A great credit score, a steady job and you could be set for life when it comes to finding a mortgage. Lose your job and refinancing gets a little bit trickier. Sticking with your current lender can be a smart move, but if you must change lenders, here’s how.
4 Reasons to Refinance in Normal Times
Refinancing has it advantages.
- You can save money by reducing your interest rate, especially with interest rates at 2.25% or lower. Before you jump in, add up penalties to break your current mortgage, plus legal fees and home appraisal charges.
- A longer mortgage term could give you stable mortgage payments for years to come. Seven- and 10-year mortgage rates are pretty attractive right now. Balance that against any penalties you would owe if you bailed out of the new mortgage early, say by selling your home.
- You can consolidate debts. Having a single loan payment can help you manage bills that could be getting out of control.
- Your could use the equity in your home to go back to school or make home repairs. Upgrades that increase your home’s value, like adding a second bathroom, make your mortgage work for you.
Deciding to Refinance or Renew
Being unemployed can put refinancing out of reach. Essentially, you are applying for a new mortgage, but without a steady job. For that reason alone, accepting a renewal offer from your present lender is far less risky.
Why You’re a Credit Risk
If you’ve been suddenly turned down by your current lender when it comes time to renew, here’s why. Mortgage lenders prefer borrowers with a solid credit history and two or more years experience with the same employer. When you lose your job, they have to worry you will default on the payments or walk away from your mortgage obligations.
Calculating How Much You Can Borrow
Your job is toast. First things first then. To improve your credit worthiness, aim to keep your mortgage principal, interest, property taxes and insurance (your gross debt service ratio or GDS) under 28% of gross monthly income Your total debt services ratio (TDS), from the mortgage, auto or student loans, credit lines and minimum monthly credit card payments, should be 36% or less of your gross monthly income. Conventional lenders use these ratios to determine your ability to manage debt. CMHC, which insures borrowers with the lowest down payments, looks for a maximum GDS of 35% and TDS of 42%.
Tally Up Your Income
Since unexpected job loss puts your ability to prove you can keep up with mortgage payments on the line, add up all sources of household income you can find. It all counts: rentals, student loans, live-in family members, spousal support payments, legal settlements, your partner’s or spouse’s wages (add them to the property title if needed), potential co-signers, pensions, GST refunds, property tax deferrals or what have you.
Make a List of Your Assets
Your assets include savings accounts, stocks and bonds, mutual funds, GICs, retirement pensions, RRSPs or RRIFs and other real estate. Collectibles not so much, since auction prices are unpredictable.
Reduce Unnecessary Expenses
Next, take serious charge of your budget to show you can manage your spending. Bring down interest charges by consolidating debts. Reduce expenses like entertainment by visiting friends or eating in more. Sell your car and use the bus instead. Take small jobs that bring in extra income or tips.
Verify Your Credit Score
You wish your credit score is intact. Making all those credit card and mortgage payments on time gives you the credibility lenders are looking for. Ask credit agencies for a copy of your credit report and correct any inaccuracies that may hold you back. Applying for a new mortgage prompts a credit enquiry from proposed lenders to agencies like Equifax. Being turned down appears on your credit record and may affect your credit score.
Take the Mortgage Stress Test
Don’t forget the mortgage stress test. Unless you renew with your current lender, you’ll have to requalify all over again, even if you have 20% or more down. A GDS less than 35% and TDS under 44% are required, plus a credit score of 680 or more if you have less than 20% for the downpayment. You must be able to afford 2% over and above the interest rate being offered by your lender or the Bank of Canada five-year, fixed posted mortgage rate, whichever is higher.
Put Your Paperwork in Order
You’re ready to apply. Bring the paperwork with you to your refinancing appointment:
- two or three pay stubs
- property insurance documents
- income tax assessment
- car or student loan agreements
- a list of credit cards and credit lines, with interest rates and amounts you owe
- mortgage agreements
- latest property tax bills
- and property assessments.
Best of luck.
Finalize Your Mortgage Refinancing Deal
Axess Law Ontario real estate lawyers go over your mortgage refinancing agreement to ensure you understand every detail. Video conference online any day of the week, from anywhere in Ontario. Day or evening appointments are available, at times that work for you. Book ahead by calling toll-free to 1-877-552-9377 or 647-479-0118 in Toronto or use our online booking form. In person meetings can be arranged at our Toronto, Scarborough, Vaughan, Etobicoke, Ottawa, Mississauga Winston Churchill or Mississauga Heartland law offices.
Click here to learn more about Axess Law’s real estate law services.
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