The client
A homeowner in Ottawa needed $75,000 and took a private second mortgage quoted at 9.5%, alongside an existing $240,000 first mortgage. The private commitment included an $8,500 lender-and-broker fee, capitalized directly into the loan rather than paid in cash at closing.
First mortgage
$240,000
Existing balance, unaffected by the private second
What the borrower needed
$75,000
Net proceeds actually used
Capitalized fee
$8,500
Lender and broker fee, added to principal, not paid in cash
Quoted rate
9.5%
Interest-only, on the FULL registered principal
Combined income
$8,600/month
Both salaried
The problem
The 9.5% rate looked serviceable next to other private quotes the borrower had seen. What the rate quote alone didn't show was that the $8,500 fee had been added directly onto the principal rather than paid in cash — so the registered loan wasn't the $75,000 the borrower needed, it was $83,500, and 9.5% interest was accruing on the whole thing, fee included.
What the capitalized fee actually did
- ▸Net advance to the borrower: $75,000 -- what actually reached their account
- ▸Fee capitalized into the loan: $8,500 -- added to the principal, not paid separately
- ▸Registered principal owed: $83,500 -- what the exit refinance would actually have to retire
Ontario's mortgage brokerage rules require a broker to disclose the cost of borrowing — the effective annual rate once fees are included, not just the quoted nominal rate. Read correctly, that disclosure is exactly where this file's real number was hiding.
The numbers
Reading the cost-of-borrowing figure, rather than the quoted rate alone, showed what this loan actually cost against what the borrower actually used.
| The real cost of borrowing, fee included | Amount |
|---|---|
| Net advance to the borrower | $75,000 |
| Capitalized lender-and-broker fee | +$8,500 |
| Registered principal | $83,500 |
| One year's interest at 9.5% on the full $83,500 | $7,932 |
| Total cost of borrowing (interest + fee) | $16,432 |
| Effective annual cost (total cost ÷ $75,000 net advance) | 21.9% |
The quoted 9.5% rate is real, as far as it goes -- it's the interest rate on the registered principal. But relative to what the borrower actually used, the loan's true annual cost is closer to 21.9%, once the capitalized fee is weighed against the smaller amount that actually reached their account.
Sizing the exit correctly
| The consolidated refinance | Figure |
|---|---|
| Existing first mortgage balance | $240,000 |
| Private second's full registered principal | $83,500 |
| New consolidated balance | $323,500 |
| Minimum qualifying rate on a 5.00% contract rate | 7.00% |
| Qualifying payment, 25 years | $2,266/mo |
Total debt service on the consolidated balance comes to 35.5% of the household's $8,600 income — informational only, since this is an uninsured refinance with no CMHC ratio ceiling.
The solution
A mortgage broker read the private commitment letter for its cost-of-borrowing disclosure before sizing anything.
First, separated the net advance from the registered principal. Confirmed with the private lender's commitment letter exactly how much cash reached the borrower's account versus what was capitalized into the loan itself.
Second, calculated the effective annual cost of borrowing. A quoted rate applied to an inflated principal understates what the loan actually costs against what the borrower actually used -- the disclosure rules attached to private mortgage costs and fees exist precisely so this number gets shown, not buried.
Third, sized the exit refinance to the full $83,500 registered balance from the first conversation. Not the $75,000 the client remembered receiving -- the number that would actually need retiring at the private lender's payout.
The outcome
A consolidated refinance of $323,500 funded at 5.00%, retiring the private note's full $83,500 registered balance together with the existing first mortgage. Total debt service settled at 35.5%.
Because this is an uninsured refinance, CMHC's ratio maximums don't apply here; the 35.5% figure is informational, not a pass/fail line.
What to take from this file
- 01A capitalized fee changes what a private loan actually costs, even at an unchanged quoted rate. Interest accrues on the fee along with the principal the borrower actually used.
- 02Read the cost-of-borrowing disclosure, not just the headline rate. Ontario's brokerage rules require it to be shown precisely because the two numbers can differ this much.
- 03Confirm the net advance versus the registered principal before quoting an exit number. A client's memory of 'what I borrowed' is often the net figure, not the amount actually owed.
- 04Size the exit to the registered balance, fee included. An exit refinance sized to the net advance alone will come up short by exactly the capitalized fee.
- 05This isn't a bullet or capitalized-interest problem. The gap here was set once, at origination, by how the fee was structured -- not by anything that accrued afterward.
Sources
Every regulatory figure in this file traces to one of these primary sources. Client details and anything that varies by lender are illustrative, as flagged below.
- ▸OSFI — Minimum qualifying rate for uninsured mortgages — the minimum qualifying rate — greater of contract rate + 2% or 5.25%.
- ▸Provincial/territorial mortgage-broker legislation fetched directly (bclaws.gov.bc.ca, legisquebec.gouv.qc.ca, fcaa.gov.sk.ca, web2.gov.mb.ca, nslegislature.ca, assembly.nl.ca) plus FCNB's own site for NB and CanLII's index for PE — see notes for per-province method — provincial mortgage regulators and licence titles.
Illustrative in this file — lender-specific, not rules:
- ▸9.5% / 5.00% rates — rates move daily; neither is a quote.
- ▸the $8,500 capitalized fee — private lender and broker fees are set deal by deal; this figure is illustrative, not a schedule.
- ▸the 35.5% total debt service figure — this file is an uninsured refinance, so there is no CMHC ratio ceiling -- the number is informational.
Authority & provenance
How this case file was built
We publish the origin, the verification method and the reviewer for every case file, so you can judge how far to trust it before you rely on it with a client.
Where it comes from
Derived from files handled by Treadstone’s fulfillment desk and from scenarios contributed by partner brokerages. Names, employers, exact amounts and dates are changed so no client or file is identifiable.
Provenance: Composite — a pattern seen repeatedly on fulfilled files, not a single transaction.
What is verified
Every regulatory figure traces to a primary source listed above and was checked against it on the date shown. The arithmetic is recomputed by machine on every rebuild.
Anything that varies by lender is labelled illustrative rather than stated as a rule.
Who reviewed it
Reviewed for Canadian regulatory accuracy before publication, and re-checked whenever a cited rule changes.
Reviewed by: Nicholas Parson, Treadstone Associates — reviews every case file before publication.
This case file is professional reference material for licensed mortgage professionals. It is not advice to a borrower, and it is not a lender commitment. Insurer rules, qualifying rates and provincial taxes change — confirm the current position with the insurer, regulator or lender before you rely on any figure here in a live file.