Imagine the financial hardship that might prevail if it were that once you lock into a mortgage for a predetermined term, say 5 years, you would be prevented from breaking that mortgage until maturity.  We are lucky that mortgages in Canada do allow for early discharge, albeit, with a penalty, allowing homeowners to get a new start on a new mortgage, with new terms, new rate, and new mortgage amount.

 To refinance your existing mortgage means simply just that.  Discharge your current amount and replace it with a new mortgage.  Why?   Simple;  to lower your borrowing rate,  and or, pay out other debts and consolidate those debts into the new, larger mortgage, resulting in a savings of monthly cash flow, since the mortgage rate is lower than any of the debts being paid off on consumer loans and credit cards.

 The refinance process is similar to obtaining a mortgage to purchase a new home.  The borrower must meet the Bank’s lending criteria based on credit, affordability, and loan to value.  Loan to value, or LTV is the amount you can borrow expressed as a percentage of the appraised value of your home.  There are guidelines established by both the lenders and the insurer in cases where the mortgage needed is high ratio.  Some lenders may offer cash back mortgages at posted rates from 1 to 7% of the mortgage amount and may be an option for borrowers seeking to borrow a bit more than what is allowed.

 Typically, borrowers may refinance up to 95% LTV, but can be offset in situation where

The borrower may be self-employed, or based on the credit grade.  Refinance funds may be used for any purpose, except debt management.  This means, if you are behind your current debts you cannot turn to refinance as an option under any of the insured programs.

 Once the refinance mortgage is approved, and all your documentation has been accepted, you will require to retain the services of a lawyer who will effectively remove the previous charge and place a new charge in favor of the new lender.  Your solicitor will also ensure the discharge balances required to pay off your existing mortgage(s) and other personal loans and credit cards.  He will be responsible to disburse the required funds to all the creditors.  In some cases, certain lenders may use a Canada wide closing service option at reduced prices and provide you with the convenience of coming right to your home to sign all the mortgage papers.  When dealing with your mortgage broker be sure to ask all the available options.

 Mortgage refinancing will be much tougher when the borrower’s credit is impaired or has had major derogatory and poor repayment history.  Until recently mainstream lenders offered several products aimed at borrowers with “ bruised credit” through programs like the Genworth Credit Assist program.  These programs were aimed at borrowers with lower credit scores negatively impacted by marital break up, job loss or illnesses.  These programs have now been sidelined with the recent economic situation making it difficult for borrowers with credit scores between 550 to 590.  If you require refinancing upto75 or 80% LTV, your chances are better even in today’s environment.  Gone are also the high ratio self-insured products offered by many of the non mainstream lenders. 

 Today, if your credit score is less  than 600, and even at that, it may pose a challenge, you may need to postpone your refinancing option if you require more than 80% LTV.  It is important that if you fall in this category to keep on maintaining your credit rating so that you may qualify when the guidelines are broadened once again.  If you fail to do so, and your credit rating deteriorates, it will affect your from any refinancing approval in the future.

 Refinance is still a very viable alternative for good credit borrowers to restructure their current finances and regain control of their debts.  Transfering high interest debt to a lower rate facility such as a mortgage helps to free up household cash flow.

 Aldo Mormile is a registered mortgage consultant with VericoLendingDirect Corp;.  He has been in the lending industry for 20 years and obtained his mortgage certification in 1993.