Refinances

• Refinancing
• Refinancing Your Property To Buy Another Property
• Getting A Secured Line Of Credit Against Your Home
• Spousal Separation Mortgage
• Refinance Plus Improvements Mortgage
• Construction Financing

There are many reasons to refinance your mortgage. Some of them are debt consolidation, renovations, education funding or taking advantage of a lower rate on the market.

Whatever the case, consulting with a mortgage professional will give you access to all available options on the market, as well as unbiased advice.

Frequently, refinancing is done with the same institition where your mortgage is located since it saves you the cost of paying unnecessary penalties when breaking your mortgage. Should this be the case, a mortgage professional will guide you through the process, explain the associated costs such as legal fees and appraisal, as well as protect you from hidden fees which sometimes can be involved in blended interest rates.

In other cases, it may be to your benefit to swich lenders and take advantage of lower interest rates and better products offered by other banks, even if this means paying a small penalty, when and where applicable. In many cases, banks will cover legal and appraisal fees for new clients and very often offer more attractive rates for new clients than existing ones.

Your mortgage professional can weigh the benefits of all options so that you can make a sound and informed decision.

You may be interested in purchasing a property such as a 3-season cottage or a vacation property in Florida, yet you find out that major banks are not interested in financing these types of properties. Or, you may be interested in simply taking equity out of your home and use it as a down payment towards the purchase of another property. Refinancing your property would be the proper approach to access that equity.

The newest regulations state that you can refinance your property to the maximum of 80% of its appraised value. The new mortgage would be used to pay off your old mortgage, if any, and the difference would be given to you to dispose as you like.

When refinancing, you are not restricted to taking a mortgage as your new product, and/or advancing all of equity up-front. If qualified, we could set you up with a Secured Line of Credit with a limit of 80% of the property’s value (subject to having at least 15% locked-in a mortgage within), and then you can advance only what you need to borrow at the time of closing. This way you pay interest only on the amount that you initially borrow. The difference will be available to you when you like it, as you like it. If you don’t use it, you don’t pay interest on it. Yet, you have the funds available should an interesting property pop up in the near or far future.

Talk to your mortgage broker about the refinancing procedures, costs, benefits and potential downfalls. If the cost of refinancing exceeds the benefits, you may need to look at alternatives. Finally, if you need to borrow more than 80%, talk to your mortgage broker about private mortgages or cash-back options.

HELOC (also known as “Secured Line of Credit”, “All-In-One”, “STEP”, etc.) is a line of credit that is secured by your home. The bank registers a charge against your home, in exchange for your ability to borrow money from the product, at rates significantly lower than an unsecured credit would offer.

Rates offered within HELOC are tied to the Prime rate and are currently offered at Prime + 0.5%. Unsecured lines of credits typically offer rates that are between 8% and 10%, rarely lower than that.

The beauty of the HELOC is that, once approved, you can use it towards anything – as a down payment on an investment property; to renovate your kitchen or basement; to help your children with the purchase of their home; to buy that condo in Florida or back in the old country – the choice is yours.

HELOC can be registered as a 1st or a 2nd mortgage.

Let’s assume your home is worth $500K. You already have a mortgage of $300K with a good rate, so you don’t want to break your mortgage but need access to equity. Since the maximum that you can borrow is 80% of property’s value (in this case, $400K), and since you already owe $300K on your mortgage, you would be eligible for a HELOC of $100K.

In this case a $100K HELOC would be registered as a 2nd mortgage, completely unlinked to your 1st mortgage. You will pay a minimum payment of interest-only on the amount you owe and your limit will not change, irrelevant of what happens to your 1st mortgage. Your line would be fully open, meaning that you can pay it off in full at any time, without penalty.

However, the full potential of the HELOC is unlocked when registered as a 1st mortgage. You can have multiple products inside of it, such as mortgages, lines of credit and credit cards. You can lock-in line of credit balances into mortgages and lower the borrowing rates. You can split products between those used for personal use versus those for investment.

Let me illustrate the power of a HELOC through an example. Let’s assume your property is worth $500K and your mortgage of $300K is coming up for maturity. You are really torn on whether to go with a fixed or variable rate. You will also need money for the down payment towards an investment property in the near future. On top of that, tight mortgage rules may be an issue when qualifying for that investment property. Let’s analyze them, one by one.

The first thing to do is register a HELOC of $400K, based on the maximum 80% loan-to-value. You want to take the maximum that you’re allowed since you don’t pay for it unless you use it. Next, if you’re not sure whether to go fixed or variable, you have the option of splitting your $300K into two separate mortgages – one fixed and the other variable, and in such way get the best of both worlds.

At this point, it is very important to take the longest amortization available on your existing mortgage. That will allow you to lower your payments and maximize your purchasing power for future investments. I am not suggesting that you pay your mortgage over 30 years… I am simply advising you to use “lump-sum” pre-payment options to pay your mortgage faster while improving your purchasing power via lower payments.

Once this was done, you will have a $300K mortgage inside of a $400K limit. As your mortgage goes down, your line of credit opens up. For example, when your balance drops to $280K, your line of credit limit will increase to $120K.

A few months later you decide to buy an investment property and need access to $100K. You already have  $120K available. You simply write a cheque for the down payment and have your mortgage broker arrange a mortgage against the new investment property.

Once the mortgage closes, you will have the option of keeping your $100K in a line of credit at 4.45% or locking it in a mortgage inside of the same product at 3% (based on today’s rates). You could end up with 3 mortgages inside of your HELOC and another $20K available to you in a line of credit. As your mortgage balance decreases, your line of credit limit will increase, giving you access to more equity.

In Canada, if you borrow to invest, you can write off the interest on the borrowed amount. That’s why it’s important to keep the mortgages used to invest separate from those for personal use. In this example we’ve achieved exactly that – your original two mortgages are separate from your $100K investment mortgage. When you get your statements from the bank, you will know which interest you can write off and which you cannot.

The HELOC is definitely the most sophisticated product on the market. It allows you to access equity in your home when you want it, how you wanted, at the lowest possible rates on the market. If you don’t already have it, but your circumstances allow you, you should really consider it.

If you are going through a separation or divorce and assume that your house must be sold, you may be in for a positive surprise. If you can afford to carry a new mortgage on your own, you are allowed to refinance your property up to 95% of its value, and provide a spousal buyout, perhaps even pay off any other joint debt.

Divorce or separation does not necessarily mean that you have to leave your family home.

A well know Toronto scenario: “Our tiny bungalow is now worth $1M dollars! We should sell it!…” Which then begs the question – “Where would we go – what could we buy for $1M?”.

As the value of property goes up – so too do the costs associated with buying and selling. Legal fees, the cost of selling and (most impactfully) the Land Transfer Tax can add significant costs to moving homes. So it’s no wonder that renovations are on the rise in Ontario.

The Star recently reported that the amount of money spent on home renovations and repairs now exceeds new home construction – with Ontario accounting for almost 40% of all Canadian renovation dollars spent.

So if you’re debating whether to “love it or list it”… and leaning towards staying put and fixing up, here are some financing options to consider.

The most common way to borrow to renovate is by accessing equity in your home. This can be done by setting up a Home Equity Line of Credit, or by refinancing (increasing) your existing mortgage. Both of these options are relatively simple and inexpensive, however limit your borrowing to 80% of your home’s value.

What if you are already near 80% of your home value though? What are your options then?

Refinance Plus Improvements is a program that let’s you borrow money based on the future, improved value of your property. For example, if your home is worth $500K, you already have a mortgage of $400K (hence 80% of the present value) and you want to replace your kitchen and finish your basement – your only decent option is utilizing Refinance Plus Improvements program.

Here’s how it works. You would present your mortgage broker with the plans and estimates of your renovations. In certain cases, an appraisal may be required. The bank will approve your mortgage and give you a green light to start renovating. Once the renovations are complete, an appraiser will confirm that renovations have been done according to the original plans. If satisfactory, the bank will release 80% of the funds which you can then use to pay your contractors.

Remember, the total mortgage cannot exceed 80% of the property value, that’s why you are responsible for 20% of the renovation cost.

Renovations don’t have to be completed by licensed contractors. You can use the program to finance the material and do the renos yourself.

If you are planning to build a house from scratch, whether by using a builder or by managing the construction process yourself, several institutions offer progress-draw financing options that could meet your needs. Although the construction financing is a relatively complicated process and varies between financial institutions, certain steps in the process are standard to all lenders.

The bank would typically assess the value of the land on which the property will be built, the cost of building according to the construction contract or estimated costs, and would come up with the value of the property upon completion. Based on the expected value of the property, the bank would approve you for a mortgage that will become active once the property is built.

During the construction phase, the bank would usually advance the funds to you in segments (also known as “draws”), which will enable you to finance the construction. The cost associated with a construction mortgage is usually in the neighbourhood of Prime (Prime + 1% – Prime + 4%) where you are required to make the interest payments only. Once the property is completed, your construction mortgage would roll into a regular mortgage at the ongoing or pre-arranged mortgage rate.

Although the majority of financial institutions will require you to have your own funds to start construction, certain lenders will allow the first draw to be advanced against the value of the land. For example, if you own a piece of land that is worth $600,000, you might be allowed to draw up to 50% of the land’s value, i.e. $300,000, to start the construction.

As an alternative to getting your construction financed through one of the major banks, you can use private funds to build a property. Although private funds tend to be more expensive than those of main banks, the process is much more simple, flexible and customer-friendly. Furthermore, once the construction is complete, you are free to pay off the loan and either sell the property or arrange final mortgage through the lender of your choice.

It is important to discuss all construction mortgage options with your mortgage broker, to see which option makes more financial sense in your particular case.