Canadians frequently need to refinance their mortgage. In fact, each year,15% of Canadians refinance their mortgage to take advantage of better mortgage terms (reduced rate, amortization, or mortgage feature), improve their financial condition, buy out a partner, or take advantage of an investment or business opportunity. 60% of Canadians break their mortgage sometime during the mortgage’s term.
While everyone’s personal and financial situation is different, refinancing your mortgage presents unique opportunities you should know are available to you (see: 10 Reasons Canadians Refinance Their Mortgage)When refinancing a mortgage, refinancing a mortgage is always uninsured primarily due to the nature of mortgage insurance regulations and the purposes for which mortgage insurance is intended (see: Insured, Insurable, Uninsurable Mortgages Explained).
The following reasons explain why refinanced mortgages are always uninsured:Refinancing Typically Involves Lower LTV
Mortgage Insurance Purpose
Mortgage insurance in Canada, provided by entities like the Canada Mortgage and Housing Corporation (CMHC), Sagen, or Canada Guaranty, is primarily designed to protect lenders against the risk of borrower default on high-ratio mortgages. High-ratio mortgages are those where the down payment is less than 20% of the home’s purchase price, making the loan-to-value (LTV) ratio higher than 80%.
Refinancing Typically Involves Lower LTV
When homeowners refinance their mortgage, they are typically not purchasing a new property but are either accessing their home equity or restructuring their debt. By the time they seek refinancing, they have usually paid down a significant portion of their original mortgage, reducing the LTV ratio below 80%. Since mortgage insurance is only required for high-ratio mortgages, it is not applicable for refinanced mortgages, which typically have a lower LTV.
Regulatory Restrictions
Canadian regulations stipulate that mortgage insurance is not available for refinanced mortgages. This means that even if the LTV ratio were above 80%, insurance providers do not offer insurance on refinances. This is because the insurance is meant to facilitate the purchase of a home, not the refinancing of existing debt.
Risk Management by Lenders
When refinancing, lenders rely on the equity in the property as collateral. The more equity a borrower has, the lower the risk to the lender. Therefore, the lender does not require insurance to mitigate the risk of default, as the equity in the home provides sufficient security.
Cost to Borrowers
Mortgage insurance adds an additional cost to borrowers. Since refinanced mortgages are generally less risky (due to the lower LTV ratio), the additional cost of insurance is unnecessary and would make refinancing less attractive to homeowners.
Alternative Lending Products
For borrowers seeking to access their home equity through refinancing, lenders may offer alternative products, such as a Home Equity Line of Credit (HELOC), which is also uninsured and based on the equity in the home.
Private Lenders
Private mortgages are an option for homeowners who may not qualify for traditional refinancing through a bank or other institutional lenders, or for those who need quick access to cash and have significant equity in their property.
Private lenders primarily focus on the equity in the property rather than the borrower’s income, credit score, or debt service ratios. This makes it easier for borrowers with less-than-perfect credit or irregular income (such as self-employed individuals) to access funds.
Private lenders will typically lend up to a certain percentage of the home’s appraised value, often up to 80% LTV, though this can vary. The higher the equity in the home, the more likely the borrower will be able to obtain a private mortgage.
If the borrower already has a first mortgage, they can also consider taking out a second mortgage from a private lender to access additional equity. This allows them to keep their first mortgage in place while using the equity from their home.
When to Consider a Private Mortgage
- Credit Issues: If the borrower has poor credit or has recently experienced financial difficulties.
- Income Challenges: If the borrower’s income is irregular, such as being self-employed or having variable income streams.
- Time Sensitivity: If the borrower needs quick access to funds and cannot wait for the lengthy approval process of a traditional mortgage.
- Unconventional Properties: If the property is considered unconventional or doesn’t meet the criteria of traditional lenders.
Summary
In summary, refinancing mortgages in Canada are always uninsured because mortgage insurance is designed for high-ratio purchases, not for refinancing existing debt. Refinances typically involve lower LTV ratios, reducing the risk to lenders, and regulatory frameworks do not allow for mortgage insurance on refinanced loans. When determining the best approach to refinancing in your unique situation, contact Allen Ehlert to review all your options.
