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There are many steps involved in buying a home, not the least of which is securing a mortgage. While this is standard for most people as they seek to buy their first home or move to another home, some owners might need to apply for a second mortgage. That means, in most cases, that they want to take out a mortgage on top of the primary mortgage to pay off debts or make a large investment, which can include post-secondary education or starting a new business.

Why Apply for a Second Mortgage?

A second mortgage is also commonly known as a home equity loan. It may seem helpful to have this option to manage complex financial matters, but it is important to not enter this arrangement lightly. For some, despite taking on more debt, it can actually help improve your credit score if you use the money for debt consolidation.

Getting Approved

It may not always be possible to get approval from a financial institution in the first place. The interest rate is usually higher and there are often penalties for defaulting, so experts recommend comparison shopping both of these factors. Still, interest rates on second mortgages are usually lower than credit cards.

Be Prepared for Fees

Each financial institutions or lenders will charge different closing costs and fees. As a result, find out in advance what these parameters are so you can create a repayment plan. Qualifications for a second mortgage are first determined by the value of your home and its equity. Income and credit history are important, but not major factors like they are with most other loan applications—including a primary mortgage.

Value for Borrowers

There is greater freedom with a second mortgage compared to other loans. In fact, borrowers can often negotiate the terms and as much as 85% of your property’s value can factor into the amount you can receive. However, not everyone will provide this option as it is riskier for the lenders. That is because, if you happened to default on your loan payments, your primary mortgage lender would be paid before your second mortgage lender.

If you are considering a second mortgage application, contact us to help you ensure it is the right move.

While every life is different, almost everyone aims to own their own home at some point in their lives. Once on the property ladder, you may move to progressively larger homes (as your family grows) or to another city for work or you might decide to rent your home and go travelling.

Whether you’re aiming to join the property ladder, move up it or change your place on it, it’s important to keep abreast of the most recent changes in the prevailing law. We’ve detailed the two most recent changes to Canadian mortgage rules below and explained what they might mean for you.

Getting Stressed

Perhaps the most notable change to the process has been the introduction of stress testing as part of the mortgage process. This new procedure is designed to settle the property market by limiting the amount that Canadians can borrow. It’s working.

The Canadian Real Estate agent Association says that home sales in 2019 are expected to reach their lowest levels for a decade and the rule change has hit new buyers hardest who, on average, can afford 20% less than their predecessors as a result of the new legislation. Different areas, however, have been affected differently. While sales have fallen in Alberta and British Columbia, they have grown in places like Ontario and Quebec.

If you’re looking to join the property ladder in 2020, one of the key steps to getting yourself up to speed on the prevailing rules is to understand both when stress-testing will apply and how it is conducted. Either using the five-year Bank of Canada Benchmark rate or 200 basis points greater than the mortgage’s contractual rate measure. Whichever measure is larger, is the one used.

Down Payments Going Up

In addition to stress testing being brought in for 2019 there were also changes made to the minimum down payment thresholds for properties of different values. 

The revised rules require a minimum downpayment of 5% for a property valued at up to $500,000, rising to 10% for properties up to a million and settling at a 20% flat fee for any property valued in excess of a million dollars.

Where stress testing has a greater effect on first-time buyers, down payment thresholds impact more on people moving further up the property ladder as they will be required to find larger sums of available cash as they move to properties of greater value.

Its impact on first-time buyers is likely to be more tangental; an increase in the amount of time they rent for in order to save more for that initial payment or an increase in those relying on mortgage loan insurance. Mortgage loan insurance is set up to protect the lender in the event that you are unable to make your monthly repayments. Premiums for this type of insurance vary based on the value of the home you are buying and how much of the down payment you can manage. 

If you can’t make the minimum down payment take time to factor in the need for mortgage loan insurance into your budgeting, and like with any other financial product, shop around to see what rates are available to you.

Keeping to the Rules

These rules changes have had a notable effect on how Canadians manage their property purchases. Even if you are on your second or third mortgage application or property purchase, procedures such as stress testing can still appear complex. 

The experts at Canadlend.com are experienced when it comes to helping new and repeat borrowers with their mortgage products. Staying abreast of the changes in the law and how they affect borrowers means they can help you understand the process. Their access to hundreds of lenders and their products means that once they’ve helped you develop your financial plan they can connect you with the best product to execute that plan.

To find out more, contact Canadalend.com today and find out how you can take your first or next step on the property ladder.

When the time comes for you to get a mortgage, where will you go? The traditional answer to this question has always been one of Canada’s big six banks. With the introduction of stricter lending rules, one-in-five mortgage applications are now denied by the banks.

So, is the traditional answer still the right one?

Regulations

The biggest change to mortgaging regulations in recent years has been stress testing. The stated purpose for introducing stress testing is to protect consumers and improve mortgage quality. It does this by setting the threshold for paying higher than it would be in the actual mortgage. This is to simulate what might happen to the base rate over the lifetime of the loan. Stress testing ensures that borrowers can pay more if needed. Setting the mortgage quality higher also keeps out people who could pay.

This also impacts on borrowers seeking a second mortgage for repairs/improvements. A second mortgage is often needed for a short period of time. In this case, stress testing creates an unrealistic model for the loan. The aim of better-quality mortgages impacts borrowers who intend on short-term repayment.

Beyond stress testing, banks often include their own set of metrics to test borrowers. This can involve deep dives into your financial history. The detailed examination of your potential future earnings. They may also need a detailed account of your holdings.

This further disenfranchises potential borrowers. Ontario, like Canada as a whole, has a rising number of self-employed members of the workforce. Borrowers in this situation may not have a monthly dependable income. Rather, they have bursts of income that they need to manage. Strict lending rules make it difficult for them to borrow money. 

Over the last few years, there have been some changes to how the big banks lend. Newer products are replacing income verification with a greater down payment. Some financial products in Ontario go as high as 35-40% for a down payment. You also need to have a high credit score. There’s also a premium to pay to account for less interest collected by the bank. It may be a different product for the banks, but it’s the same old attitude. 

Alternatives

There needs to be limits and regulations around borrowing. But the banking system is shutting out borrowers with the ability to pay. What are the alternative options for them? For anyone seeking the best possible arrangements for their mortgage?

Canada has an alternative lending market that is among the best in the world.

Alternative lenders - or so-called B-Class lenders - are lenders other than banks. They can be businesses that specialize in loans or co-operative setups like a credit union. While others are investment focused groups who deal in specialized mortgaging.

In 2019 almost a third of Canadian borrowers took their business to an alternative lender. Between 2007 and 2018 the total value of mortgages not issued by banks grew by over 900%. This increase has been driven by restrictions in regulations since the financial crash. Those alternative borrowers that do step beyond the banks, find it to be a rewarding experience.

Alternative borrowers do their homework beforehand. Most reported assessing 3 or more lenders before applying. After application, 86% of borrowers received their funds within 72 hours. The majority of borrowers rated themselves satisfied or very satisfied with their experience. Crucially, more than half of borrowers wouldn’t go back to traditional lending or are now unsure about it.

There is a growing number of potential borrowers locked out by stricter regulations. The alternative lending market has grown for over a decade. The experience borrowers have is overwhelmingly positive.

Taking an Alternative Route

As with traditional borrowing, alternative borrowing requires preparation and expertise. You might attend meetings with banks, talk to their experts, and read their documents. But you’re not getting the full picture.

The financial experts that work at the banks are salespeople. They will sell you the product they have, whether it’s right for you or not. Something we never do. The financial experts at Canadalend.com are independent. We don’t incentivize them to sell you a specific product because it’s better for us. Instead, they help you find the product that’s right for you and the alternative lender that can provide it.

If you contact Canadalend.com today we can help you. We’re experts in finding alternative lenders that can help you achieve your goals.

Securing a loan with your home equity is one of the easiest ways to get low interest rates. If you need a lot of cash, it’s a great way to use your most valuable asset (your property) to secure a loan.

While tapping into your home equity may seem attractive, you need to be careful. Home prices are higher in Canada than ever before and rising quickly, which makes home equity more plentiful. But if you aren’t careful, it’s your property that’s on the line after all. There are a few things you need to keep in mind if you want to use this powerful tool.

What You Need To Tap Into Your Equity

Using your home equity is fairly easy. But you will need to meet a few minimum requirements before you’re able to.

Equity

First, you’ll need to have sufficient equity available. Most lenders will need you to have enough to justify a loan. A good rule of thumb is to only consider tapping into your home equity if you have at least 20% in your home.

Credit Score

Lenders will have their own minimum credit score requirements. If your credit score is in the mid-600s or higher, you will have many opportunities for loans with lower rates. But having a lower credit score won’t necessarily hold you back. Lower credit scores will usually just mean higher APRs for your loans.

Debt-to-Income Ratio

Lenders want to see a reliable source of income for their borrowers. But they also want to make sure you’re not already struggling with debt. So, they’ll have a look at your debt-to-income ratio. If your debt-to-income ratio is lower than 40%, it shouldn’t stop you from tapping into your equity.

To be safe, it’s best to not take on significant amounts of debt. Unless you’re consolidating debt, if your debt-to-income ratio is already high, you might want to think twice.

Have A Good Reason

The best safety tip for tapping into your equity is to make sure it pays off. There are several ways you can ensure you’re getting an excellent deal. Frivolous spending with borrowed money is unsafe in many circumstances, not to mention pointless from a purely financial point of view. The goal is to produce a net gain for yourself.

Consolidating Credit Card Debt

Consolidating higher-interest debt is arguably the best reason to tap into your equity. Credit cards can easily set you up for a rough time if you don’t pay your balance at the end of the month. Credit card interest rates are notoriously high, with most at 19%. Some credit cards go as high as 29.99%.

You can use your equity to secure a debt consolidation loan. You would then use the loan to immediately pay off all your credit card balances. The result is you have one large debt to pay off instead of many smaller ones. But your interest rate on a home equity loan will usually be far lower than the rate on your credit card. That means you can save a lot of money and save your credit score at the same time.

Home Improvement

Using your equity to secure a home improvement loan is another move that just makes sense. When you make improvements to your home, you add value to it. That’s why tapping into your equity to allow you to sell your house for a much higher price just makes sense!

If your current equity allows for it, you can add a basement or another addon to your property. With the value this creates for your home, you could sell it for more.

Retirement

There is one way to tap into your home equity that stands out for its retirement benefits. A reverse mortgage can help you afford retirement through a repayment-deferred loan.

If you’re simply short on cash for retirement, a HELOC is likely your better choice.

Education

If you or someone close wants to advance their education, tapping into home equity is one way to do it. Like some of our other examples, education expenses are an investment for which you can get a great return. Because some equity loans, especially HELOCs, are so inexpensive, they are good options for paying education expenses.

Place Safe Limits

Regardless of what you want to spend your money on, there is always a financial line you cannot reasonably cross. That’s why if you’re not borrowing money to reduce your debt, you can’t afford to borrow too much.

One factor to be aware of is the loan’s APR. An APR can be sneaky because it’s not quite the same as an interest rate. For example, a $10,000 loan with a 5% APR and a 5-year repayment term will mean a monthly repayment of $188.71, but a total of $1,605.48 in interest payments. But what if the repayment term is just 2 years? It would cost you $443.43 per month and you would pay $642.26 in interest.

To make sure you don’t overburden yourself. Do the math on any loans you are considering taking. Fortunately, there are plenty of online APR calculators that can determine your monthly repayments and the total amount you’ll pay in interest.

What Is A Safe Loan?

Safe is a subjective term. But there’s a reason many lenders will cut you off with a debt-to-income ratio higher than 43%.

If you’re already overburdened with debt, it’s risky to take on more debt. So, ask yourself what you will get out of your equity. Tapping into your equity can help you reduce debt if you approach it safely.