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Choosing your dream home is a major decision. So too is finding the right kind of mortgage. Understanding the difference between an open and closed mortgage, as well as a convertible mortgage means a difference in interest rates (which translates into more or less money in your pocket) and flexibility (how much you can pay toward the mortgage and when you can pay it off). Choosing between an open and closed mortgage will have a big impact on the length of the mortgage and your personal finances, that’s why it’s important to consult with a licensed mortgage broker.

What Is an Open Mortgage?

Compared to closed mortgages, open mortgages are more flexible. With an open mortgage, you can make a lump sum prepayment or, if finances permit, make accelerated payments to pay down the loan before the end of the amortization period (or term length), without facing a penalty.

That flexibility comes at a cost though. Open mortgages tend to have higher interest rates than a closed mortgage with a comparable amortization period. Again, interest rates are higher because you can make extra payments toward your mortgage on top of the regular payments.

With an open mortgage, you can also renegotiate the mortgage before the end of the term and break the contract to change lenders before the end of the term.

What Is a Closed Mortgage?

A closed mortgage has a lot more restrictions than an open mortgage. For example, with some closed mortgages you cannot pay it off before the term ends without paying a big penalty. Other closed mortgages have a prepayment limit; if you go over that limit, you are, once again, hit with harsh penalties.

A closed mortgage also means, once you sign on the dotted line, the deal is closed, and it’s very, very difficult to make any changes.

Why would a homeowner want a closed mortgage? Closed mortgages have lower interest rates than an open mortgage, because there are limits on how quickly you can pay the mortgage off. While some closed mortgages do allow you to make limited extra payments on a mortgage, it’s rare.

What Does “Convertible Mortgage” Mean?

A convertible mortgage is very different from an open mortgage and closed mortgage. Where an open mortgage and closed mortgage has more to do with the length of time it takes to pay off a mortgage, a convertible mortgage has to do with rates.

Every mortgage is, in theory, a convertible mortgage, meaning, a convertible mortgage starts as either an adjustable rate mortgage or a fixed rate mortgage.

With a fixed rate mortgage, the mortgage is locked in at an agreed upon rate for the life of the loan, usually five years. The benefit of a fixed rate is that you know what your mortgage payments are going to be, and you pay those rates even if interest rates skyrocket or fall.

With an adjustable rate mortgage, your mortgage payments are adjusted regularly. If rates go up, you pay more in interest.

With a convertible mortgage then, you can, as the name suggests, convert your mortgage from a variable to fixed rate mortgage, or vice versa (or another type of mortgage), after a set period of time.

Which One Is Right for You?

The main difference between an open mortgage and a closed mortgage is the flexibility you have in making extra payments or paying off the mortgage in its entirety. Paying down your mortgage more quickly means less money going to the bank in interest.

You may want to consider an open mortgage if:

• You hope to pay off the mortgage soon
• Are thinking of moving in the near term
• Think you will, from time-to-time, have extra money to put toward the mortgage

A closed mortgage might be a good option if:

• You plan to live in the home for the length of the mortgage term
• Don’t expect to have extra money to make additional payments
• Or, the limited prepayments offered by the mortgage are flexible enough

Why consider a convertible mortgage? Switching to a variable rate mortgage, fixed rate mortgage, or other type of mortgage could end up saving you tens of thousands of dollars over the term of the loan.

A convertible mortgage is worth considering if:

• You’re in an adjustable mortgage and interest rates are going up
• If you’re in a fixed mortgage and rates are lower than what you signed up for
• You have a closed mortgage and want to convert it into a longer, closed term without prepayment charges

Confused? Contact a Mortgage Broker

Financial terms related to mortgages can be confusing. Understanding the basics can mean the difference between getting a great mortgage with the best terms and deals or getting stuck with a financial product that ends up costing you in the end.

For an objective overview of your finances and the financial products best suited to your needs, contact an independent licensed mortgage broker.

Banks provide mortgages and hundreds of other financial products. And that’s part of the problem—they don’t specialize in any one area and may not be up-to-date on new policies and products. Moreover, they only try and sell you their own products, even if it’s not right for you.

A mortgage broker on the other hand, specializes in mortgages and is better equipped to meet your individual needs. How can a mortgage broker do that? Independent mortgage brokers have access to a number of different types of private lenders.

Some of those lenders can give you better rates or prepayments options on closed mortgages.

Best of all, when using a mortgage broker, they will negotiate the rates and terms of your mortgage or any other financial product with the lender on your behalf. With traditional banks and lenders, you’re responsible for negotiating the interest rates.

Canadalend.com, Helping You Secure a Mortgage

If you’re in the process of buying a home and need help determining if you should go with an open mortgage or closed mortgage with fixed or variable rates or if you’re a homeowner with a convertible mortgage, contact the mortgage experts at Canadalend.com.

The licensed mortgage professionals at Canadalend.com will help you find a mortgage with the best rates and terms, suited to your financial and lifestyle needs.

To find out what kind of mortgage you qualify for, contact Canadalend.com today or apply online and a Canadalend.com mortgage specialist will set up an appointment at your earliest convenience.

If you’re a homeowner in North America today, you might be over budget on current home renovations, behind on your mortgage payments, drowning in student debt, or struggling to consolidate debts in other areas of your life. These situations can make life a stressful journey to bear on your own, but you no longer have to suffer with debt weighing you down.

If you relate to the feeling of stress or the financial burden and worry, then you might be the perfect candidate for a second mortgage.

What Is a Second Mortgage?

A second mortgage is a second loan that is secured against the equity in your home. With a traditional second mortgage, you can borrow up to 85% of the appraised value of your home, minus the amount left to pay on your first mortgage.

A second mortgage, as the name implies, is a mortgage loan taken out after the first mortgage is already in place. It does not replace the first mortgage. With a second mortgage, a homeowner will take out a separate mortgage with a different lender. This means that while you make payments on your second mortgage, you will also continue to make payments on the original, first mortgage.

The term second mortgage is used in part because it is second in priority if you happen to default. If you do, the first mortgage gets paid off before the second one does. A second mortgage is thus considered riskier for mortgage lenders. To compensate for this additional risk, interest rates on second mortgages are higher than on the first, or principal mortgages.

Second mortgages are one way to wisely consolidate multiple debts, which is why many homeowners take out a second mortgage on their property. They can then use that money for anything from home renovations, to their children’s education, investing, or even to pay off debt.

Top Ways to Refinance

To qualify for a second mortgage, lenders will look at how much equity you have in the home. The more you have available, the better your chances for qualifying for a second mortgage. They also want to ensure you have a dependable source of income, so you can make these additional payments. Lenders will also look at your credit score. The higher your score, the lower your interest rates.

For homeowners with more than 20% equity in their homes and good credit, a popular, affordable second mortgage will be a home equity line of credit (HELOC). A HELOC is a revolving line of credit that accesses up to 65% of the value of your home. You receive a commitment for an agreed upon amount and use only what you need. You also only pay interest on the amount you use.

If, however, a homeowner has bad credit and/or little equity built up in their property, they may want to consider getting a second mortgage through a trust company, smaller bank, or private lender. A more traditional second mortgage is for a specific amount and repaid with monthly payments. Here you can borrow up to 85% of the appraised value of your home, minus the amount left to pay on your first mortgage.

Sample Case Study

Samantha and her husband, Jeremy, have been struggling financially for years, and they can’t seem to get themselves back on their feet and out of debt. They have a mortgage on their current house but are behind on their payments. They’ve been racking up credit card debt over the years and don’t know what they’re going to do next. Lucky for Samantha and Jeremy, there is a financial solution.

Step 1: Samantha and Jeremy call Canadalend.com for financial advice.

Step 2: Canadalend.com introduces Samantha and Jeremy to the option of taking out a second mortgage, which is a loan at a lower rate of interest than conventional credit card loans.

Step 3: Samantha and Jeremy have plenty of equity in their current home and are able to take out a second mortgage.

Step 4: With the immediate cash, Samantha and Jeremy are able to pay off the urgent debts that were completely ruining their lives.

Step 5: With monthly payments they can meet, at a fixed interest rate, Samantha and Jeremy are on track to financial freedom!

If you are out of options and struggling with debt, we’ll take a look at the equity in your home and determine if a second mortgage is the right option for you.

FAQs about Second Mortgages

Are second mortgages a good idea?

The idea of taking out a second mortgage sounds daunting. After all, you’re taking on an extra monthly payment. But, under the right circumstances, a second mortgage can actually save you money.

The interest rate on a second mortgage will be higher than the interest on a primary mortgage. That’s because a second mortgage is second in line to be paid off should you default on the loan. As a result, the risk is higher for the lender of the second mortgage. While the interest is higher on a second mortgage, it is still significantly lower than the interest charged on short term debt like credit cards.

Why would you take out a second mortgage?

Many Canadians take out a second mortgage to help them consolidate debt. If you’re overwhelmed by credit card debt, car loans, or other high interest debt, a second mortgage can help you consolidate your debt.

Instead of having numerous high interest debt payments, you have one, lower monthly payment at a lower interest rate. That translates into a whole lot of savings.

More and more Canadians take out a second mortgage to pay for things like home renovations or to help pay for their children’s tuition. Second mortgages are also a good idea if you want to tap the equity you’ve built up in your home but you’re in the middle of your mortgage term and you don’t want to deal with the fees associated with refinancing your current mortgage.

Is it easy to qualify for a second mortgage?

Even though you already have a mortgage, and have maybe never missed a mortgage payment, there is no guarantee you’ll be able to secure a second mortgage with Canada’s big banks. In order to qualify for a second mortgage, traditional lenders will look at equity, income, credit score, and property.

• Equity: The more equity you’ve built up in the property the better chances you are of qualifying for a second mortgage.
• Income: Banks and trust companies want to make sure you make enough money to make payments on your second mortgage. If you’re an entrepreneur or self-employed and have unreliable income, traditional lenders may not be able to verify you earn enough.
• Credit Score: The higher your credit score, the lower your interest payments.
• Property: Even if you do well on the other three factors, the big banks may not want to give you a second loan because they do not like the property they are lending on. If for some unfortunate reason, the bank forecloses, it needs to secure their investment. If it doesn’t think it can turn it over quickly, it may turn you down for a second mortgage.

Can you sell your house if you have a second mortgage?

You can absolutely sell your home if you have a second mortgage. The money from the sale of the property goes to pay off the primary mortgage first and then the second mortgage. You get anything that is left over.

The only time a homeowner with a second mortgage could run into trouble when selling their property is if home values have fallen. It is possible that the sale of the property does not generate enough cash to pay off the first and second mortgage.

Canadalend.com: Helping You Find the Best Low-Rate Second Mortgages

If you’re looking for a second mortgage and want to know what you can afford, it’s important that you work with a mortgage broker that has a proven track record of helping clients find the best financial products at the best rates. A second mortgage that not only meets your financial needs but also your long-term lifestyle needs.

Canada’s big banks and traditional lenders need to follow strict lending guidelines set out by the Federal Government. Private lenders, because they are private, are not subject to the same rules; they are much more flexible, which means they can be a much better option for homeowners.

The licensed, independent agents at Canadalend.com will help you make the most informed decision possible when it comes to getting a second mortgage. To see what kind of second mortgage is right for you, contact Canadalend.com today. Or apply online and a Canadalend.com and one of our lending specialists will help you set up an appointment for a free, personal consultation.

When you talk about the amortization period of a mortgage, you are referring to the length of time it takes to pay off your mortgage. Deciding on the amortization period is an important decision that could cost or save you tens of thousands of dollars.

Each mortgage payment you make goes to paying down the principal mortgage and interest. The interest is what you pay to the lender for the privilege of borrowing their money. The rest of the mortgage payment goes to pay down the principal balance of the loan.

The longer the amortization period, the more you pay in interest. The shorter the amortization period, the less you pay in interest. There is a tradeoff though, the shorter the amortization period the higher the monthly mortgage payments.

Historically, the most popular amortization period is 25 years. But the amortization period can be longer or shorter depending on how much of a down payment you have.

What’s the Difference between Amortization and a Mortgage Term?

One of the most confusing aspects about the home buying process is the difference between the amortization period and the mortgage term. For example, a so-called typical mortgage in Canada has a 5-year term with a 25-year amortization period.

As already discussed, the amortization period is the length of time it takes to pay off the mortgage. The mortgage term is the length of the mortgage rate, lender, and associated mortgage terms and conditions you commit to.

When the five-year mortgage term is up, the mortgage rates are basically reset. When the mortgage term ends, you renew your mortgage on the remaining principle at a new rate. If interest rates have gone up since you signed your first term, you’ll be paying more in interest.

How Much Can You Save with a Shorter Amortization Period?

How much money can you save with a shorter amortization period? Below are two scenarios.

Let’s say you have a $150,000 mortgage with a five-year fixed rate term of 4.0% and 25-year amortization period. According to the most recent data, the monthly mortgage payment would be around $789.00. Over the full 25-year amortization period, you would pay $86,707.00 in interest.

If you had a $150,000 mortgage with a five-year fixed rate term of 4.0% and 30-year amortization rate, the monthly mortgage payment would be close to $715.00. Over the life of the 30-year amortization period, you would end up paying $106,779.00 in interest.

The longer 30-year amortization period reduces the monthly mortgage payment by $74 but you pay an additional $20,072.00 in total interest.

Can I Reduce or Extend the Amortization Period of My Mortgage?

You are not stuck with the original amortization period you selected when you originally applied for your mortgage. In fact, it’s a good idea to reevaluate your amortization period every time the mortgage term ends and you renew your mortgage.

Nowadays, more and more Canadians are choosing longer amortization periods. After all, a 30-year amortization period can cut your monthly mortgage payment by about 10%; but it can also add more than 20% of interest costs over the life of the mortgage.

There are lots of reasons why Canadian home buyers are taking out longer amortizations. Rising home values is one big reason; over the last ten years, national home prices have increased more than 70%.

Unfortunately, wage growth has been stagnant. Over the same time frame, earnings have risen just 23%. If your wages are not keeping pace with the increase in housing prices and you want to get on the property ladder, you need to consider a longer amortization period.

While the maximum amortization from big banks in Canada is generally 35 years, some non-traditional lenders still provide amortization periods of 40 years. Private lenders can provide these better options because they are not bound by the same stringent rules set forth by the Federal Government.

Does Amortization Impact Mortgage Interest Rates?

No. The amortization period has nothing to do with interest rates. You choose an amortization period when you are approved for a mortgage. The Bank of Canada is in charge of interest rates. While amortization does not impact mortgage interest rates, the reverse is certainly true.

When interest rates go up, Canada’s big banks and trust companies raise their prime lending rates with impacts mortgages and other interest-bearing loans. Interest rates are currently on the rise and the Bank of Canada has said it will continue to raise rates for the foreseeable future. This means it is going to cost more money to borrow and cost more to carry debt.

The Benefits of a Longer Amortization Period

Whether it’s a residential or commercial mortgage, there are a lot of benefits to having a longer amortization period.

For starters, a smaller monthly mortgage payment means you can put that cash to better use elsewhere. This is especially true for those who are self-employed and have unreliable cash flow. A longer amortization period is also a good idea if you want to pay down high interest credit card debt.

A lot of Canadians like how flexible a longer amortization is because they know they can reduce amortization period whenever they like, by simply making a prepayment.

Canadalend.com, Helping You Find the Best Mortgage with the Best Terms

Whether you’re looking to secure a mortgage or want to refinance a mortgage with the best terms and rates, the licensed mortgage specialists at Canadalend.com can help you choose the financial product and amortization period that best suits your long-term financial and lifestyle needs.

How can Canadalend.com provide you with better financial products and services, freedom, and flexibility than traditional lenders? Unlike the big banks, which only push their own mortgage products, even if they’re not right for you, the mortgage experts at Canadalend.com are independent.

We have access to hundreds of different lenders. Lenders that specialize in helping homebuyers or homeowners looking to refinance secure a loan with an amortization period that fits your needs.

To find a mortgage with the best rates and amortization period, contact Canadalend.com today or apply online and a Canadalend.com mortgage specialist will set up an appointment at your earliest convenience.

Loans are risk-adverse financial endeavours, especially with respect to the lender. The most favourable applicants have stable incomes, assets, a positive credit score and history and haven’t endured financial hardships like bankruptcy or debt consolidation.

If you’ve experienced financial complications, you could still be eligible for a loan whether it’s to buy a home, start a business or to improve cash flow. Here are a few tips if you are applying for a loan following some financial hardships.

Credit History vs. Credit Future

Lenders use credit score and history to get an idea of how you’ve managed previous and outstanding debts. A credit score is the most comprehensive way for a lender to learn what kind of borrower you are.

Apply for your credit score and if it’s low, then take a few months to improve it. This means paying your bills on time, trying to completely pay off a few debts and considering options like consolidation if it can improve your situation.

Assets

Financial hardships can stem from losing a job, switching careers, paying for post-secondary education or from unforeseen medical expenses. While hardships can make a dent in your present and future finances, it doesn’t mean you are a bad candidate for a loan.

If you have assets (property, businesses, investments, etc.), then they could outweigh any financial issues you might be facing. Don’t assume you will be denied a loan.

Loans to Handle Financial Hardships

A loan can help a borrower weather the financial hardships they might be experiencing. There are loans specifically geared towards increasing cash flow or repaying large debt loads. It’s not a bad option to consider a loan for this reason. A lender could be more willing to approve a loan for this reason as oppose to others like buying a property.

Every situation is different. Speak with a lender and let them guide you as to your available options and might be your best course of action. Contact us today and we’d be happy to answer your questions.