How much equity do you need to refinance in BC?

As a homeowner in British Columbia, you've likely heard the term "refinancing" tossed around. But what exactly does it mean, and how much equity do you truly need to make it happen? It's a question I get a lot, and for good reason. Refinancing can be a powerful financial tool, whether you're looking to consolidate high-interest debt, fund a major renovation, or simply secure a more favourable interest rate. However, it's not quite the same as renewing your mortgage, and there are specific requirements you'll need to meet, especially concerning the equity you've built in your home.

Understanding Refinancing vs. Renewal

Before we dive into equity, let's clarify the difference between a mortgage renewal and a refinance, as they're often confused.

• Mortgage Renewal: This happens at the end of your mortgage term. It's essentially signing a new contract with your existing lender (or a new one) for a new interest rate and term length, keeping your existing loan balance and amortization period largely the same. You're not typically looking to borrow more money or significantly change the structure of your mortgage.
• Mortgage Refinance: This is a more significant change. You're replacing your entire existing mortgage with a new one, which you can do at any time, not just at the end of your term. This allows you to make changes to your loan amount, amortization, and even access the equity you've built in your home. Because you're breaking your current mortgage contract, there can be prepayment penalties involved, which is an important consideration.

People usually refinance to:

• Access home equity for things like renovations, investments, or education.
• Consolidate higher-interest debt, like credit cards or personal loans, into a lower-interest mortgage.
• Secure a lower interest rate if market rates have dropped significantly.
• Change your mortgage terms, such as extending your amortization period to reduce monthly payments.

The 80% Loan-to-Value (LTV) Rule: Explained with Real Numbers

When it comes to refinancing in Canada, the golden rule for most conventional lenders is the 80% Loan-to-Value (LTV) ratio. This means that the total amount of your new mortgage (including any funds you're taking out) cannot exceed 80% of your home's appraised value. Conversely, this implies you need to have at least 20% equity in your home to refinance.

Let's break this down with an example:

Imagine your home in Burnaby is currently appraised at $1,000,000.

1. Calculate the maximum loan amount: 80% of $1,000,000 = $800,000.
2. Determine your current mortgage balance: Let's say you still owe $400,000 on your existing mortgage.
3. Calculate the equity you can access: $800,000 (maximum loan) - $400,000 (current mortgage) = $400,000.

In this scenario, you could potentially refinance your mortgage to a new total of $800,000, allowing you to access $400,000 in cash from your home's equity. This $400,000 could be used for various purposes, from a major home renovation to consolidating other debts.

It's important to remember that this 80% LTV is a general guideline for uninsured mortgages. If you have less than 20% equity, you might still be able to refinance, but it would typically involve mortgage default insurance (like CMHC insurance), which is usually only for new purchases with down payments less than 20%. However, CMHC does have a specific refinance product for homeowners looking to create secondary suites, which can allow for insured financing up to 95% of the "as-improved" value, with a maximum lending value below $2 million. This specific program is designed for project-related costs, not for general equity take-out.

The Mortgage Stress Test and Refinancing

Just like when you first got your mortgage, you'll need to pass the mortgage stress test when refinancing with a federally regulated lender. This test ensures you could still afford your mortgage payments if interest rates were to rise.

Currently, the stress test requires you to qualify at the greater of:

• Your contracted mortgage rate plus 2%.

For example, if your lender offers you a refinance rate of 5%, you'd need to qualify as if your rate were 7% (5% + 2%). If the Bank of Canada's benchmark rate was higher than 7%, you'd use that higher rate. This doesn't mean your actual payments will be at this higher rate, but it's a crucial step to ensure financial stability.

Refinancing for the Self-Employed in BC

Being self-employed in British Columbia often means your income looks different from someone who receives a regular paycheque. This can sometimes make qualifying for a mortgage, including a refinance, a bit more nuanced. However, it's certainly not impossible!

Lenders understand that self-employed individuals often minimize their taxable income for business purposes. When refinancing, you'll still need to demonstrate sufficient income to support your mortgage payments. This might involve providing:

• Recent Notices of Assessment (NOAs).
• Business financial statements.
• Bank deposit patterns.

Some lenders, often referred to as "B-side" lenders (like credit unions or trust companies), are more accustomed to working with self-employed individuals. They may offer "stated income" options, where they consider your declared income and business performance rather than solely relying on traditional tax documents. These options typically require a strong credit history and often around 20-25% equity in your property.

If you're self-employed and looking to refinance, working with a mortgage broker like myself is particularly beneficial. I can help navigate the different lender requirements and find the best solution for your unique financial situation.

Other Important Considerations for Refinancing in BC

• Prepayment Penalties: If you refinance before your current mortgage term is up, you'll likely incur a prepayment penalty. For variable mortgages, this is usually three months' interest. For fixed mortgages, it's typically the higher of three months' interest or the Interest Rate Differential (IRD). These penalties can range from a few hundred to tens of thousands of dollars, so it's crucial to factor them into your calculations.
• Closing Costs: Beyond prepayment penalties, refinancing comes with other costs, including legal fees, appraisal fees, and potentially title insurance. These can add up to a few thousand dollars.
• Property Transfer Tax (PTT): In British Columbia, Property Transfer Tax is generally paid when real estate changes ownership. While refinancing typically doesn't trigger PTT if the ownership on title remains the same, certain situations like adding or removing someone from the title can. If you're adding a non-family member, PTT would be payable on the fair market value. If you're adding a spouse or close family member to a primary residence, there might be an exemption. It's always best to consult with a legal professional to understand the implications for your specific situation.
• FHSA/RRSP Home Buyers' Plan: While these programs are fantastic for first-time homebuyers to gather a down payment, they are generally not directly involved in refinancing an existing mortgage. The First Home Savings Account (FHSA) allows tax-deductible contributions and tax-free withdrawals for a qualifying first home, with no repayment required. The RRSP Home Buyers' Plan (HBP) allows you

Related mortgage resources

• Explore my self-employed mortgage options to explore financing built around complex income.
• Explore my refinancing options to compare ways to restructure your mortgage.
• Read Refinancing Your Burnaby Home to Fund Major Renovations Wisely for a related BC mortgage perspective.