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Mortgage Refinancing in Ontario, Canada
If you have a mortgage on a property in southern Ontario, Canada, and you have been paying on it for more than three or four years (or fewer, if you’ve been making accelerated payments), then refinancing that mortgage may be an attractive option. When refinancing your home Ontario is one of the more attractive provinces, because of the increases in values in Toronto and elsewhere in the south of the province. There are several reasons to consider refinancing a mortgage, so let’s take a look at them and how they might relate to your situation.
To benefit from lower interest rates – Interest rates have been at historically low levels since 2008 and 2009, when central banks began reducing the prime lending rates in order to stimulate economic activity. If you signed your mortgage before that date, chances are you are were paying a few points more (if not more) than the current market rates available. So if you have a fixed rate mortgage, and you’re not already close to renewal, consider a refinance to move your interest rates down. As long as you can go down at least a couple percentage points, you can make significant financial gains from this strategy. If you have a variable rate mortgage, most lenders charge a penalty of three months’ greater interest, while if you have a fixed rate mortgage, you pay the greater of an interest rate differential penalty (IRD) or three months’ interest as your penalty. So the final analysis here becomes a question of math – how much money you will save from the lower interest rate, and whether that savings will counteract the expense of taking out the new loan, not just in terms of penalties but also loan origination fees and other closing costs.
To take equity out of your home – Another reason for refinancing your mortgage in Ontario has to do with accessing some of the equity that you have accrued in your home. Every time you make a mortgage payment, some of that payment goes to pay down the principal of the loan. As each month goes by, less of your payment goes to the interest expense and more toward the principal. Over time, each dollar you pay toward the principal becomes equity – the percentage of the house that you own. If you think of your home as a giant bank, that you slowly fill with cash with each passing payment, after you have been paying on the home for several years, you have built up enough equity to consider treating that equity as a savings account that you can tap when you have a real financial need. For properties in southern Ontario, you can count on taking out equity up to a 80% LTV (loan-to-value) ratio with a traditional lender, up to 85% with some B lenders at higher rates, and even up to 90% with a handful of private lenders with higher rates still. Equity is defined as the difference between the current appraised value of the property and the total balance owed on the outstanding mortgage. Let’s say you bought the property for $600,000, and thanks to improvements in the real estate market, it is now worth $750,000. You have paid the principal down to, say, $400,000, and if a lender approves your equity request for 80% LTV, you could push that balance back up to $600,000 (80% of $750,000). So if you have some surprise medical expenses, some needed home improvement tasks, or some children heading off to college, this is one way to access liquidity at lower interest rates than consumer loans.
To consolidate your debts – Remember, the key question with refinancing is whether you will profit in the process. If you went through some tight financial times and have run up a considerable amount of credit card debt, all of which is costing you north of 20 or 25 percent interest, taking out a home equity loan can be the best way to save money. In this scenario, you have several different methods at your disposal. You can take out a home equity loan, which would basically add a second loan to your existing mortgage. This means that you would have two monthly payments to make.
Getting a Second Mortgage in Ontario
When you think about taking out a second mortgage, you probably think of a situation where a homeowner is in crazy debt and has to do something almost unthinkable to escape it. However, there are many reasons that 2nd mortgage lenders in Ontario and elsewhere have sprung up – not as a stopgap, last second resort, but as a way for people to turn the equity in their homes into pathways to investment and to saving thousands in interest expense.
Just what is a second mortgage?
Well, a second mortgage is just what it sounds like – it’s a mortgage that you take out on a home on which you’re already paying an existing loan. When you go to the bank and ask for a second mortgage, you are going to face a higher interest rate than what you’re paying on the first one. Why? Because there is more risk with that second note. Second mortgage lenders in Ontario know that if your financial situation takes a bad turn, the last bill you’re going to let go into default is that house payment. However, when you take out a second mortgage, you give a second lender a lien on your house. So if you default on either one of these mortgages, you can end up in a power of sale situation… commonly referred to as foreclosure in other provinces throughout Canada.
If you are a lender holding a 2nd mortgage in Ontario, Canada, then you know that if your borrower defaults on either mortgage and the home goes to power of sale, then the first mortgage has to get paid off first. In a power of sale, the price of the home is often less than it would have been in a normal sale, because the time frame is shorter. In order to to compensate a second mortgage lender for this risk, you pay a higher interest rate.
But if the interest rates are higher, why would anyone take out a second mortgage?
You took out your first mortgage because you wanted to buy a house and could not afford the full purchase price yourself. So you could take it out to help you buy a boat, or to take your wife on that 25th anniversary cruise that you had always promised her. You can take out a second mortgage for rental property in Ontario or elsewhere, and a lot of people do that, because they want to get into the landlord business as another income stream and lack the liquidity to buy a rental home unless they tap into the equity of their primary dwelling. If you plan this correctly, you can use the rental stream from your new property to pay for your second mortgage, and then when that mortgage is paid in full, you’re looking at pure profit (less savings for vacancies and repairs) once you own that rental property free and clear.
Another reason why many people take out a second mortgage (in Ontario, Canada, and elsewhere) is that they have accrued a significant amount of high-interest debt, typically in credit card balances that have spiraled into the five figures, tax arrears, judgments or collections. In this case, a second mortgage allows you to pay all of those debts off at once, settling those balances, and then you can pay yourself back by satisfying your second mortgage, at a lower interest rate while to keeping your credit score as high as possible).
Do all lenders offer second mortgage loans in Ontario?
Most bank or other lender can issue a second mortgage. The question is whether or not that lender wants to take on the risk that this sort of loan represents. The majority of the big lenders in Canada are more likely to point you toward a HELOC, or home equity line of credit, to hedge their risk. This works basically like a credit card that you can access if you need it and the spending limit is the amount of equity the bank is willing to let you borrow – without the risk of adding a lump sum payment to your budget.
Finding a second mortgage with bad credit in Ontario can be a little trickier. The big banks are less likely to work with you because your poor credit means to them that you are a significantly bigger risk of default than a borrower with a blue-chip credit score. This is where private lenders can come in, as there are many of those who will offer you a loan. The interest rate with a private lender is often higher than it would be with a bank, but if it’s still lower than the debt you are paying off with the loan, then it could make sense, depending on the fees involved and the differential of interest rates.
How can you qualify for approval for a second mortgage?
Most lenders will look at four things when you go in and apply for a second mortgage:
- Equity – You’re unlikely to get approval for more than 755% LTV (loan-to-value) ratio for a second mortgage. That means that your two mortgages combined can’t have a higher balance than 75% of the current appraised value of your home. In Toronto and other major cities, some private lenders will consider 85-90% on a case-by-case basis. If you live outside the big city, that number can drop to 60 or 65%, and 70-75% on a case-by-case basis.
- Income – In most cases, the lender will want to verify how much money you bring in each month, to make sure that this new loan still fits within your budget. However, income verification guidelines are not as strict. In cases in major cities where the equity exceeds 35%, income verification is not always required.
- Credit score – The better this score is, the better your interest rate is likely to be. Higher credit scores indicate less risk to the bank, which means less money out of your pocket.
- Property value – How much is your home worth, just in case you default and the property ends up on the auction block or in a distressed sale? This number is key in determining the size of your loan.
A second mortgage isn’t a stopgap solution that you use when you’re on the edge of bankruptcy. It’s a tool that you can use to help you manage your financial picture effectively. If you have questions about how one of these could work for you, Amansad Financial has access to a large DLGN (Direct Lender Group Network) that can assist with your private mortgage needs… and quickly.
Home Equity Line of Credit
Another way to proceed involves a home equity line of credit, or HELOC. When you gain approval for a HELOC, it’s like getting another credit card, but now you’re taking equity out of your house whenever you use it. If you’re in a situation such as sending a child off to college or facing an upcoming medical expense of significant scale, but you’re not sure exactly how much you will be able to cover out of your personal income, a HELOC gives you more flexibility than a home equity loan. Instead of getting a lump sum and having to make a monthly payment. Stand-alone HELOC are allowed up to 65% LTV, and up to a maximum of 80% when combined with a standard amortized mortgage product. The real positive with HELOC is that if you don’t use anything, you don’t pay interest. So how does mortgage refinancing in Ontario, Canada, work? There are several different paths that you can use when you refinance your mortgage, in effect bringing that contract to an end earlier than its term for an advantageous outcome.
Replace your existing mortgage with a new mortgage
This scenario involves the early termination fees that we mentioned early, often in the form of a penalty involving several months’ interest. This is why understanding the terms of refinancing is an important part of signing an initial mortgage. In this case, you take out a second loan that pays off your existing mortgage (in the case of the example, the $400,000 balance) and then gives you an additional $200,000. This type of refinance can be done with your current lender or new institution. The other options, of course, are the home equity loan and the HELOC, as mentioned above. No matter which refinancing option you choose, you will face some fees. An attorney is necessary to change the financing methods on the title to the house, so you will have some legal fees. If the balance is greater than $200,000, some lenders will also cover that fee for you. Be sure to ask about closing costs and other fees associated with your refinancing, because each additional dollar in fees cuts down on your savings. The more information you have, the better deal you will get. Amansad Financial can refer you to agents within the brokerage network to assist; however, if you cannot qualify for a traditional equity take out, we can provide private mortgage options. They are more expensive but will get you from point A to B.