Personal Loans vs Mortgage Refinancing: Rates Compared

Q: What are current personal loan rates in Canada?

In 2025-2026, unsecured personal loan rates range from 6.99% for borrowers with credit scores above 750, to 12.99% for solid profiles, and from 15% to 29% for borrowers with mediocre credit. Secured personal loans backed by an investment (e.g., GIC) can offer rates of 4% to 7%. Rates vary by lender and banking relationship.

Q: Is it better to take a personal loan or refinance my mortgage?

It depends on several factors. Refinancing costs less in interest but involves high fees (penalty, notary, appraisal) and spreads the debt over a longer term. A personal loan is more expensive in rate but has no significant setup fees and faster repayment. For needs under $15,000 to $20,000, a personal loan is often more advantageous.

Q: How does a personal loan affect my mortgage qualification?

The monthly personal loan payment is included in the total debt service (TDS) ratio calculation. A $20,000 loan over 5 years at 9% represents a payment of approximately $415 per month, which reduces your mortgage capacity by approximately $80,000 to $100,000, depending on current mortgage rates.

Q: Can I repay a personal loan early?

In Quebec, the Consumer Protection Act generally allows early repayment of a personal loan with a maximum penalty equivalent to two months' interest. This is significantly less than a mortgage prepayment penalty, which can reach several thousand dollars with the interest rate differential calculation.

Q: Do credit unions offer better rates than banks?

Desjardins caisses and credit cooperatives often offer competitive rates on personal loans, particularly for long-standing members. Rates can be 0.25% to 1.00% lower than the major banks. A broker can also access alternative lenders offering different terms.

RefinancePro.club

Personal Loans: A Financing Tool Worth Understanding

Personal loans hold an important place in Quebec's financial landscape. Whether used to consolidate debts, finance a project, or meet a liquidity need, they are often compared to mortgage refinancing. Understanding the fundamental differences between these two products is essential for making an informed choice that optimizes your debt situation and your mortgage borrowing capacity.

Types of Personal Loans Available

Unsecured personal loan: no collateral required. The rate depends solely on your credit score and income. Typical rates from 6.99% to 29%. Amounts from $1,000 to $50,000.
Investment-secured personal loan: your GIC, RRSP, or other investment serves as collateral. Reduced rates of 4% to 7%. The amount is limited to the value of the pledged investment.
Vehicle-secured personal loan: your vehicle serves as collateral. Intermediate rates of 7% to 12%. Caution: a default can result in vehicle seizure.
Personal line of credit: unsecured revolving credit. Rates from prime + 2% to prime + 6%. Interest-only payment, with flexible principal repayment.
Peer-to-peer loan: online platforms connecting borrowers and investors. Rates from 8% to 25%. Regulatory framework evolving in Canada.

Detailed Comparison: Personal Loan vs Mortgage Refinancing

The choice between a personal loan and mortgage refinancing depends on several key variables. Mortgage refinancing offers the lowest rate (4% to 6%), but involves significant fees: prepayment penalty (potentially thousands of dollars), notary fees ($1,000 to $2,000 in Quebec), appraisal fees ($300 to $500), and a process taking 30 to 60 days. A personal loan has a higher rate but near-zero fees, a 1 to 7 day process, and a short term that forces disciplined repayment.

Impact on Mortgage Debt Ratios

For borrowers considering a real estate purchase, a personal loan has a direct and measurable impact on borrowing capacity. Mortgage lenders use two key ratios governed by OSFI's Guideline B-20: the gross debt service ratio (GDS, maximum 39%) and the total debt service ratio (TDS, maximum 44%). The monthly personal loan payment enters the TDS calculation. Every dollar of monthly payment on a personal loan reduces mortgage borrowing capacity by approximately $5.

Optimal Strategy by Profile

The optimal approach varies by profile. For a homeowner with significant equity and a high-rate mortgage near renewal, refinancing is generally a commonly preferred option. For a homeowner with an excellent fixed rate whose term does not expire for another 3 years, a personal loan avoids sacrificing an advantageous rate. For a renter or future buyer, a short-term personal loan allows repaying the debt before the mortgage application, thereby eliminating the impact on TDS ratios. The AMF-certified mortgage broker in Quebec is the best-positioned professional to analyze these variables and recommend the most suitable solution for your overall financial situation, in compliance with their professional obligations under the LDPSF.

Legal Protections in Quebec

In Quebec, personal loans are governed by the Consumer Protection Act (CPA), which offers substantial protections. The lender must disclose the effective credit rate (including all fees), early repayment conditions, and the consequences of default. The maximum early repayment penalty is limited to the equivalent of two months' interest, which is much more advantageous than mortgage penalties. In case of dispute, Quebec's Office de la protection du consommateur can intervene. For loans brokered through a broker, the AMF oversees compliance with the LDPSF professional standards.