Expert: Cinzia Dalgarno - 8/19/2009

Question
My husband and I are discharged (March 2008) bankrupts.  We have been trying to get approval from our existing mortgage lender to tap into some equity in our home for improvements by adding onto our existing mortgage.  We have just been recently denied once again and told to try again in a year which is what we were told last year.  The main reason we are told is the lack of time since our discharge and the fact that a loan with this institution was affected by the bankruptcy.

My question is this:  If we were to switch financial institutions at this point (about 17 months left on our term) what are our chances of getting approval elsewhere?  Will we even be able to get CMHC approval?  We are interested in borrowing approximately 80% of the value of our home in order to do the improvements we want to do.  Is there a large penalty for breaking our mortgage before the term ends?

We understand the ramifications of bankruptcy and that we will certainly have difficulties for years to come but we would like to know if there is even a chance for us to do this at some point in the future or if we are now committed to staying with this financial institution for the duration.  Our current mortgage has another 15 years left on it at the current rate/payment schedule.

I hope this is all clear and thank you for your time!

Cathy

Answer
Hi Cathy - you indicated that my answer was perhaps not as helpful as you wished, and I realized that with all the information I gave you, I neglected to actually answer your specific questions; so here you are, in brief:
-yes, you can certainly break your term. It may cost you quite a bit to do that, depending on your lender. Easy enough to find that out, simply call them and ask them what would the penalty be to payout your mortgage today. There is a way to reduce the penalty a bit, and your mortgage broker will be able to advise you on that.

-your chances of getting approval by another lender are good, if you have re-established credit since the bankruptcy. However, the rate you get won't be so great.

-CMHC approval is not required for mortgages up to 80%; however, if the lender you are going with wishes to use CMHC (some lenders do, regardless of the loan to value ratio), then you will have to wait until it's been 24 months past the date of discharge, as that is CMHC's policy.

-another option is to leave your existing 1st mortgage as is until the maturity date, and get a private 2nd mortgage. The interest rate will likely be around 12%, and there will be fees to pay, but you will avoid incurring the payout penalty from your 1st mortgage. Have the private mortgage term be the same as the remaining term on your 1st, and you can refinance a whole new 1st, on your maturity date.
Regards, Cinzia

Initial answer:
Hello there. First of all, your term: I'm guessing when you say you have 15 years left, you mean your amortization (as opposed to your term, which is what the rate is guaranteed for).
How much it will cost you to break your term is entirely dependant on the lender you're with - you can easily ask them to give you that information. Typically, it will be the greater of 3 months interest or interest rate differential.

As to refinancing (paying out and re-registering a new 1st mortgage), or increasing your existing mortgage (blend and extend, so as not to incur a payout penalty), or getting a 2nd mortgage for the renos you wish to make:
most "A" lenders will require that you've been discharged for at least 3 years, with re-established credit for that 3yrs, before they will consider lending you anything.

There are only a couple of banks who will consider giving you money after you're discharged for 2 years - again, this assumes you have re-established credit, and that all else is wonderful (good stable jobs, clean current credit, etc). There are many more private lenders who will consider your request - but the rate will be high.

You may wish to deal with a mortgage broker to get the money you're looking for - we have over 70 lenders we can deal with, including private lenders, which is likely the way you'll need to go in order to get money at this moment. Not only do mortgage brokers have relationships with many more lenders than you do, but the lenders typically will give us much better rates than they will give you. Having said that, you will not be getting a good rate right now, given your credit.

Hope this was helpful to you,