Posted: 1 Apr

Should I Consider Mortgage Refinancing After Bankruptcy, or Before?

Should I Consider Mortgage Refinancing After Bankruptcy, or Before?

Have you found yourself in a situation where you have a lot of debt and are considering filing for bankruptcy? If so, you may also be wondering how to navigate your homeownership situation. Should you consider mortgage refinancing after bankruptcy or should you try before bankruptcy? Read on to learn more and call us to discuss your options with a mortgage broker. 

Mortgage Refinancing Before Bankruptcy  

While you can refinance before or after bankruptcy, remember that lenders will review your creditworthiness before approving your mortgage. Before filing for bankruptcy, you likely have many unpaid debts and are behind on bills, which means your credit risk is high. While most traditional lenders will shy away, there are many equity banks in Canada that can still help before bankruptcy if your file is packaged properly by an experienced mortgage broker.  

Besides mortgage advice, it is also important to get advice from an experienced bankruptcy trustee in addition to a mortgage broker, because the amount of equity you have in your home also affects whether your home is exempt or not in the proceedings. Further, if you take a bunch of equity/cash out of your home just prior to bankruptcy, this can have a severe effect on the proceedings as well. 

 

Mortgage Refinancing After Bankruptcy

Filing for bankruptcy discharges most of your unsecured debts, however it takes at least 2 years after your discharge to be back where a traditional bank would lend to you. While the lower debt load is good, the mortgage lenders will want to see that you have some new credit accounts that you are managing properly.  Prior to the 2 years, but after bankruptcy discharge your debt load is down, but your credit score is in the tank. 

Usually, if you have enough equity in your home, you may be able to refinance to pay the amount owing in order to discharge the bankruptcy. Mortgage refinancing after bankruptcy is possible even if you are not discharged yet, and offers several benefits to your situation.  

Why Mortgage Refinancing? 

  • Mortgage refinancing after bankruptcy allows you pay off your bankruptcy and start the 2 year clock sooner.   
  • Refinancing can reduce your monthly payments and gives you better monthly cash flow.  
  • Mortgage refinancing after bankruptcy allows you to take out the equity in your home and pay for other expenses.  

Mortgage Refinancing Limitations 

  • You can qualify for mortgage refinancing after bankruptcy, but you are limited to specific conditions.  
  • You are limited to equity banks in Canada. If your current lender is unwilling to renew your mortgage, your Dominion Lending Centres mortgage broker can help find another lender.  
  • If equity banks are unwilling to refinance your mortgage, you can work with a Mortgage Investment Corporation (MIC) and private lenders. While the rates are higher than conventional banks, this is a band-aid solution to get you back on your feet so you can hopefully get a bank mortgage in 2 years.  

In addition to the above, you still have to pass the Canadian Mortgage Stress Test to qualify for mortgage refinancing after bankruptcy. The OSFI Mortgage Stress Test seeks to prove your ability to keep making mortgage payments, even if interest rates go up, or if you face another financial emergency. To qualify for refinancing, you have to prove that you can pay the mortgage rate provided by the lender plus 2%, or the current five-year benchmark rate set by the Bank of Canada, or whichever of the two rates is higher.  

Example

If you are trying to get approved for a mortgage at a rate of 4.65%, the lender will assess if you can afford the mortgage at 6.65% (4.65% + 2%) or the Bank of Canada rate if it's higher (at time of writing it is 4.79%). The purpose of this government rule is to ensure there is a bit of leeway in your debt ratio just in case interest rates go up.  

Should You Consider Refinancing and Bankruptcy  

You can refinance before declaring bankruptcy but remember that you better double check with your bankruptcy trustee. If you take the cash out, your bankruptcy trustee will scrutinize what you did with the money. Mortgage refinancing after bankruptcy may be a better option. Talking to a bad credit mortgage broker at Dominion Lending Centres is the best way to get tailored advice about your mortgage and your home. Contact us today.

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