Over the last few years, changes to mortgage financing rules have created confusion with many clients I speak with. If a client comes to me to refinance his or her home, then they ultimately want to know, "How much mortgage refinance can I qualify for?"
The amount of mortgage refinance you qualify for depends on 2 factors, your income and your home value. The maximum you can refinance your home, with an "A" lender, is 80% of the value. The next determining factor is whether you earn enough income to qualify for that amount.
Most financial institutions are governed by a branch of the government called OSFI, the Office of the Superintendent of Financial Institutions. These financial institutions are also governed by the National Housing Act which stipulates mortgage financing regulations.
Basically, the rules state that a financial institution can lend up to a maximum of 80% of the value of a home. If a financial institution wishes to lend more than 80% of the value, then mortgage loan insurance (I wrote and article about this insurance here) is required.
The rules were recently changed to state that no institution can obtain mortgage default insurance for a mortgage refinance. Therefore, 80% is the maximum financing available through most financial institutions.
In short, the first factor to determine how much you can qualify for is based on your home's value.
How Do I Calculate the Maximum Mortgage Refinance Amount?
Let's look at a couple of examples so that we can see how much the maximum mortgage refinance amount is calculated.
Example 1: $500,000 Home with $300,000 Current Mortgage
Your home is worth $500,000, you are currently paying for a mortgage on this property with a balance of $300,000. You are considering a mortgage refinance to pay out some debt and top up your RRSP's. How much mortgage can you refinance on your home and how much money will you receive?
To calculate how much mortgage you could potentially refinance, you simply multiply your home's value by 80%. Therefore, $500,000 x 80% is $400,000. In this example you could finance up to $400,000.
You already have a mortgage owing and that mortgage will have to be paid by the new mortgage, therefore you will receive $100,000 cash out of your home after you refinance. That is calculated by subtracting the current mortgage amount from the new mortgage amount. That is, $400,000 minus $300,000 is $100,000.
For this example, the client wants to pay off debt and invest some into an RSP. Based on this initial calculation, this client can decide if they want to proceed with the mortgage refinance. That is, can they get access to enough money to do what they want? Is $100,000 enough for this client?
Now let's look at another example.
Example 2. $500,000 Home with $375,000 Current Mortgage
For this client, they want to do the same thing as the last one. Their home is worth $500,000 with a mortgage balance of $375,000. They want to pay off debt and top up their RSPs. How much mortgage can they refinance and how much cash will they get out of their home?
The first calculation is the same. To determine the maximum mortgage refinance amount, multiply the home value by 80%, therefore $400,000 is the maximum mortgage refinance.
The second calculation is also the same. Subtract the current mortgage balance from the maximum refinance amount. Calculated as $400,000 minus $375,000. This client will have access to $25,000 after the refinance is completed.
For this client, $25,000 may be too little. If that's the case, then they may want to consider other options. These could include a personal loan, a debt consolidation loan, an RSP catch up loan or a second mortgage. I wrote about how second mortgages work in an article here.
This client may also want to take a look at a cash flow management tool that I use with clients.
Now that you understand how the mortgage refinance is calculated, let's take a look at income and how that factors into how much mortgage you qualify for.
How Much Income Do I Need To Refinance My Mortgage?
The qualification criteria for all mortgages involves a calculation related to your income. For mortgage financing, two ratios are calculated. The TDS and the GDS ratios. The TDS is the ratio of debt to income and the GDS is the ratio of housing costs to income.
The maximum housing costs can not exceed 39% of your gross annual income (that's the GDS calculation). The maximum total debt payments, including housing costs can not exceed 44% of your gross income (that's the TDS calculation).
There are some criteria that is legislated. For conventional mortgages (that is, mortgage refinances), the mortgage payment used to calculate the TDS & GDS is based on the rate you receive for the mortgage plus 2% or the Government Benchmark rate, which ever is greater.
To calculate how much mortgage you can qualify for based on your income, then you can us our calculator below to figure that out. If you want to understand more about this calculator and all the different input fields, please read this article we wrote to explain how to use the calculator.
OK, so let's look at a couple of examples here too.
Example 1. $110,000 Gross Income and $500,000 Home Value
You Earn $110,000 per year before tax. You have a car loan payment of $500 per month and credit card debt of $10,000. Your home is worth approximately $500,000 and the property tax payments are $4,000 per year. How much mortgage could you qualify for?
To complete this calculation, you must set the down payment to 20%. Even though you don't have a down payment on a home you are refinancing, you must leave 20% equity in that home when you refinance the mortgage.
This calculator does not include your debts to determine the mortgage amount.
Based on the calculator, your income could qualify for a mortgage of approximately $520,000.
But is this correct? No. The first determining factor for a mortgage refinance is that the maximum mortgage you can refinance is 80% of the total value. Therefore, even though your income will allow you to qualify for a mortgage of $520,000. Your home value will only allow a maximum mortgage of $400,000.
Example 2: $85,000 Gross Income and $500,000 Home Value
In this example, let's say your gross income if $85,000. (note, when I say "your" I could be referring to you and your spouse if you are both on the title to the home) You want to include the income of everyone who is on the title to the home and on the mortgage.
Let's also assume your home is worth $500,000 and you want to refinance the mortgage. The property taxes are $4,000 per year, and you have no condo fees.
Using the calculator above, you can determine that the maximum mortgage you can qualify for is approximately $385k. This number is actually less than 80% of your home's value. In this case, your income is the deciding factor to how much mortgage you can qualify for when you refinance your home.
How Much Money Can You Take Out On A Refinance?
As you can see from the previous 4 examples, the amount of money you can take out on a mortgage refinance depends on the value of your home and your income.
The first step is to figure out the maximum financing based on your homes value. The next step is to use the calculator above to determine how much mortgage your income will allow you to qualify for.
The lesser of these 2 numbers is the maximum refinance you can take out on your home.
Let's look at another example.
Example 1. $500,000 Home Value, $90,000 Gross Income, $405,000 Current Mortgage Balance
In this example, you and your spouse earns a total of $90,000 gross income per year. Your home is worth $500,000 and has a current mortgage of $405,000. You pay $4,000 per year property taxes. How much mortgage refinance can you qualify for?
You first calculate the maximum refinance mortgage amount by multiplying your home value by 80%. $500,000 multiplied by 80% is $400,000. (note, this is below your current mortgage balance - we could just stop here, but let's complete the second calculation anyway)
Your next calculation can be done by using the calculator above. Based on your gross income if $90,000 per year, you can qualify for a mortgage of approximately $410,000.
Your current mortgage balance is $405,000. This is higher than 80% of the value of your home. Therefore, you could refinance your home, but you would have to pay $5,000 back to your bank.
In this case, you would not get enough funds from a mortgage refinance to pay off the current first mortgage. If you must arrange financing, then you would have to consider a private second mortgage.
Can I refinance more than 80% of the value of my home?
Yes, you can refinance and get more than 80% of the value of your home with a private lender. There are many private lenders, mortgage investment corporations as well as individuals who will finance more than 80% of the value of your home. Many would consider financing up to 85% or even 90% of your home's value.
These private lenders will use your home as collateral for the financing that you want. It's often a better option to set up a second mortgage rather than a private mortgage for the full amount you need.
Most private lenders will charge a higher interest rate than "A" lenders. They will also charge fees for setting everything up. If the interest rate is higher, then it's often a better strategy for you to keep the mortgage you already have and then get additional funds through the private lender.
How Often Can You Refinance Your Home?
It is certainly possible to refinance your home if and when you have adequate equity to do the refinance. The key is to figure out if you can accomplish your financial goal by refinancing your home and the benefits outweigh the costs.
The costs to refinance includes legal fees, potential mortgage penalties and appraisal costs. Ask yourself if incurring these costs are offset by the benefits of the mortgage refinance?
We created a calculator that you can use to compare 2 different mortgage options. You can determine whether or not you can recoup your costs. You can find that mortgage comparison calculator on this page of our site.
People that I meet with will want to refinance for many different reasons and each is valid. In my opinion, what's important is to understand whether or not you are in a better financial situation after.
Is Mortgage Refinancing Worth It?
We wrote a fairly extensive article that discusses how to determine if it's worth it to refinance your mortgage, read that article here.
Mortgage refinancing may or may not be worth it depending on your goals and the costs. If you can be in a better financial situation and you can recover your costs within 2 years, then mortgage refinancing is likely worth it.
It's important for you to know all your options. There may be some other options, with lower costs that are better.
If you aren't sure, connect with us. Fill in the details in the middle of the calculator above. We can chat about all your options so that you can make an informed decision.
We have gone through several examples of how to calculate how much mortgage refinance you can qualify for. The tools we have on our website are for you to use.
Please feel free to play with the calculators. If you want some feedback or want to know how things could work for your specific situation, then connect with us through our about page, or by completing you details in the middle of the calculator above.