Variable vs Adjustable Rate Mortgage

Variable vs Adjustable Rate Mortgage

Did you know there are two types of mortgages whose interest rate can change as per the change in the lending institutions prime rate? That’s right, the two types are the Variable Rate Mortgage and the Adjustable Rate Mortgage.

You now might be asking what is the difference between a variable vs adjustable rate mortgage. In this post we provide a general overview of each one and hopefully provide a clear explanation to your question what is the difference between a variable vs adjustable rate mortgage.

variable vs adjustable rate mortgage

Adjustable Rate Mortgage – ARM

Payments automatically adjust with changes in the prime rate of the lending institution your mortgage is with to ensure that you maintain the original amortization schedule of your mortgage. The rate varies during the term of the adjustable rate mortgage.

The interest rate can change from time to time because it changes when the prime rate changes.

If your adjustable rate mortgage interest rate decreases, the payment amount also decreases..

If your interest rate rises, the mortgage payment amount will also increase.

One advantage of this product is you can have the ability to potentially lower, short-term interest rates.

 

Variable Rate Mortgage – VRM

The main difference with a variable vs adjustable rate mortgage is that the mortgage payments with the variable product remains fixed for the duration of the term; as the interest rate changes with any fluctuations in the prime rate. If the prime rate decreases, more of the mortgage payment will go towards paying off the principal; if the prime rate increases, more of the mortgage payment will go towards interest costs.

Your amortization period (number of years to repay the mortgage) may vary and be longer if rates have risen or be shorter if rates have fallen since the start of the term.

 

With both the Variable Rate Mortgage and the Adjustable Rate Mortgage you can always convert your mortgage into a fixed rate mortgage should you feel that the prime rate is rising or don’t have the tolerance anymore of rate fluctuations. Most of the time, the variable and adjustable interest rates are lower than the fixed rates.

If you still are not sure of which one is better or what the main differences are between a variable vs adjustable rate mortgage we encourage you to contact us with your questions and we would be happy to answer them. You may also like to add your remarks and questions in the comment section below.

Variable Rate vs Fixed Rate Mortgage

Variable Rate vs Fixed Rate Mortgage

This is probably one of the most popular and famous questions of all times in the real estate mortgage financing world; variable rate vs fixed rate mortgage. Which one is better? or Which one is worse? How do you decide which mortgage product is good for you?

variable rate vs fixed rate mortgage

To look at variable rate vs fixed rate mortgage as a question for your own good would be right for everyone depending on their own unique needs and tolerances.

A fixed rate mortgage has a rate guaranty for the term of the mortgage. For example, if you get the 5 year closed fixed rate, then, you are guaranteed to hold on to your rate for the full five years without it changing. There is a sense of security and closure for you knowing that you don’t have to worry about the fixed rate changing during the life of your mortgage term.  Even if you are an investor of real estate, this type of a mortgage can be beneficial to you because you know exactly what the interest rate will be and can calculate your R.O.I. accurately and work into your formula other expenses, which would allow you to know exactly what your net income could be each year. One down side to a fixed rate mortgage is the fact that if you ever decide to break the term / contract in the middle of it, the penalty can be significantly higher than if you were to break a variable mortgage.

A variable rate mortgage many times starts with a much lower interest rate than its counterpart fixed term rate. The variable interest rate is a discount that you would get from the lender against it’s prime lending rate. For those who are not tolerant of minor rate adjustments throughout the term of a variable rate mortgage, this product might not be your cup of tea. Currently the Bank of Canada has not changed its stance on the prime lending rate and it has not changed since September 9, 2010. However, the lenders have changed their discounts off of the prime rate. Several years ago you could have been approved for a variable rate as low as Prime minus .90%. Since then the current average discount for the closed variable rate is Prime -.50%. If you are planning to break your mortgage in the middle of its term, the penalty for the closed variable rate mortgage is three months interest payments, which for the majority of the time comes out a lot less than if you were to break a closed fixed rate mortgage that uses a formula called interest rate differential to calculate the penalty amount.

However, overall, statistics have shown that you can save more money if you go with a variable rate vs fixed rate mortgage. As of the date of writing this post the 5 year fixed closed mortgage is 2.99% and the 5 year closed variable mortgage is Prime -.50% = 2.50%.

Build an Eco-Friendly House

The Right Way to Build an Eco-Friendly House

This is an interesting article written by the Globe and Mail writer Alex Bozikovic about building eco-friendly homes.

Simplicity seems to be the main suggestion to the building process and the title of the article “The Right way to build an eco-friendly house” seems to give it away.

In Canada the idea to build an eco-friendly house is slowly starting to catch on with the general public, especially as the cost of living and maintaining a home is rising; to be more specific water, gas and electricity.

First time home buyers or fist time eco-friendly home builders should do their research very carefully to learn as much as they can about this up and coming industry and way of living before making any final decisions on purchasing an already built eco-friendly home, or starting from scratch and building their own eco-friendly home.

For some real life example of these types of homes have  a read of the below article on our Facebook page, or visit the site directly.

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build an eco-friendly house
picture courtesy of Darren Greenwood photography

Why rent when you can own

Why rent when you can own?

First Time Home Buyers why rent when you can own your home! Switch from paying rent, to making monthly mortgage payments that’s going towards your property instead of someone else’s.

[fb_embed_post href=”https://www.facebook.com/trusterramortgage/posts/711708095555552/” width=”466″/]

 

Variable vs Fixed rate mortgage

Variable vs Fixed rate mortgage

When trying to decide which mortgage type to go with, a variable vs fixed rate mortgage, you have to ask yourself how tolerant you are with risk. A variable rate mortgage traditionally has a better discounted rate than the fixed rate mortgage, but it can change at any time depending on what decision the Bank of Canada makes on its overnight rate. As the Bank of Canada Bank of Canadaincreases or decreases its overnight rate, so too will the chartered banks and other lenders that borrow money from the Bank of Canada increase or decrease their prime lending rates, which in turn affects the variable rate.

If you don’t want to worry about interest rates going up or down during the contractual term that you have agreed upon with your mortgage, then the best bet would be to go with a fixed rate term. This way you know for sure that your mortgage interest rate is locked in and guaranteed not to change within the term. For example, if you go with a 5 year closed fixed term; your mortgage interest rate will not change until the end of the fifth year. For some, the disadvantage to this mortgage product is the fact that your rate will not go down should the Bank of Canada lower its overnight lending rate as would be the case with the variable rate mortgage product.

When contemplating whether to go with variable vs fixed rate mortgage, know that it is ultimately up to the lender to decide if they are going to change their prime rate or not every time the Bank of Canada changes their rate. Sometimes Banks and other lenders of mortgage products will choose not to change their prime rate although the Bank of Canada changes theirs. Historically though, whenever the Bank of Canada changes their overnight rate, shortly after the banks adjust their rates accordingly.

Others might be thinking to break their mortgage in the middle of the term; whether it be for the reason of selling their home to take advantage of increased equity and home value due to favorable market conditions, or because they may not be happy with the current lender or interest rate, and for any other reason. To break a fixed term mortgage is more expensive than to break a variable rate mortgage. The lenders use different formulas to calculate the mortgage penalty to break the mortgage. With the fixed term, the lenders use a formula called Interest Rate Differential, and with the variable rate they only charge the client three months of interest payments. Therefore it can be much cheaper to break a variable vs fixed rate mortgage.

When considering these matters it is always best to consult with a mortgage broker or mortgage agent. These professionals are trained, and licensed to work on your behalf and to give you unbiased and sound advice regarding your mortgage options.

Private Mortgage

Private Mortgage

private mortgageWhat is a private mortgage you ask? A private mortgage is a loan provided by individuals who wish to gain a higher return on their investment focused funds in comparison to depositing their money into a regular savings bank account, or an investment type of an account with low yields. A private mortgage is secured against the property that the borrower has requested the private mortgage for.

Private mortgages can be an accumulation of a large number of investors who have pooled their personal or business / investment related funds into a trust account, or single individuals with enough of their own money. These funds are managed by a mortgage brokerage company or a company solely created for the reason of lending out private funds for the purpose of real estate financing.

To get approved for a private mortgage is not as difficult as to get approved for a mortgage from a lender such as the chartered banks; there are less restrictions in comparison to the other extreme, which are the chartered banks that require detailed information from the borrower, such as employment / source of income, proof of down payment, and a healthy and strong credit score with no recent credit issues. In comparison, the most important item that a private lender looks at is the property that is being purchased; where is it located, what is its condition, and can it be sold if the borrower defaults on their mortgage payments and the private lender has to foreclose and sell the property.

A private mortgage comes with a much higher interest rate and there is a onetime lender fee that must be paid by the borrower of the private mortgage. Normally what happens is that the borrower cannot be approved for a regular mortgage from a bank or the other specialty mortgage lenders, and what is left is a private mortgage. These types of mortgages are contracted to be paid in full in a short period of time, such as one year or less, and they are used many times as a second mortgage to cover up the difference of the down payment that the borrower does not have.

For example, the borrower does not get approved by one of the big banks in Canada, and his or her mortgage broker or agent will take their client to the next available option, which are what we call the ‘B’ lenders who deal with special case scenarios, such as those who have had previous bankruptcy’s, self-employed individuals who can’t prove their income, those with bad credit, …etc. You get the picture. The ‘B’ lenders will potentially give the client a mortgage loan no more than 80 – 85% of the real estate value; otherwise known as LTV Loan To Value. That means if the borrower does not have enough of the remainder of the funds in the form of a down payment, then they are left with trying to get a private lender to give them a private 2nd mortgage which would cover part of the down payment and the borrower would provide the rest of it. No lender would ever go up to 100% financing on these special case scenario types of deals. Therefore, the 1st mortgage lender will go up to a maximum of 80 – 85%, then they will stipulate in their contract that the borrower can get a 2nd mortgage up to an additional 5 – 10% and the rest the borrower will have to provide from his or her own resources.

Pros

– Quick money

– Straight forward approval process

– Look at the property more than the applicant

Cons

– High interest rates

– Lender fees

– Short term borrowing solution; paid back usually by one year or less

– Because it’s short term, at the end you have to refinance mortgage to pay back the 2nd mortgage and costs occur again in a short period of time

Home buying step by step – Step 4

Source: CMHC Canada Mortgage and Housing Corporation

home buying step by step

 

Home Buying Step by Step – Step 4 The Buying Process

Starting Your Search

 

Here are some ways to begin looking for your new home:

  • Word-of-mouthTell everyone you know that you are looking for a new home. Surprising things sometimes happen. For example, you might hear about a home that is just becoming available on the market.
  • Newspapers and real estate magazinesCheck the new homes section in daily newspapers. Look for the free real estate magazines available at newsstands, convenience stores and other outlets. These publications are free and give pictures and short descriptions of homes for sale.
  • The InternetCheck out real estate websites, such as realtor.ca. These websites give information and pictures of a wide range of properties. Most sites let you search by location, price, number of bedrooms, and other features.
  • “For Sale” signsDrive, bike or walk around a neighbourhood that interests you and look for “For Sale” signs. This is a good way to find homes that are being sold by the owner and are not listed with an agent.
  • Visit new development sitesIf you are looking for a newly built home, you can see available models and get information from builders.
  • Work with a realtorFor most buyers, a realtor is key to finding the right home.

 

Useful Tips for Your Search

  • Keep recordsWhether you have a realtor or are looking by yourself, visit lots of homes before choosing one. Some things to compare are the home’s energy rating, utility costs, property taxes and major repairs. These will affect your monthly housing expenses. You can ask to see copies of utility and other bills. Use the CMHC Home Hunting Comparison Worksheet to make sure you get all the information you need to compare homes.
  • Check out the property’s current financingIf the existing mortgage on the home is favourable, it may be possible to take it over from the vendor. It may even be possible to get a vendor take back mortgage, to help close the deal.
  • Think twiceEven if a home seems perfect, go back and take a closer, more critical look at it. Visit it on different days and different times of the day. Chat with the neighbours. Look deeper — don’t be distracted by attractive surface details.
  • Energy RatingSome houses and most new homes in Canada have an Energy Rating that describes the energy efficiency of the home. An energy-rated home usually has a sticker with the rating on the electrical panel. The energy rating is on a 0 – 100 scale. The higher the rating, the more energy-efficient is the home, and the less it costs to operate.
  • CMHC statistics and analysisCMHC has the latest statistical information and analysis of housing trends. Our Market Analysis Centre tracks information for local, provincial and national markets.

 

Making an Offer to Purchase

 

After you have found the home you want to buy, you need to give the vendor an Offer to Purchase (sometimes called an Agreement of Purchase and Sale). It is very helpful to work with a realtor (and/or a lawyer/notary) to prepare your offer. The Offer to Purchase is a legal document and should be carefully prepared.

These items are typically included:

  • NamesYour legal name, the name of the vendor and the legal civic address of the property.
  • PriceThe price you are offering to pay.
  • Things includedAny items in or around the home that you think are included in the sale should be specifically stated in your offer. Some examples might be window coverings and appliances.
  • Amount of your deposit
  • The closing dayThe closing day is the date you take possession of the home. It is usually 30 – 60 days after the date of agreement. But, it can be 90 days, or even longer.
  • Request for a current land survey of the property.
  • Date the offer expiresAfter this date the offer becomes null and void — that means it’s no longer valid.
  • Other conditionsOther conditions may include a satisfactory home inspection report, a property appraisal, and lender approval of mortgage financing. This means that the contract will become final only when the conditions are met.

 

What Happens After You Make an Offer to Purchase?

 

Imagine that your realtor has helped you prepare an Offer to Purchase. This offer includes all the details of the sale. To be extra cautious (since you know an Offer to Purchase is legally binding) ask your lawyer to look at it before showing it to the vendor. The realtor presents the offer to the vendor. What can you expect to happen next? There are three possible responses.

  • Response 1The vendor accepts your offer. The deal is concluded and you move on to the next steps in the buying process.
  • Response 2The vendor makes a counter-offer. The counter-offer might ask for a higher price, or different terms. You can sign the offer back to the vendor, offering a higher price than your original offer, but lower than the vendor’s counter-offer. If the vender accepts this counter-offer, the deal is concluded.
  • Response 3The vendor makes a counter-offer, asking for a higher price or different terms. If a counter-offer is returned to you at a higher price, ensure that you know exactly how much you can afford before you start negotiating. You don’t want to get caught up in the heat of the moment with costs you can’t afford. You reject the counter-offer because the price is still too high, or you can’t agree to the conditions. The sale doesn’t go through, and your deposit is returned.

 

Getting a Mortgage

 

Once your Offer to Purchase has been accepted, go to see your lender. Your lender will verify (and update, if necessary) your financial information and put together what’s needed to complete the mortgage application. Your lender may ask you to get a property appraisal, a land survey, or both. You may also be asked to get title insurance. Your lender will tell you about the various types of mortgages, terms, interest rates, amortization periods and, payment schedules available.

 

Depending on your down payment, you may have a conventional mortgage or a high-ratio mortgage.

 

Types of Mortgages

 

Conventional Mortgage

A conventional mortgage is a mortgage loan that is equal to, or less than, 80% of the lending value of the property. The lending value is the property’s purchase price or market value — whichever is less. For a conventional mortgage, the down payment is at least 20% of the purchase price or market value.

 

High-ratio Mortgage

If your down payment is less than 20% of the home price, you will typically need a high-ratio mortgage. A high-ratio mortgage usually requires mortgage loan insurance. CMHC is a major provider of mortgage loan insurance. Your lender may add the mortgage loan insurance premium to your mortgage or ask you to pay it in full upon closing.

 

Mortgage Term

Your lender will tell you about the term options for the mortgage. The term is the length of time that the mortgage contract conditions, including interest rate, will be fixed. The term can be from six months up to ten years. A longer term (for example, five years) lets you plan ahead. It also protects you from interest rate increases. Think carefully about the term that you want, and don’t be afraid to ask your lender to figure out the differences between a one, two, five-year (or longer) term mortgage.

 

Mortgage Interest Rates

Mortgage interest rates are fixed, variable or adjustable.

 

Fixed Mortgage Interest Rate

A fixed mortgage interest rate is a locked-in rate that will not increase for the term of the mortgage.

 

Variable Mortgage Interest Rate

A variable rate fluctuates based on market conditions. The mortgage payment remains unchanged.

 

Adjustable Mortgage Interest Rate

With an adjustable rate, both the interest rate and the mortgage payment vary, based on market conditions.

 

 

Open or Closed Mortgage

 

Closed Mortgage

A closed mortgage cannot be paid off, in whole or in part, before the end of its term. With a closed mortgage you must make only your monthly payments — you cannot pay more than the agreed payment. A closed mortgage is a good choice if you’d like to have a fixed monthly payment. With it you can carefully plan your monthly expenses. But, a closed mortgage is not flexible. There are often penalties, or restrictive conditions, if you want to pay an additional amount. A closed mortgage may be a poor choice if you decide to move before the end of the term, or if you want to benefit from a decrease of interest rates.

 

Open Mortgage

An open mortgage is flexible. That means that you can usually pay off part of it, or the entire amount at any time without penalty. An open mortgage can be a good choice if you plan to sell your home in the near future. It can also be a good choice if you want to pay off a large sum of your mortgage loan. Most lenders let you convert an open mortgage to a closed mortgage at any time, although you may have to pay a small fee.

 

Amortization

Amortization is the length of time the entire mortgage debt will be repaid. Many mortgages are amortized over 25 years, but longer periods are available. The longer the amortization, the lower your scheduled mortgage payments, but the more interest you pay in the long run. If each mortgage term is five years, and the mortgage is amortized over 20 years, you will have to renegotiate the mortgage four times (every five years).

 

Payment Schedule

A mortgage loan is repaid in regular payments — monthly, biweekly or weekly. More frequent payment schedules (for example weekly) can save some interest costs by reducing the outstanding principal balance more quickly. The more payments you make in a year, the lower the overall interest you have to pay on your mortgage.

 

New Home Warranty Programs

 

Each province has new home warranty programs.

 

British Columbia

See the Homeowner Protection Office at www.hpo.bc.ca for the most up-to-date list of warranty programs. These include:

 

Lombard Canada New Home Warranty Program: www.lombard.ca

 

Travelers Guarantee Company of Canada (formerly London Guarantee Insurance Company): www.travelersgaurantee.com

 

National Warranty Program Ltd.: (includes Royal and Sun Alliance) www.nationalhomewarranty.com

 

Pacific Home Warranty Insurance Services Inc. (Echelon General Insurance Company): www.pacificwarranty.com

 

Willis Canada Ltd (Commonwealth Insurance): www.williswarranty.com

 

Alberta

Progressive New Home Warranty Program (Echelon General Insurance Company): www.progressivewarranty.com

 

National Home Warranty Program Ltd.: www.nationalhomewarranty.com

 

New Home Warranty Program of Alberta:www.anhwp.com

 

Blanket Home Warranty Ltd.: www.blankethomewarranty.ca

 

Saskatchewan

Progressive New Home Warranty Program (Echelon General Insurance Company): www.progressivewarranty.com

 

National Home Warranty Program Ltd.: www.nationalhomewarranty.com

 

New Home Warranty Program of Saskatchewan: www.nhwp.org

 

Blanket Home Warranty Ltd.: www.blankethomewarranty.ca

 

Manitoba

Progressive New Home Warranty Program (Echelon General Insurance Company): www.progressivewarranty.com

 

National Home Warranty Program Ltd.: www.nationalhomewarranty.com

 

New Home Warranty Program of Manitoba: www.mbnhwp.com

 

Blanket Home Warranty Ltd.: www.blankethomewarranty.ca

 

Ontario

Tarion Warranty Corporation: www.tarion.com

 

Quebec

Garantie des maisons neuves de l ’APCHQ:www.gomaison.com

 

Garantie des maisons neuves de l’ACQ: www.acg.org

 

La garantie des maîtres bâtisseur: www.maitresbatisseurs.com

 

New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador

Atlantic Home Warranty Program: www.ahwp.org

 

Lux Residential Warranty Program: www.luxrwp.com

 

Progressive New Home Warranty Program (Echelon General Insurance Co.): www.progressivewarranty.com

 

Closing Day

Closing day is the day when you finally take legal possession and get to call the house your home. The final signing usually happens at the lawyer or notary’s office.

 

These are the things that happen on closing day:

  • Your lender will give the mortgage money to your lawyer/notary.
  • You must give the down payment (minus the deposit) to your lawyer/notary. You must also give the remaining closing costs.
  • Your lawyer/notary
    • Pays the vendor
    • Registers the home in your name
    • Gives you the deed and the keys to your new home

 

Moving

 

Hiring a Mover

When planning your move, friends or relatives may be able to recommend a professional moving company. Don’t forget to ask the mover for references. Ask the mover for an estimate and outline of fees (Do they charge a flat rate or hourly fee?). Once you’ve chosen a mover, ask them to come to your home to see what will be moved in case the estimate needs to be changed.

 

You’ll want to ensure that your belongings are insured during the move. Your home or property insurance may cover goods in transit. Call your broker or insurance company to be sure. Ask if you are fully covered. Many moving companies offer additional insurance coverage. Be aware that professional movers are not responsible for items such as jewellery, money, or important papers. Move these yourself to keep them safe.

 

If you decide to do your own packing, keep in mind that you will need the proper materials, and that packing can take up a lot of time.

 

Moving Day

On moving day, go through the house with the van supervisor and give him (or her) any special instructions. The supervisor will note the condition of your goods on an inventory list. Go through the house with the supervisor to make sure the list is complete and accurate. When the van arrives at your new home, mark off the items on the mover’s list as they are unloaded. If you paid for the movers to unpack boxes and remove packing materials, remember that they will not put dishes or linens into cupboards.

 

Moving day is almost always tiring. But, planning ahead will make the transition as smooth as possible.

 

Moving Costs

The amount you spend depends on your decisions about many things. Here are some to think about:

  • Do you want to hire professional movers?
  • If so, will it be a large company, or a smaller local moving company?
  • Will you need to buy insurance to protect your items in transit?
  • If you plan to move yourself, will you rent a vehicle?
  • Will your current auto or home insurance policy cover your items during the move?
  • Will you have to pay utility companies a fee to connect their services in your new home? Are there other utility charges (such as a deposit)?

 

Post-Closing Costs

 

Changing the Locks

When you move into your new home you’ll want to change the exterior door locks for security. After all, you want only the people you choose to have the key to your new home. You can change the locks yourself, or call a locksmith to do the job.

 

Cleaning

Both your old home and your new home should be given a thorough cleaning at moving time. Whether you’re buying cleaning supplies and doing it yourself, or hiring someone to clean for you, the costs can really add up. Plan for this expense.

 

Decorating

You might want to re-paint, replace some light fixtures, refinish the floor, re-carpet, or do any number of other re-decorating tasks. Plan your budget, and consider postponing some projects for a period of time.

 

Appliances

If your offer to purchase didn’t include appliances, and if you don’t have your own, you will have to buy them when you move into your new home. Some appliances might have installation charges.

 

Tools and Equipment

When you own your own home, you can no longer call the landlord to do repairs. You’ll need to own some basic hand tools and possibly some gardening and snow clearing equipment.

Moving From ‘RENTER’ to ’OWNER’

Moving From RENTER to OWNER could be easier than you think

 

Moving from renter to owner

Start Enjoying All the Rewards of Home Ownership when moving from renter to owner.

 

There is great satisfaction in having a home you can call your own, and we’re committed in helping you enjoy every benefit of home ownership.

We have access to a variety of programs to help first-time buyers with low and no down payment programs, options for less-than-perfect credit, self-employed customers and more, for moving from renter to owner.

 

Here’s WHY Buying and moving from Renter to Owner Makes Sense:

Stop paying your landlord’s mortgage – Instead, your monthly payments cab go toward paying down your mortgage principal, and interest, not your landlord’s.

Equity – Over the years, homeowners have the opportunity to build equity and receive a great return on their investment in a home.

Security – Unlike rent, a homeowner’s mortgage payment will not increase over the term of their loan.

Cash Access – Homeowners can borrow against their home’s equity, or turn it into cash when they sell their property.

Whatever your home financing needs are, we’re ready to help with a broad range of programs, money-saving options and personalized service.

 

Contact us at info@trusterramortgage.com for more information.

Second Mortgage – what is it, and how does it work?

What is a Second Mortgage?

A mortgage, whether a first mortgage or second mortgage is an interest in land created as a security for a loan that the lender would give to the borrower for purchasing real estate. Majority of the people who purchase real estate, are in fact buying a residential property to live in and get what we call a 1st Mortgage. The borrower completes a mortgage application in order that they can be approved for getting a loan to buy their home.

There are instances where due to different factors, an applicant cannot come up with the entire amount of the down payment to buy a house (real estate) and the lender would only give up to a certain percentage of the appraised value of the property to the borrower. To come up with the difference, the applicant looks for another lender who is willing to give a Second Mortgage (loan) in place of the missing down payment amount in order to allow the applicant to get the first mortgage.

The steps and qualifications of getting a second mortgage are in line with, and similar to getting approved for a first mortgage, except that the application process will be somewhat more strenuous on the applicant due to the fact that there is a higher risk involved. Therefore the lender, who most likely will be a ‘Private Lender will want to make sure that the applicant is capable of handling an increased debt load.

There could be several reasons as to why one would apply for a second mortgage, but two obvious and common ones are because of debt consolidation and maxing out on the exiting property’s equity for investment purposes.
If your first mortgage is with one of the large chartered banks, they will most likely not allow you to get a second mortgage behind them from anyone else. The alternative option would be to go back to the same bank that your first mortgage is with and see if there is enough room to refinance the property to get more money out of it, or to get approved for a HELOC (Home Equity Line of Credit). In either case, once approved, you will have access to extra cash that you can use for the purposes you need it for.

If going to your bank for refinancing or getting a HELOC is not an option, then the next thing you can consider to do is to refinance the mortgage with other lender types that will allow a second to come behind their first mortgage, which in most cases would be that you get your first mortgage with a Trust company sort of a lender and they usually allow you to get a second mortgage behind them through a private lender. Sometimes the first lender will offer their own second mortgage solution.

— Process & Qualification —

– If you have an existing mortgage, check with your current lender if they allow a second mortgage behind their first.

– In both cases, whether the answer to the above is a yes or a no, you must complete the mortgage application in order that it can be evaluated and analyzed to make sure your income to debt ratio is strong enough to handle both mortgages.

– An appraisal needs to be done on the property that the mortgages will be registered to, for the purpose of confirming its current market value.

– The first lender will then make the decision on whether to allow a second mortgage to come in behind it and what the total loan to value of the combined mortgages can be. For example, they would say that the first mortgage will be 70% of the appraised value, and they will allow a second to be set up to 15%, making the total loan amount 85% of the appraised property value.

The reason that the application process can be more strenuous and harder to get approved for the second mortgage is because usually the second mortgage comes with a high ‘price tag’, meaning a very high mortgage interest rate plus lender and broker fees. So when your debt ratio levels are being calculated not only is your first mortgage considered in the calculation but also the second mortgage must be added, which will have a much higher interest rate, plus all your existing debts. What is happening now is that your total debt level has increased by a whole lot, but most likely your income has still remained the same; so the total second mortgage that you could get approved for might not be as much as you would think you could get.

— Cons of getting a Second Mortgage —

– Very high interest rate

– Expensive lender and broker fees

– Short term solution

– You can be taken advantage of and need to be careful who you work with.
Another matter that you should consider is that most second mortgage lenders want to get their money back by the end of the year. You need to plan for the future and make sure that you would be able to pay them back, otherwise known as a exit strategy. The second mortgage lender could consider extending the loan to you, but again it will be at an expensive cost, or they may stick to their guns and demand that you pay them back, and if you can’t then things can start to get ugly legally and financially.

— Conclusion —

Whenever clients approach us about the idea of getting a second mortgage we try to guide them away from it, and only go that route if necessary and when there is absolutely no other option available.

Fixed Mortgage Rate

For many, the thought of knowing that your mortgage interest rate is set and will not change for the contract term is a piece of mind. The fixed mortgage rate is guaranteed not to change until the end of its contractual term; at which point the borrower will have to renegotiate with the existing mortgage lender or shop around for a better interest rate and mortgage term. This is another great example of how a mortgage professional can help you find the best mortgage product and interest rate.