The client
A Prince Edward Island household took out a $180,000 private first mortgage structured as an interest-only mortgage three years ago, while their own credit was being repaired. With that repair now complete, they wanted to exit to an A-lender ahead of the private term's maturity — and assumed, reasonably but wrongly, that three years of payments meant three years of principal paid down.
Structure
Private first mortgage, interest-only
Three years into the term
Principal
$180,000
Unchanged since the mortgage funded
Private rate
9.49%
Illustrative; interest-only, no amortization
Household income
$6,200/mo
Existing car loan $250/mo
Exit target
A-lender refinance
Ahead of the private term's maturity
The problem
An interest-only mortgage does exactly what its name says and nothing more: every payment covers the interest charged that month and not one dollar of the principal. Three years of perfect payment history on this file produced zero reduction in what was actually owed — a fact the client only fully absorbed once the exit numbers were laid out.
Three years, zero principal reduction
- ▸Interest-only payment at 9.49%: $1,424/mo
- ▸36 payments over 3 years, total paid to the private lender: $51,264
- ▸Principal at exit: still $180,000 — exactly what it was on day one
The private lender's discharge and legal administration fee of $3,000 came as a second surprise on top of the first — a cost that had nothing to do with the mortgage's rate or performance, and one the client had not budgeted for because no one had walked through what a private mortgage actually costs to close and to exit when the file was first placed.
Private lending of this kind is not a rounding error in the Canadian market — it fills a real share of the financing that private and alternative lenders provide by lender type across Canada, which is exactly why an honest accounting of how these products actually work matters at scale, not just for one file.
The numbers
The exit refinance had to be sized to the real numbers: the unchanged principal, plus the fee the private lender charges to discharge its own security.
| Sizing the exit refinance | Amount |
|---|---|
| Private mortgage principal (unchanged after 3 years, interest-only) | $180,000 |
| Discharge and legal administration fee | +$3,000 |
| New balance at exit | $183,000 |
| Rate & payments | Figure |
|---|---|
| Contract rate, new A-lender (illustrative, not a quote) | 5.65% |
| Minimum qualifying rate | 7.65% |
| Monthly P&I at the qualifying rate — the ratio runs on this | 1,356 |
| Monthly P&I at the contract rate — what they’ll actually pay | 1,133 |
This is the first payment in three years that will reduce principal at all — a standard amortizing mortgage, replacing an interest-only one.
| TDS | Figure |
|---|---|
| Housing costs (P&I + tax + heat) | 1,676 |
| TDS vs. the 44% comfort line | 31.1% ✓ |
The solution
The exit was priced on the actual mortgage instrument, not the client's summary of it.
First, confirmed the interest-only structure directly against the private mortgage document, not the client's recollection — establishing in writing that the $180,000 principal had never been reduced.
Second, obtained the discharge fee in writing before pricing the exit, adding the $3,000 to the new balance rather than discovering it at the lawyer's table days before closing.
Third, shopped the exit to an A-lender ahead of the private term's maturity, giving the file time to close cleanly rather than racing a deadline.
The outcome
The exit refinanced at $183,000 — the unchanged principal plus the discharge fee — on a standard amortizing structure, with TDS at 31.1%.
Prince Edward Island's own transfer-tax rate is under dispute at the statutory level, so no dollar figure is quoted for it here — and in any case this is a refinance with no change of ownership, so no transfer tax applies regardless.
What to take from this file
- 01Interest-only means exactly that. No portion of any payment reduces the principal, no matter how many years pass or how clean the payment history is.
- 02Confirm the structure against the actual mortgage document, not a summary of it. The client's own understanding of the loan was wrong in good faith, not carelessly.
- 03Discharge and administration fees are real costs, not footnotes. Get them in writing before pricing an exit, not after.
- 04An uninsured exit has no CMHC ratio ceiling, but lenders still watch a comfort line. 44% is common practice, not a regulatory cap.
- 05PEI's transfer tax is disputed at the statutory level. Never publish a dollar figure for it — and it doesn't apply to a refinance in any case.
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%.
- ▸CMHC — CMHC Reviews Underwriting Criteria — GDS 39% / TDS 44% maximums and the 600 credit-score floor for insured files.
- ▸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:
- ▸9.49% private rate / 5.65% A-lender rate — rates move daily; neither is a quote.
- ▸the $3,000 discharge/admin fee — each private lender sets its own discharge and administration charges.
- ▸the 44% comfort reference — this file is uninsured, so there is no CMHC ratio ceiling -- 44% is a common internal comfort line, not a regulatory cap.
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.