
• Fund the Difference: You may need to come up with additional funds to cover the shortfall.

Understanding the appraisal process and its importance can make a significant difference in your refinancing journey. By being prepared and knowing what to expect from your property appraisal, you can ensure a smoother process and potentially save money in the long run. Whether you're refinancing now or planning for the future, this knowledge is a valuable tool in your financial toolkit.

The Closing Process and Costs

In this section, we'll cover the role of legal professionals, potential penalties and additional considerations like cashback clawbacks. Understanding these aspects will help you navigate the closing process smoothly and avoid unexpected costs.

Legal Fees: When refinancing a mortgage, the lender typically has to revise the mortgage charge based on the title of your home. As well, "disbursements" funds sent to the borrower's lenders to pay out consumer debt, another mortgage or cash directly must be paid by routing them through a legal professional with a trust account.

Closing Professionals You May Need

Lawyers: Aside from the exception to the "Internal Legal Services" rule, in some provinces, lawyers are mandatory. A lawyer must draw up the title registration and handle the disbursement of funds. Typical costs for a lawyer to complete a refinance are $1,300 to $3,000. If you live in a stratified property, such as a condo or townhome, or you're paying out multiple consumer loans, the cost of the lawyer will be on the higher end of this range due to the reports they need to order and the courier fees to pay the different parties involved.

Notaries: In British Columbia and Quebec, notaries can complete refinance transactions and deal with disbursements to creditors. Typical costs for a notary to complete a refinance are $1,300 to $2,000. If you live in a stratified property, such as a condo or townhome, or you're paying out multiple consumer loans, like a lawyer the cost of the notary will be on the higher end of this range due to the reports they need to order and the courier fees to pay out the different parties.

Internal Legal Services: Lenders can also close refinances through their internal legal services, primarily offered by two of Canada's largest title insurance companies, First Canadian Title (FCT) and FnF Canada. The paperwork is drafted by their internal legal teams en masse and then couriered to a local notary who authorizes (notorizes) the signatures. Typical turnaround times for these services are 15 to 20 business days from 100% mortgage completion. The costs of internal legal services are a significant advantage, ranging from $600 to $1,200, depending on the province and disbursements.

Title Insurance

Title insurance protects the lender from any mistakes or claims to the home's title that were not observed at the time of closing. While, title insurance policies can protect both the owner and lender, only the lender makes it mandatory that a policy protects their interest in the title. Title insurance costs are based on the home's value; title insurance on a higher-valued home will cost more.

Additionally, title insurance can cover various issues such as unpaid property taxes or utilities from previous owners, discrepancies in the property survey, or legal challenges to your ownership. It provides peace of mind by mitigating the risks of unforeseen title issues that could affect your ownership rights or financial security. By including title insurance in your refinancing process, you ensure a smoother transaction and safeguard against potential legal and financial complications.

Penalties

Penalties can be split into two types: Prepayment Penalties and Administrative Penalties. Prepayment penalties are typically the largest and are specific to your mortgage contract. They could potentially include charges like three months' interest or interest rate differential (IRD) penalties. Administrative penalties, though generally smaller, cover costs associated with processing changes to your mortgage, such as discharge fees or documentation preparation fees. Understanding these penalties in advance can help you budget accurately and make informed decisions about refinancing.

Three Months of Interest: This is a simple penalty, but there can be some nuance based on the lender. On a variable rate mortgage, the only penalty is three months of interest. For a fixed-rate mortgage, the penalty is the greater of three months of interest or the interest rate differential (IRD).

Interest Rate Differential (IRD): The IRD is a penalty meant to compensate the lender when they are unable to reinvest the funds of the mortgage at the same rate, for a comparable term. The reinvestment rate will be on the lender's rate sheet for a term close to what remains on the mortgage.

Example Calculation: Philip and Suzie have a $500,000 mortgage with a five-year variable rate of prime1.10%. Two years into the mortgage, Philip and Suzie are looking to increase it for a future business investment. They cannot refinance the mortgage at the existing lender, so they must break it and pay the penalty. Prime is currently 6.95%, and they have a discount of 1.10%. This lender charges the penalty based on the contract rate, so the penalty would be: (500,000 x .0585) 4 = $7,312.50.

Administrative Penalties: These penalties are generally smaller but still add up in the long run. To change any mortgage, administrative tasks are required across multiple channels. Typically, some lenders charge a discharge fee, while others will charge an administrative fee in addition to the discharge fee for the preparation of documentation and to remove themselves from the title. These fees range from $75 to $500.

Cashback Clawback: This usually surprises most people and can impact the viability of refinancing if you also have a significant interest rate differential penalty to pay. Any cashback you receive from the lender at the onset of the mortgage term can be reclaimed or "clawed back" by the lender if you break the mortgage. Some lenders will prorate this, and others will claw the entire sum back if you break the mortgage early.

Conclusion

By preparing thoroughly for the refinancing process, understanding what lenders look for, ensuring an accurate property appraisal, and being aware of the steps involved in closing the deal, you can make informed decisions and secure the best possible refinancing terms. This preparation not only streamlines the process but also protects your financial interests.

We covered the importance of having all your documentation in order, from identification and proof of income, to property details and other assets. Understanding the lender's assessment criteria, including debt-to-income ratio, credit score and employment stability, prepares you to present a strong application. We also delved into the significance of a property appraisal and how it impacts the loan amount you can secure.

Navigating the closing process involves understanding the various costs, including legal fees, penalties and title insurance, all of which are crucial for a smooth refinance. We highlighted the importance of knowing potential prepayment penalties and administrative fees to avoid unexpected costs.

Proper planning and organization can save you time, reduce stress and ultimately ensure a successful mortgage refinance. By taking these steps, you position yourself to achieve favourable terms, lower your monthly payments or access your home's equity. This comprehensive approach ensures you are well-prepared to handle any challenges and make the most informed decisions for your financial future.

Refinancing your mortgage is a significant financial move that requires careful consideration and preparation. By following the guidelines in this chapter, you can confidently navigate the refinancing process, secure the best terms possible and achieve your financial goals.

Chapter 7: Risks and Considerations When Refinancing a Mortgage

Refinancing can be a savvy financial move, but it's to your advantage to be aware of the risks and considerations involved. Understanding these potential pitfalls will help you make informed decisions and avoid costly mistakes. This chapter will go into detail regarding the key risks associated with refinancing and how to navigate them. Being informed is your best defense against unexpected expenses.

Understanding the Impact on Your Overall Debt Load

Refinancing often means taking on more debt, which can increase your monthly payments and overall financial burden. Can you comfortably afford the new payments without stretching your budget too thin? Here are some factors to consider:

• Increased monthly payments: Depending on the terms of your new loan, your monthly payments could increase, especially if you're taking out a larger loan or extending the term.

• Debt-to-income ratio: Lenders will assess your debt-to-income ratio to determine your ability to manage additional debt. Keeping this ratio in check is vital to avoid financial strain.

• Long-term financial health: Consider how the increased debt will impact your long-term financial goals, such as retirement savings or paying for your children's education.

By carefully evaluating your financial situation and ensuring you can manage the new debt load, you can avoid the stress and potential default that can come from overextending yourself.

The Risk of Negative Equity

Negative equity occurs when the value of your home drops below the amount you owe on your mortgage. This can happen with declining home values or from over-borrowing against your home's equity. Here's why this is a concern:

• Market fluctuations: Real estate markets can be unpredictable. A downturn in the market can reduce your home's value, leaving you owing more than your home is worth.

• Over-borrowing: Taking out too much equity during refinancing can put you at risk of negative equity if the market declines.

• Selling challenges: Negative equity can make it difficult to sell your home or refinance again in the future.

To mitigate this risk, it's wise to borrow conservatively and leave a cushion of equity in your home. Regularly monitor the real estate market and your home's value to stay informed.

Prepayment Penalties: The Cost of an Early Exit

Prepayment penalties can significantly impact the cost-effectiveness of refinancing. These fees are charged if you pay off your mortgage early, either by refinancing or selling your home before the end of your term. Here's what you need to know:

• Types of penalties: Prepayment penalties can be a percentage of the remaining loan balance or a certain number of months' worth of interest. The calculation method varies by lender.

• Timing matters: Penalties are often highest in the early years of your mortgage and decrease over time. Understanding the terms of your current mortgage can help you avoid costly penalties.

• Negotiation possibilities: Sometimes, lenders may be willing to negotiate or waive penalties, especially if you're refinancing with the same lender. It never hurts to ask.

Before committing to a refinance, review your current mortgage agreement carefully to be fully aware of any prepayment penalties that might apply. Factor these costs into your refinancing decision to ensure it makes financial sense.

The Risk of Higher Interest Rates

In many cases, the goal of refinancing is to secure a lower interest rate than your current mortgage. However, market conditions can change, resulting in a higher rate if you're not careful. Here's how to manage this risk:

• Market timing: Keep an eye on interest rate trends and economic indicators. Refinancing when rates are low can save you money, but waiting too long might result in higher rates.

• Rate lock: Before closing, consider locking in an interest rate with your lender during the refinancing process to protect yourself from rate increases.

• Fixed vs. variable rates: Decide whether a fixed-rate mortgage, which offers stability, or a variable-rate mortgage, which might start lower but can fluctuate, is best for your situation.

Potential Impact on Credit Score

Refinancing your mortgage involves a hard inquiry on your credit report, which can temporarily lower your credit score. Additionally, the increased debt load can affect your credit utilization ratio. Credit Utilization Ratio is primarily used to evaluate your credit risk and impacts your credit score. It focuses solely on revolving credit, such as credit cards or lines of credit.

Here are some tips to mitigate this impact:

• Minimize other credit inquiries: Avoid applying for other new credit (like credit cards or car loans) during the refinancing process to limit additional inquiries on your credit report.

• Pay down existing debt: Paying down debt can improve your credit utilization ratio, which is the percentage of your available credit that you're currently using. Since this ratio is a key factor in your credit score, reducing your debt can boost your score and potentially help you secure better refinancing terms.

• Monitor your credit report: Check your credit report regularly to ensure there are no errors and to understand how your score might be impacted by the refinance. This is a soft credit check and will not impact your credit score.

Impact on Home Sale Plans

If you plan to sell your home in the near future, refinancing might not be the best option. Here's why:

• Recouping costs: The upfront costs that come with refinancing (closing costs, fees, etc.) might not be worth it if you're planning to sell your home soon. You may not recoup these expenses in the short term.

• Market conditions: If you refinance and then decide to sell in a declining property market, you could lose money if home values drop below your new mortgage balance. You will owe the difference.

Changes in Financial Circumstances

Your financial situation can change due to job loss, medical emergencies or other unforeseen events. Consider these scenarios:

• Job stability: Ensure your employment situation is stable before refinancing. Lenders prefer borrowers with a steady incomelosing your job could affect your ability to make payments.

• Emergency fund: An emergency fund to cover mortgage payments and other expenses is useful in the event your financial situation changes unexpectedly.

Future Flexibility

Refinancing often locks you into new terms and conditions that might limit your flexibility. Consider the following:

• Prepayment privileges: Look for a mortgage with favourable prepayment terms that allow you to pay down your mortgage faster and without penalties.

• Portability: Consider a mortgage that is portable, meaning you can transfer it to a new property without incurring penalties.

Summary: Refinancing your mortgage can offer substantial financial benefits, but it's essential to weigh the risks and considerations carefully. By understanding the potential impacts on your debt load, home equity, interest rates, credit score and future financial plans, you can make more informed decisions.

Assess your current and future financial situation, stay on top of market conditions and work closely with a trusted mortgage advisor. This proactive approach will help you navigate the refinancing process successfully, securing favourable terms while minimizing risks and ensuring long-term financial health.

Chapter 8: How Using a Mortgage Broker to Refinance Can Save You Money

Refinancing can be complex, but a mortgage broker can simplify the process and help you save money. This chapter will guide you through the benefits of using a mortgage broker, what to look for in a good broker and pitfalls to avoid. Let's explore how expert assistance can lead to substantial savings and a smoother refinancing experience.

Benefits of using a mortgage broker: One of the primary benefits of working with a mortgage broker is access to multiple lenders. A good mortgage broker has connections with various lenders, including major banks, credit unions and private lenders. This extensive network ensures you get the best deal tailored to your unique financial situation. Brokers often secure better rates than those you find on your own because they leverage their industry influence and volume discounts to get you the most competitive rates available.

Mortgage brokers provide invaluable expert advice on various aspects of refinancing, from credit improvement strategies to selecting the best mortgage features for your situation. Their up-to-date knowledge of the mortgage market, including new products, trends and regulations, ensures you're well-informed. Using a mortgage broker also saves you the time and effort it would take you to do your own research. Instead of contacting multiple lenders and comparing products, your broker does the legwork for you, streamlining the entire refinancing process.

Diverse solutions are another advantage of working with a mortgage broker. They can offer custom solutions for homebuyers with unique circumstances, such as those who are self-employed, new to Canada, or previously denied by other lenders. A good mortgage broker provides ongoing supportlike money-saving tips, help with mortgage renewals and answering any questions you may haveeven after your mortgage is finalized. This ensures a smooth and stress-free home-buying journey.

What to know about mortgage broker compensation: Mortgage brokers work on commission, meaning they only get paid when they help you secure a mortgage. The average commission a broker earns is between 0.5% and 1.2% of the total mortgage amount. Mortgage brokers can also offer part of their commission to you as a disount to help bring down your mortgage rate. They are required to inform you of any and all fees upfront before signing an agreement.

Mortgage brokers are motivated to find you, the client, the best mortgage because their compensation depends on successfully securing your mortgage. This route is particularly helpful for those with poor credit or requiring specialized mortgage products.

Brokers typically earn their commission from the lender, usually between 0.5% and 1.2% of the loan amount. For instance, on a $500,000 mortgage, a broker could earn between $2,500 and $6,000.

In some cases, especially with private mortgage lenders, you may need to pay the mortgage broker's fee directly. This fee is agreed upon before the transaction is finalized and is typically around 1% of the mortgage amount. Additionally, if you cancel your mortgage before closing, you may incur a cancellation fee.

Potential drawbacks and what to watch out for: While mortgage brokers offer many benefits, it's essential to be aware of potential drawbacks. Some brokers might charge fees for their services, particularly for clients with complex financial situations. There is also the possibility of conflicts of interest, as brokers are paid by lenders. However, reputable brokers prioritize their clients' needs and are transparent about their compensation.

Avoid brokers who withhold relevant information, practice poor communication, make unrealistic promises, or push unnecessary products. These warning signs indicate that a broker may not be acting in your best interest.

What a good mortgage broker should do: A good mortgage broker provides transparency, ensuring you're aware of all costs and factors influencing their recommendations. They should educate and empower you by using clear, jargon-free language and answering any questions you may have. Communication should be tailored to your unique situation, with regular updates on your application status.

Proactive problem solving is a hallmark of a good broker. They anticipate potential challenges in the mortgage process and offer solutions. Embracing technology to streamline the mortgage application and approval processes can reduce delays and frustrations. A client-centric approach means understanding your financial goals and working towards solutions that align with them, even if it means recommending alternatives to a mortgage.

Choosing the right mortgage broker: When choosing a mortgage broker, start by evaluating potential brokers. Research brokers in your area, check their credentials and ensure they are listed and licensed. Asking important questions about their preferred lenders, their application process and their mode of compensation will help you make an informed decision. Check their references, read reviews and testimonials, and ensure their communication style matches your preferences. As well, remember to ask trusted friends and family for recommendations, ideally someone they've used personally.

Choosing a broker who is interested in your long-term financial success is vital. A broker who truly understands your financial goals becomes a strategic ally in navigating the complex field of home financing. Their ability to provide specific advice and customized solutions is essential to obtaining a mortgage that meets your objectives.

Conclusion: This chapter provided insights into how mortgage brokers can save you money and simplify the refinancing process, ensuring you get the best deal possible. Choosing the right mortgage broker can make a significant difference in your refinancing journey. By understanding what to look for in a broker and the benefits they offer, you can make informed decisions that align with your financial goals.

Chapter 9: Yes, You Can Negotiate Mortgage Rates.
Here's How To Do It

Negotiating your mortgage rate is not just possible it's essential for saving money. Don't settle for the first offer; push for better terms. This chapter will arm you with strategies to effectively negotiate your mortgage rate, ensuring you get the best deal possible. Let's unlock the potential savings that come with smart negotiation tactics.

Negotiating a mortgage rate is relatively easy if you're prepared. Trying one or more of the following approaches can save you some real money on your refinance.

When Should You Negotiate a Mortgage Rate?

Generally speaking, there are three specific times to negotiate your mortgage rate during refinancing:

• When refinancing your mortgage: This is, arguably, the best time to negotiate, as multiple lenders will want to land your business. Take the time to shop around or find out if your current or preferred lender is willing to match or beat the competition.

• When your mortgage term is up: Your current lender will send you a mortgage renewal letter a few months before your mortgage term is up. Instead of accepting the contract, look into what else is available out there. You could save big if you switch.

• When rates are dropping: If mortgage rates have dropped, you may be able to refinance your mortgage to get a better rate before the term expires. You must find out what prepayment penalties would apply if you decide to refinance mid-term.

Five Tactics for Negotiating a Better Mortgage Rate

1. Understand lenders' posted mortgage rates - If you're refinancing your mortgage, you'll likely encounter a financial institution's posted mortgage rates. Like the sticker price on a new car, these are just their publicly advertised mortgage rates. They're useful as a starting point for negotiations, but they are not the amount many people end up paying. You should be able to get a better rate than the one postedas long as you negotiate.

When negotiating a mortgage rate, always ask about any discounted or special rates the lender might offer. These deals often pop up for specific situations, like if you have a high credit score or need a shorter term, like three years. They're not always easy to find. Banks don't often post them on their websites. Instead, they might email them to select clients or offer them through certain channels to drum up business.

So, if a bank's posted rate for a five-year fixed mortgage is 6.5%, but you hear about a 5.5% special rate, bring it up with your lender or mortgage broker. Ask for that lower rate and see what they say. Even if you don't qualify, at least you've made it clear you're not going to pay the full posted rate.

2. Shop around - Always shop around when refinancing your mortgage. The mortgage rates offered by various lenders will be similar, but the difference between rates could save you thousands of dollars.

Simply call a few lenders or visit a few websites to get a sense of what's out there. With several different quotes in hand, you can then see if your preferred lender is willing to match your lowest researched rate.

3. Ask for a lower rate - Even if you've been offered a discounted rate, it never hurts to ask if your lender can do better. Lenders are never going to loan money out at a loss, but you won't know how low they're willing to go unless you ask. A simple, "Is that the best you can do?" might be one way to avoid leaving money on the table.

4. Use a mortgage broker - If you don't have the time or inclination to shop around on your own, you may want to enlist the services of a mortgage broker. They don't work for one specific lender, so they can compare offers from multiple lenders to find you the lowest rate and best terms. Brokers can also be helpful for applicants with more challenging circumstances, like the self-employed or borrowers who've experienced credit difficulties in the past. Because brokers get paid by lenders and not borrowers, there's no financial reason to avoid working with one.

5. Build up your credit score - Quite often, getting the best interest rate comes down to presenting yourself as a low credit risk. If you have a large amount of home equity and an excellent credit history, lenders are more likely to give you the best rates during negotiations since they can trust you to pay back the loan. Accounting for all income sources.

Chapter 10: Now Get Out There & Make Refinancing Work for You!

Refinancing your mortgage is a big decision. But when it's done right, it can lead to some serious savings. EveryRate's guide walked you through the steps to get there, such as the refinancing process, pros and cons and your best options were all covered.

As we've mentioned a few times here, whether you're looking to lower your interest rate, tap into your home equity or pay off debt, the key is having a clear plan and making informed choices.

Our realistic scenarios showed that refinancing isn't a one-size-fits-all solution. It's about where you are now and where you want to be. Even small tweaks to your mortgage can have huge implications down the road. Not to mention, those savings can make a real difference where it matters most whether it's funding a renovation, shaving off debt or building a financial cushion.

As you take your next steps, please remember you're not alone. EveryRate is here to help you through the process. Ask questions, compare lenders and never settle for the first offer. The goal is to make sure refinancing not only saves you money but also fits into your overall financial picture.

Refinancing is a tool, but it's the decisions you make that unlock its potential. With what you've learned, you're ready to take that leap. Whatever your next move might belike contacting potential lenders, reassessing your current mortgage or rethinking your financial goals you've got the knowledge to make it work and make it count.

Now, get out there and turn those potential savings into real results.