Refinancing리파이낸스 (재융자)

What is it?

Refinancing means paying off your current mortgage and replacing it with a new one. The new mortgage can be with the same bank or with a different lender.

There are two main kinds. In one, you keep the same loan amount and only change the rate, the term or the amortization (how many years you take to repay). In the other, you borrow more because your home is worth more than when you bought it. Borrowing more is often called an equity take-out or cash-out refinance. Equity is the part of the home’s value that is yours after subtracting what you still owe.

Signing a new term for the same balance when your term ends is a renewal, not a refinance. You can refinance in the middle of a term, but then a penalty may apply.

Why do people refinance?

Lenders must ask and record what the money is for. OSFI (the federal banking regulator) lists these examples in its Guideline B-20.

• Debt consolidation: paying off high-interest debts such as credit cards or a car loan by folding them into the mortgage.
• Access to home equity: investing, paying for a child’s education, or the down payment on another property.
• Renovation: a basement, kitchen or roof project.
• Changing the loan: switching between fixed and variable, changing the amortization, or changing how you pay.

How you use the money can change whether the interest is tax-deductible (for example, borrowing to invest). Check this with an accountant.

How much can you borrow? The 80% rule

Government-backed mortgage insurance (CMHC and the private insurers) can only cover a loan whose purpose includes buying the home, or a loan that pays off a prior uninsured low-ratio loan. It cannot cover a refinance that takes out extra money (federal Eligible Mortgage Loan Regulations, s. 5(1)(b)).

At the same time, federally regulated lenders such as banks must insure any mortgage above 80% of the home’s value (OSFI Guideline B-20). Put the two rules together: when you refinance with a bank, the new mortgage cannot go above 80% of the appraised value. That 80% includes every other loan on the home, such as a second mortgage or a HELOC.

The value is the lender’s appraised value, not what you think the home is worth. B-20 says the lender must recalculate the loan-to-value ratio on every refinance.

Because the new loan is uninsured, you also go through the stress test again. At federally regulated lenders you must qualify at the higher of your contract rate plus 2% or 5.25% (OSFI minimum qualifying rate, as announced December 12, 2023). Credit unions are provincially regulated and their rules can differ, so ask them directly.

Example calculation

Suppose the appraised value is $1,000,000 and the current mortgage balance is $550,000.

This is an estimate for reference only. The real limit can be lower because of the appraisal, your income (stress test) and your credit score.

What does it cost?

• Prepayment penalty: if you pay off the old mortgage before the term ends, you pay the penalty written in your contract. It is common for variable-rate mortgages to charge three months’ interest and for fixed-rate mortgages to charge the greater of three months’ interest or the interest rate differential (IRD), but ask your lender for the exact figure in writing. If the mortgage is more than five years old, the federal Interest Act lets an individual borrower pay it off with three months’ interest.
• Legal and registration costs: the old mortgage is discharged from title and the new one is registered. If you only change the amount with the same bank, the registration is sometimes left as it is.
• Appraisal fee: the lender may order an appraisal to confirm the value.
• Lender or broker fees: the commitment letter lists the fees and charges you must pay. If you use a mortgage brokerage, it must tell you in writing whether it gets paid by anyone else, such as the lender, and by whom (O. Reg. 188/08, section 21). Check the amounts in the commitment letter and the disclosure documents.
• Mortgage insurance: even if your current mortgage was CMHC-insured, the insurance does not carry over to a new mortgage that takes out extra money.

Refinance vs HELOC vs second mortgage

Which one is better depends on the penalty, the rate gap and how long you need the money. Ask a mortgage broker or your bank to show all three side by side.

What to watch out for

• Resetting the amortization to 25 or 30 years lowers the monthly payment but raises the total interest you pay over your life.
• Moving credit card debt into the mortgage turns unsecured debt into debt secured by your home. If you cannot pay, the home is at risk.
• If the appraisal comes in low, you may get less money or no refinance at all.
• If your income fell or rates rose, you may fail the stress test. Then renewing with your current lender may be the better path.
• If a bank says no and you refinance with a private lender, rates and fees are higher and payments are often interest only. FSRA (Ontario’s financial regulator) treats private mortgages as a one- to two-year temporary option and says you need a realistic exit strategy first.
• If you use refinance money as the down payment on another property, the new, larger payment counts against you when that purchase is underwritten.

Step by step

1. Ask your lender in writing for the balance, the maturity date and the exact penalty on your current mortgage.
2. Ask a mortgage broker or your bank to compare a refinance, a HELOC and a second mortgage side by side.
3. Apply and provide income documents. If the lender wants an appraisal, an appraiser visits the home.
4. Read the commitment letter. If a broker arranged it, you must get the disclosure documents at least two business days before you sign. They can come later only if you agree to that in writing.
5. Your lawyer pays off the old mortgage, updates the registration on title and sends the remaining money to your account.

Example