Homeowner: Refinancing a Mortgage

Notes on refinancing, or, in our case, changing the term or our mortgage and going from a variable rate to a fixed mortgage. If you are just starting out with getting a first mortgage in Canada, you may also find these notes useful!

When we bought our house in the Spring of 2005 we got a mortgage from FirstLine Mortgages, a firm recommended by our realty agent (estate agent). The rate was 1.75% for the first six months, and then half a percent below prime after that.

So we had a variable-rate mortgage. The down side of this is that, if the interest rate goes up, your payments go up. Right now Canada is still having an economic boom under a Liberal government, but the government is weak and recently fell. So there is an election. The interest rates are going up. On the other hand, it's a good time for debt consolidation!

We switched to a seven year fixed term mortgage. This has a slightly higher interest rate right now, but the amount of interest we are charged on our loan will not change over the next seven years. Confusingly, this does not mean we will have paid off our mortgage in seven years. Instead, it means that after seven years we will need to refinance our mortgage. So our gamble is that the interest rates in Canada will rise, and with our fixed rate we'll be paying less than if we had had a variable rate loan.

Most banks have a mortgage rate calculator that lets you work out how much you will have to pay. Mortgage companies have their own set of jargon, so you just have to be patient and work through it.

The other thing you can control is how often you make payments. We currently make a payment every two weeks (biweekly). The more often you make payments, the sooner the mortgage is paid off. To see why this might be true, imagine that you were going to make a payment after two weeks, but instead you make half now and half a week later. When you make a payment, you no longer get charged interest on the amount you just paid off, because you paid it off. So you save a few day's interest. In addition, biweekly means 26 payments a year, since there are 52 weeks in a year, whereas twice a month would mean 24 payments.

Your mortgage company or bank will have a calculator to let you work out the effect of switching payment schedules.

Before changing your mortgage payments you should also consider debt consolidation (search for debt consolidation or for loan consolidation, but you might also want to get advice from your bank), because credit card interest rates are usually much higher than mortgage rates. Once you have paid off part of your mortgage you might also be able to increase the mortgage and transfer other debts over to it.

Your first mortgage

Neither Clyde nor I had bought a house in Canada before, and we had some surprises when it came to the mortgage. In England I'd had a 90% mortgage, and had borrowed the remaining 10% from the bank. Here, if your deposit is less than a quarter of the value of the house (actually I think the lower of the apprised value and the agreed purchase price), you may have to buy additional insurance. In our case this was going to be $8,000 of insurance. Once we understood that, we paid a higher deposit!

There are also issues with zoning: our house was once used as a farm, and it's very difficult to get a mortgage on a farm in Canada. This (we were told) is because the government forbids banks from foreclosing on active farms, so the banks don't like the risk. Although our house was zoned Residential, the sellers' realty agent had mistakenly put Farm in the listing, and we had to get it changed.

It's worth shopping around to get a mortgage, but it's also worth asking your realty agent (the one helping you buy somewhere, assuming you have one), or your solicitor/attorney/lawyer, who to deal with. When Clyde had his own legal practice in Vermont he saw one bank that would foreclose 30 days after the first time that a payment was missed or late! This was the earliest possible allowed by law in Vermont at that time; I don't know the corresponding laws here in Ontario, but the important thing is that you want a mortgage company with a good reputation, not necessarily the cheapest.

Note that the mortgage term is (in Canada) usually much shorter than the amortisation/amortization period, which means that the bank does not guarantee to continue lending you the money! For example, we have a 20-year mortgage, so it will be paid off in twenty years, but the mortgage term is only seven years. So after seven years we have to hope that the bank will let us sign up for another seven years, or that we can find another bank to help us!

You can also take out up to $10,000 of your RRSP (per person listed on the sale agreement) to use for part of a house deposit. This is almost certainly a good investment. If you don't already have an RRSP, or don't have enough in it, but you have cash for the deposit, open an RRSP account and put the cash into it. Tell the bank that this is what you are doing when you open the account and they will give you the form for withdrawing the money. You need to do this at least 30 days before the closing date of the house, and possibly sooner. It may even be worth borrowing money from the bank to make the RRSP contributions, because the interest on the loan will be massively less than the money you'll save on taxes.

Credit History

If you have a poor credit history, there are firms that offer an "adverse credit remortgage" but they may charge higher interest, I don't know. Refinancing, or renewing, are not the same as getting a second mortgage, which is where you have two mortgages at the same time.

In Canada, one way to improve your credit history, especially if you are new to the country, is to go to a major department store and buy something, but pay with three separate cheques, two of which are post-dated. This will start you off with a credit history.

As a computer programmer I feel obliged to mention that you should not do online financial transactions with Internet Explorer because too many people write viruses and spyware that target it. Mozilla firefox will make the URI address location bar (the thing with the Web page address in it) go yellow when you are on a secure site, and will also show a padlock in the status bar at the bottom of the window. To get to your bank, do not click on links in email, but type in the URL or use a bookmark, to avoid "phishing" scams and spoofs.

[these pages are in preparation and not yet public]