Two years of interest, nothing amortized

Two years of on-time payments feels like progress on any loan. On an interest-only private second it isn't — every payment covered interest only, and the $40,000 owed at maturity is exactly the $40,000 borrowed at the start. The household had, reasonably enough, been thinking of the upcoming maturity the way anyone thinks about a mortgage renewal: a remaining balance to refinance, smaller than what they started with. It wasn't smaller. It was the same number.

This matters for how the refinance gets sized. A broker who assumes a bullet loan has quietly amortized down, the way a normal mortgage would over two years, will price and pre-qualify against the wrong number — and discover the shortfall mid-underwriting, when it is far more expensive to fix.

Getting the exit balance right meant treating the private second as if not one dollar of it had ever been repaid, because none had.

The ratio moved almost nothing — up half a point, if anything, because the stress-tested qualifying rate on the larger consolidated balance costs slightly more than the old first mortgage plus the private interest did. This file was never going to be difficult on the numbers. Getting the exit balance right, early, was the entire job.

A submortgage broker working under Saskatchewan's Financial and Consumer Affairs Authority set the client's expectations correctly before shopping a single rate.

First, confirmed with the client that the bullet was the full original principal. Walked through exactly what two years of interest-only payments had and hadn't done, so the refinance target was $190,000 from the very first conversation, not a smaller number discovered to be wrong three weeks into underwriting.

Second, sized the new lender's approval to the correct combined balance. Pre-qualified against $150,000 plus $40,000, not against the first mortgage alone with the private balance treated as an afterthought.

Third, timed the closing to land before the bullet's maturity date, not after. A private lender with a bullet due in full has no obligation to extend it even briefly; the refinance needed to fund on or before the date the $40,000 came due.

The consolidated refinance funded at 5.05% before the bullet's maturity date, retiring the full $40,000 private second in one payment. Total debt service settled at 28.9%, barely different from what carrying both mortgages had cost before.

Because this is an uninsured refinance, CMHC's ratio maximums don't apply here; the 28.4% and 28.9% figures are informational, not a pass/fail line.

• 01Interest-only means interest only. An unamortized bullet loan owes exactly what it started at, no matter how many on-time payments preceded maturity.
• 02Confirm the exit balance in the first conversation, not partway through underwriting. A refinance sized to a wrongly-assumed paid-down balance is a shortfall waiting to surface.
• 03A bullet lender has no obligation to extend past maturity. The refinance has to fund on or before the due date, not sometime near it.
• 04A larger consolidated balance at the qualifying rate can cost about the same as two smaller payments did before. This file's ratio barely moved — the real work was getting the balance right, not the rate.
• 05Ask what an interest-only structure has actually done to the principal before quoting a client anything. The answer, correctly, is often nothing at all.