For mortgage brokers: when refinancing will not solve the debt problem

A guide in the Mortgage Trouble centre

Help your client compare financing with a debt assessment, and recognize when to bring a Licensed Insolvency Trustee into the conversation.

Your client may need money to pay off credit cards, cover a loss of income, complete a purchase or manage a mortgage renewal. A bank’s refusal does not tell you which solution is right. The question is whether the available financing will leave the household able to meet its obligations.

A licensed mortgage professional, such as a mortgage broker or agent, may find a workable solution through a bank, another institutional lender or a private lender. But if the loan only postpones an unaffordable debt problem, an assessment by a Licensed Insolvency Trustee may be the useful next step. A failed property deal may instead call for advice and negotiation by the client’s lawyer.

This guide helps you identify those different situations, gather the facts and explain when another professional should be involved. It does not ask you to diagnose insolvency or recommend a filing.

Does the proposed financing improve the household’s position?

Put the loan beside the full household budget. Show the client:

• The loan amount and the cash actually available after fees and payouts.
• The interest rate, payment and total borrowing costs.
• The term, principal due at the end and relevant default provisions.
• The other debts and living costs the household must still pay.
• How the loan will be repaid, and what happens if the expected sale or refinancing does not occur.

A private mortgage can serve a clear purpose. A borrower may need a short bridge to a realistic sale or to financing expected to become available after a specific change in circumstances. High cost alone does not settle the question. The cost, the repayment plan and the household’s ability to carry the loan must make sense together.

The warning sign is a loan that closes today but leaves the client unable to pay tomorrow. Moving credit-card balances onto the home changes the security behind the debt; it does not cure a continuing budget shortfall.

Show the cost in dollars

Consider this hypothetical one-year, interest-only private second mortgage:

Illustrative private mortgage costs

Loan amount	$350,000
Lender, finder’s and legal fees deducted	$44,500
Net advance	$305,500
Interest for one year at 10%	$35,000
Fees plus first-year interest	$79,500

The assumed fees and interest equal about 26% of the net advance. This is a simple cost comparison, not a regulatory annual percentage rate. The net advance is before any other debts are paid. Show the client a budget that includes interest payments as they fall due, payments on the existing first mortgage and repayment of the $350,000 principal at the end of the term. The figures are an illustration, not a quote or a claim about every private mortgage.

Use the client’s actual terms. If there is no workable way to carry and repay the loan, the file needs a wider assessment before the client commits.

When should a Licensed Insolvency Trustee be involved?

Consider an assessment when unsecured debt payments cannot be maintained, further borrowing does not produce a sustainable budget, or a property problem is part of wider financial distress. The client need not wait until every possible loan has been exhausted.

The trustee first assesses whether the person is insolvent and which remedies are available. A declined mortgage application does not establish insolvency. If the client is not insolvent, a consumer proposal or bankruptcy is not the answer.

Where a consumer proposal is available, replacing the existing unsecured-debt payments with an affordable proposal payment may leave room for the mortgage. That improvement must be demonstrated in the budget, including the proposal payment and all housing costs.

A mortgage normally remains outside a consumer proposal. Continuing mortgage payments and the lender’s renewal requirements still matter; a filing does not guarantee renewal. Home equity also affects what creditors would expect under a proposal. See Mortgages and a Consumer Proposal for the detailed distinctions.

If the mortgage remains unaffordable after the unsecured debt is addressed, the household still needs to consider financing, housing and sale options. Return to broker options to choose a client guide or open the toolkit.

Flag second properties and shared security early

Ask whether the client owns another property and whether any lender holds security over more than one property.

A second property’s mortgage counts toward the consumer proposal debt limit, unlike debt secured by the home the client lives in. A large mortgage on a second property may therefore require assessment of a different route, such as a Division 1 proposal.

Where one lender holds security over both properties, do not assume that selling one will release it. The client needs their lawyer and trustee to examine the documents, the lender’s security and the available options before relying on a sale. A consumer proposal cannot make that secured lender accept less or release its security.

Use the guide to a condo that no longer pays for itself and Division 1 Proposals in Plain Terms for the fuller discussion.

A purchase that may not close: six questions

A closing problem can involve financing, contract rights, wider debt or all three. Establish these facts while the client still has choices:

1. What is the firm closing date, and what notices have arrived?
2. What is the purchase price, and what value will the lender use?
3. What financing is firmly available, what conditions remain and how much cash is missing?
4. Does the agreement permit an assignment, and is there written consent or a proposed release?
5. What deposit was paid, where is it held and what purchase documents were delivered?
6. If the purchase fails, what other debts, assets, co-signers or guarantees are involved?

The broker assesses financing. The real estate lawyer advises on the agreement, deadlines, deposit and potential exposure. A Licensed Insolvency Trustee assesses insolvency and any available formal debt solution.

Not every failed closing calls for an insolvency proceeding. If the client is otherwise solvent and the problem is one bad deal, a lawyer-led settlement may be the appropriate route.

Documents that make the assessment useful

Ask the client to gather the records that exist. This prepares the conversation; it does not turn the broker into the client’s legal or insolvency adviser.

• Purchase and deadlines: the agreement and all schedules, amendments, notices, extensions, occupancy dates, closing statements and assignment correspondence.
• Value and financing: the appraisal, commitments and conditions, refusals, available funds, closing-cost estimate and proposed private-loan terms.
• Deposit and parties: deposit receipts, disclosure documents and delivery records, purchaser and guarantor names, and any relevant corporate, trust or funding agreements.
• The full household: income, expenses, debts, assets, property values, mortgages over multiple properties, demands and lawsuits.

Broker Closing-Risk Toolkit

These resources help your office record facts and prepare client conversations. Obtain your internal compliance department’s approval before professional use, and make the changes it requires. The documents do not determine legal rights, insolvency eligibility or mortgage suitability.

View the complete toolkit

• Guide for Mortgage Brokers: the guide, the file sheet, three letters and the cost worksheet in one document. Download the Guide for Mortgage Brokers (PDF).
• The guide with the editable tools: Download the guide and editable tools (ZIP).
• Closing-Risk File Sheet: record the funds required, future carrying costs and questions for the next professional. PDF or editable Word.
• Private Mortgage All-In Cost Worksheet: compare net proceeds, interest, fees, principal due and repayment plans. PDF or editable Word.
• Three template letters in one file: a purchase that may not close, a renewal that may not be available, and wider financial distress. PDF or editable Word.

Complete the brokerage, licence and contact fields before using an approved document. The letters explain questions to take to the appropriate professional; they do not recommend a filing.

Explain the option without pressing the client to file

You can explain the financing concern and what a Licensed Insolvency Trustee does. Do not urge the client to make a proposal or file for bankruptcy. The distinction between explaining an option and soliciting a filing matters.

I do not pay or receive a fee or benefit for a broker referral. The client should receive independent advice and decide how to proceed.

Do not promise a credit recovery date or score. A filing is a debt remedy, not a credit-repair product. The resulting payment obligations may change the household budget, but future lending decisions remain the lender’s.

For credit-file questions, read Your credit after a consumer proposal or bankruptcy.

Discuss a difficult file

If the available financing does not solve the client’s debt problem, contact Paul Franchi, Licensed Insolvency Trustee, with your question. You can also leave a voicemail at 647-492-9283.

For the broader enforcement context, see Power of Sale in Ontario. Return to broker options for client guides and the toolkit. This page is general information for professionals, not advice about an individual client.