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Only a few months later and we’ve experienced a significant interest rate hike from the Bank of Canada. To compound matters, other lenders have followed their lead and increased their interest rates.

This hike should affect all loans and saving products sold by Canadian banks.

What Led to the Interest Rate Increase?

This was the first interest rate hike in years and the resulting fallout is complex with potentially major implications.

Part of the rate increase is due to a rebound in the economy. As oil prices rebound somewhat since its 2014 plunge and the housing market’s dip seems minimal, there are signs that the Canadian economy has bounced back from its recession.

These measures are also an attempt to curb the debt load of Canadians, to spur savings and to strengthen pensions. These all suffered when interest rates were low and people took advantage by loading up on debt.

Where are Interest Rates Headed?

As we’ve recently learned, these things are tough to predict even for financial experts. Remember, pundits called for rates to stabilize beyond 2018 but a hike hit Canadians in July 2017.

Mortgage rates might continue to climb throughout the rest of the year and into 2018 due to North America’s economic expansion. Desjardins Bank has suggested that the rate could reach 5% by 2019.

It might be best to lock into a fixed rate, if possible.

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What will Other Lenders Do?

This will most likely be a case of follow the leader. In fairness to lenders, they have also lowered rates in conjunction with the Bank of Canada when they were not required to. It would be surprising to see any lender not try to keep pace.

There’s no need to panic. As easily as rates could increase, they could also lower or stabilize. This is an opportunity to look for some value in the housing market or to save for longer or at better rates.

What’s better than escaping the harsh Canadian winters to your own private villa in Mexico or a beach house in Miami? Or maybe it’s owning a cottage that your family can enjoy on weekends?

Wherever your dream vacation home is located, owning one takes money and a financial plan to achieve. The good news is that you might have options that don’t include winning the lottery or discovering you had a rich uncle.

Can you Fund your Vacation Home with a Loan?

Loans aren’t meant to be used frivolously and while a vacation home can feel like a luxury, it can also be an investment. Properties as assets are historically very secure, so using different loan types to invest in a vacation home could work in your favour.

If you plan on treating a vacation like a second home that will aid in your retirement than borrowing might be an option if you can afford the second mortgage.

Invest in the Proper Research

Scour the web and speak to realtors and travel agents to find an under-the-radar spot to buy a vacation home. You’ll pay less and potentially find an intriguing opportunity to turn a profit.

This might mean Arizona instead of Mexico or a cottage outside of Muskoka, but a bit of sacrifice could result in a vacation home and a sound investment.

Finding the Right Partner

Another option is to co-own a vacation home with another person or family. It could be in a timeshare situation, where you would own under specific circumstances with strangers. Alternatively, you could find the right person in your network to invest in the venture. 

Should I Apply for a Second Mortgage?

A second mortgage is a mortgage taken out on a property that is already mortgaged. Using this type of loan to finance a vacation home isn’t uncommon. You could then use a home equity line of credit for any repairs or renovations.

Finding a property for a reasonable price in a desirable area can turn a loan into both a vacation home and an investment.

Even if your savings account isn’t flush, a vacation home can be a reality. Speak with a mortgage expert to review your finances to see if you can make it work.

When applying for a loan, the application process and the lender’s checklist can be mysterious. Most borrowers recognize that factors like credit history, salary, debts, assets and price of home will play a part in whether you are approved or denied.

How do all these factors come together? What can applicants do to make sure they have the strongest chance at a mortgage, home equity loan, second mortgage or other financial products that are available?

Be Honest with Yourself About your Strength as a Candidate

Above all else, go into an application process understanding where your weaknesses might reside. If you don’t have a full-time job or you have a weak credit score or you have a large amount of consumer debt—these are all things you must speak to and rectify.

What do Lenders want to see in an Application?

Lenders want the process to be as clear and transparent as possible. They want to attract the right type of borrower, which means one that carries the least amount of risk.

At the top of the list, they want an applicant with a positive credit reputation, steady monthly income and one that can clearly demonstrate an ability to repay the loan.

Does it Matter Where the Money is Spent?

There are several variables that make a clear answer to this question murky.  If you are buying a home than the price and condition of the home matters, you might even be subjected to a home inspection.

If it is for home renovations, medical care or education, you usually don’t have to provide much further context.

Focus on these Parts of your Application 

To be a strong candidate, work towards bettering your credit score and ensuring you have some assets to your name. While these are easier said than done, small improvements in both can lead to a greater chance at approval.

For second mortgages and home equity loans, the more equity you own in your home, the more funds a lender can provide to you.

Applying for loans of all types can be complicated. The more boxes you check off, the more likely you are to receive exactly what you want with appealing terms.

While not always the case, most people earn more as they gain more experience in their field. From there, the more one earns the more they can afford or the better they will appear to a financial lender.

For loan borrowers, especially first-timers, a challenge comes from agreeing to the terms of a lender when you are not at your peak financial state. This means potentially receiving a lesser amount, paying higher interest rate or not being eligible for better terms like having to pay your loan off in more years.

Finances shift. Refinancing allows you to shift in conjunction.

Align your Finances with your Loan with a Strategic Refinancing Plan

If you’re earning more money or have paid off other debts, it might be good to consider refinancing your mortgage. This way you can pay off your mortgage faster or receive a lower interest rate because your finances have improved.

On the flip side, if your finances have worsened and you need a lower monthly payment, then refinancing might be a necessity.

Interest Rates Should Dictate when you Refinance

If there are whispers of a hike from the Bank of Canada, then consider refinancing to secure a lower fixed rate for a longer period. If rates drop and you’re not locked into a fixed term than it would be wise to consider refinancing.

Monitoring interest rates and the Bank of Canada is important so that you know if you need to act.

Has your Credit Score Vastly Improved?

Along with interest rates, your credit score is a number you want to monitor on a consistent basis. If you applied with a weak or poor rating, then once you move the needle to strong or excellent, refinancing could result in better terms for you.

Refinancing is a powerful tool in a borrower’s arsenal but it should be employed only at opportune times. It can be a reward for improving your financial situation or it can be in response to the market. Either way, make sure that it is something you consider.