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While home owners have enjoyed low interest rates over the last number of years, the days of cheap borrowing are coming to an end. Interest rates are on the rise. In fact, the Bank of Canada has raised its rates three times over the last 12-months and more hikes are in the forecast.

Interest rate hikes result in Canada’s big banks and trust companies raising their prime lending rates, which impacts mortgages. This means it’s going to cost a lot more to borrow money and cost more to carry debt.

For homeowners, the benefits of a variable rate mortgage are being stripped away. Those looking to renew their mortgage have big decisions to make: Do you go for a variable or fixed rate mortgage?

What Is a Variable Rate Mortgage?

A variable rate mortgage fluctuates, as often as every month, based on changes on the prime lending rate, which is set by the lender.

Ultimately, this results in how much of your mortgage payment goes toward paying down your mortgage and how much goes to interest. When the banks’ prime rate goes up, the variable mortgage rate follows suit which results in higher monthly mortgage payments. In some cases, your mortgage payment will stay the same, but a smaller portion will go to pay down the mortgage and a larger portion will go to interest.

Over the last number of years, the Bank of Canada had been lowering how much it charges banks to borrow. This was good news for those with mortgages. But because the Canadian economy is doing well, the Bank of Canada is now raising its rates.

Since variable rate mortgages are priced off of Prime, Canadians holding these kinds of mortgages are now being hit with higher mortgage rates.

With a variable mortgage, you cannot reliably predict what will happen or what the prime lending rate will be, say, six months from today.

What Is a Fixed Rate Mortgage?

Over 65% of Canadians have a fixed rate mortgage. When you lock in with a fixed rate mortgage, the interest rate charged on the loan remains the same for the duration of the term of the loan. If interest rates soar, you only pay the amount you initially agreed to with your lender.

For example, if you chose a five-year fixed rate mortgage and your monthly mortgage payments are $2,000, you will be pay $2,000 every month for the next 60 months. It doesn’t matter if interest rates go up or not, your monthly mortgage payments, and the amount that goes toward the principle and interest, stays the same for five years.

Factors to Consider When Switching from a Variable to Fixed Rate Mortgage

There are a large number of factors to consider if you’re thinking of switching from a variable mortgage to a fixed mortgage.

Interest Rates

The biggest one of course is interest rates. Taking advantage of variable rate mortgages is a good idea when rates are low and expected to go lower. But that simply isn’t the case.
While interest rates are still historically low, that doesn’t mean interest rate hikes won’t hurt. It’s quite conceivable that interest rates could double from current levels over the near term. That means less money in your pocket and more money being wasted on interest payments.

When should those with a variable rate mortgage switch to a fixed mortgage rate? The best time is when interest rates are starting to rise, like they are right now. This doesn’t mean you try and time the perfect opportunity to switch to a fixed mortgage rate, it’s impossible to time the interest rate market.

Keep in mind, it’s not a good idea to wait too long. Interest rates have already turned around and are going up. And they’ll go up a lot faster than when they came down. The vast majority of Canadians prefer peace of mind, especially when it comes to finances. With a fixed rate mortgage, you know how much you’re going to pay and you can set your budget for the length of the mortgage terms.

Locking in a Fixed Rate Mortgage

Variable rate mortgages come with the option of switching to a fixed rate mortgage during the term of the loan. When it comes to traditional banks though, peace of mine comes with a cost. Not only are there penalty costs, but some traditional lenders insist that borrowers switching to a fixed rate mortgage sign up for a five-year term, regardless of what is left on their current loan.

Breaking a Variable Rate Mortgage for a Fixed Mortgage

When breaking a variable rate mortgage and switching to a fixed mortgage rate, traditional lenders will hit you with a penalty of around three months’ worth of interest at the current rate. Switching mortgages can also involve a lot of paperwork and legal fees.
Not only that, homeowners switching their variable rate loan for a fixed mortgage might only be eligible for rates offered to homeowners refinancing their mortgage, which is usually higher than the rates offered to homebuyers.

Canadalend.com, Helping You Secure a Mortgage

Interest rates are rising which means mortgage rates are going up. Because it’s more expensive to secure a mortgage, more home buyers and those looking to refinance are switching to fixed mortgage rates from variable rate mortgages. Not only does a fixed rate mortgage mean locking in at a low rate, more of the payment goes toward the principle over time, no matter how high interest rates go. To improve the terms of your mortgage, call the mortgage professionals at Canadalend.com.

How can Canadalend.com give you better options that the big banks and other private lenders? The independent, licensed mortgage experts at Canadalend.com work with hundreds of different private lenders. Many specialize in helping those who have bad or even no credit, are self-employed, and have unreliable income secure or switch to a fixed rate mortgage.

To find out what your fixed rate mortgage options are, contact Canadalend.com today or apply online and a Canadalend.com mortgage specialist will set up an appointment at your earliest convenience.

Closing costs are the fees associated with buying a property and are required to close the transaction. Closing costs can include appraisal fees, title insurance, legal fees, taxes, commissions, pre-paid property tax, mortgage insurance, and can even extend to moving expenses and certain upgrades or repairs to the new property.

Buyers need to prepare for these one-time expenses and make sure their budgets reflect more than just the upfront costs.

Let’s take a closer look at the closing costs to help you estimate what you should put aside so that you can mitigate any surprises.

Planning for Closing Costs

You’re always better overestimating what you will need to pay in closing costs. The best advice is to budget around 4% of the purchase price of the property to pay for all the associated closing costs. This number could increase or decrease depending on the size of the home, location, level of legal requirements, among other variables.

Closing Cost Breakdown

Appraisal fee: This fee covers the services provided by the appraiser to assess the market value of the proposed property.

Title Insurance: This type of insurance is mandatory and protects against any fraud or issues with the title of the property.

Lawyer Fees: You will need to contact a lawyer. The fees charged will consist of a title search, prepare the mortgage, drafting the deed. There could be other fees that are specific to your purchase. Typically, lawyer fees for the average home is a minimum of $500 plus taxes.

Utility Adjustments: Prior to closing, the buyer is responsible to reimburse the seller for any prepaid utility charges, or to cover any adjustments. Your lawyer will advise you of these costs.

Mortgage Insurance: This is sometimes not associated with closing costs but it is too often left off budgets. Based on the amount you’re borrowing and your down payment, you might have to insure your mortgage. This can cover the lender in the event of job loss, disability or death.

When calculating your budget for purchasing your next home, make sure to include all closing fees. Even overestimate certain expense like lawyer fees just in case costs come in higher due to unforeseen circumstances.

Many property owners take out a second mortgage in Toronto on their property to unlock the equity they’ve built up in their homes. The idea of taking out two mortgages on the same home might sound daunting, but a second mortgage can make a lot of sense, and when used to pay down or off debt, can actually help you save money. Here are some answers to common questions regarding second mortgages.

What does it mean when you take out a second mortgage?

When you take out a second mortgage, you are taking out an additional loan on a property you already have a mortgage on. Just like the first mortgage, a second mortgage is secured against your property. And, just like a first mortgage, you repay the second mortgage on a monthly basis.

Is refinancing the same as a second mortgage?

Refinancing is not the same as a second mortgage. When you refinance a mortgage, you are applying for a new mortgage all over again. That means getting a new home appraisal, verifying employment, family income, and any debts.

Is a second mortgage and a home equity loan the same thing?

A second mortgage and home equity loan are the same; you are taking out a loan based on your home’s equity. That said, a home equity loan should not be confused with a home equity line of credit (HELOC).

A second mortgage operates like the first mortgage. After being approved, you receive a one-time lump sum payment that is paid off over a set period of time with monthly payments. Like a first mortgage, you are charged interest on the total amount as soon as you receive it.

A HELOC, while also secured against the equity you’ve built up in your home, operates like a revolving line of credit. Money is deposited into an account and you can use as little or as much as you like. You are also only charged interest on the amount you borrow.

How soon can you take out a second mortgage?

You can take out a second mortgage in Toronto as soon as you’ve built up enough equity in your home. What that magic number is will vary depending on what kind of lender you go to. Traditional lenders, like Canada’s big banks will need you to have at least 25% of equity built up in your home. A trust company will want to see equity of between 10% and 15%.

A private lender on the other hand, because they are not bound by the same rules, are a lot more flexible; with a private lender, you can have less than 10% of equity built up in your property.

As for how much you can actually access, with a second mortgage, you can borrow up to 80% of the appraised value of your home, minus the balance on the first mortgage.

How long does it take to get a second mortgage?

Again, it depends on what kind of lender you use. With the big banks or trust companies, it could take a number of days before you find out if you’re approved for a second mortgage.

If you use mortgage experts that have access to private lenders, you can be approved for a second mortgage in less than 24 hours.

What is the interest rate on a second mortgage?

A second mortgage in Toronto operates the same as a first mortgage, but, should you default on your mortgage, the first mortgage gets paid off first; any money left over goes toward the second mortgage.

Because there is more risk for the lender associated with a second mortgage, the interest rates are higher than first mortgages. But, the interest rate with a second mortgage will be a lot lower than other types of loans, this includes, credit cards, car lease payments, and other unsecured lines of credit.

Can you take out a second mortgage with bad credit?

Because there is a lot more risk associated with a second mortgage than a first, it can be difficult to get a second mortgage if you have bad credit (credit scores generally range from 300-900; the higher the better). This is true even if you’ve never missed a mortgage payment.

The big banks don’t like approving second mortgages if you have bad credit and will want to see a credit score of 650-900. Trust companies won’t sign on the dotted line unless your credit score is in the 550-700 range.

Private lenders though, because they are not bound by the same rules, will give you a second mortgage even if your credit score is less than 600.

Is it a good idea to remortgage to pay off debt?

Taking out a second mortgage in Toronto is a great way to pay off your debts. That’s because the interest on a second mortgage, while higher than the primary mortgage, is significantly lower than the interest charged by major credit cards and store credit cards. It’s also lower than interest charged on car leases and unsecured lines of credit.

Moreover, using a second mortgage to pay off your debt will help improve your credit score. This in turn, will mean you can apply for other financial products with even better terms and conditions.

What can you do with a second mortgage?

You can use your second mortgage for anything. You can pay off debt, buy a second home, pay for unexpected expenses, school tuition, the stock market, a wedding…anything!

How can Canadalend.com help you?

Second mortgages are an excellent way to tap the equity in your home to pay off debt. Unfortunately, stricter lending rules mean the big banks and trust companies are turning away more and more homeowners because they haven’t built up enough equity, have bad credit, or earn enough. Canadalend.com though makes it easy for homeowners to get a second mortgage.

How does Canadalend.com do it? The independent, licensed mortgage experts at Canadalend.com work with hundreds of different private lenders.

If you are interested in finding out what kind of second 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.

Below are some of the top Frequently Asked Questions about second mortgages.

What is a second mortgage?

A second mortgage, also called a home equity loan, is an additional loan (you can also get a third mortgage etc.) taken out on a property you already have a mortgage on. Just like the first mortgage, a second mortgage is secured against your property.

Is a home equity line of credit the same as a second mortgage?

A home equity line of credit and home equity loan (or second mortgage) sound alike but they are very different financial products. A second mortgage operates like a mortgage. After being approved for a second loan, the lender will send you a one-time lump sum payment that, like the first mortgage, gets paid off over a predetermined time period with monthly payments. Just like the first mortgage, with a second mortgage, you are charged interest on the total amount as soon as you receive it.

A home equity line of credit (or HELOC) is also secured against the equity you’ve built up in your property, but it is more like a revolving line of credit. The money is deposited into an account and you can take out as little or as much as you like. You are only charged interest on the amount you borrow. You also cannot borrow as much with a HELOC and the qualifying requirements can be quite strict.

What is the credit limit with a second mortgage?

You have to have a certain amount of equity built up in your property to get a second mortgage. Exactly how much depends on who the lender is. With the major banks, you need to have at least 25% equity built up in your home; trust companies like to see equity of 10% to 15%; and for private lenders, you can have less than 10% equity. You can borrow up to 80% of the appraised value of your home, minus the balance on the first mortgage.

What is the interest rate for a second mortgage?

The interest rate on a second mortgage can be either fixed or variable. Whether it fluctuates or is fixed, one thing is certain, the interest on a second mortgage will be higher than on the first mortgage. But, the interest rate will be a lot lower than other types of loans, including credit cards, car lease payments, and unsecured lines of credit.

What can I use a second mortgage for?

You can essentially use your second mortgage for anything you like. The sky’s the limit. This includes buying land as an investment or to build on. You can also use your second mortgage to pay for unexpected expenses, a wedding, school tuition, the stock market, purchase a second home…anything! In fact, a second mortgage is a great way for homeowners to consolidate their debt.

Can I get a second mortgage with bad credit?

You’d think that if you had a mortgage and were making your payments on time it would be easy to get a second mortgage. Unfortunately, it’s not. There is a lot more risk associated with a second mortgage than with the first. If you default on your payments and the property is foreclosed, the lender who holds the primary mortgage is paid out first. The lender who helped you secure a second mortgage runs the risk of not getting paid out in full. To compensate, the lender charges higher interest rates than what you pay on the principle mortgage.

Because of this added risk, lenders don’t like handing out second mortgages to those with bad credit. Canada’s major banks want to see a credit score in the 650-900 range and trust companies want to see a credit score 550-700. Private lenders though, because they do not need to follow the same federal rules as traditional lenders, will give you a second mortgage even if your credit score is less than 600.

Is it difficult to get a second mortgage?

Lenders look at a number of different factors when determining whether or not you deserve a second mortgage.

Equity: The more equity you have built up the better your chances of getting a second mortgage. Again, that only applies if you use a big bank or trust company. Private lenders are not bound by the same strict lending rules.

Income: Big banks and trust companies want to make sure you have enough income to make the payments on your second mortgage. Makes sense. Unless you’re self-employed or an entrepreneur and have unreliable income, or, for tax purposes, draw a small income. The bank only cares about the bottom line and simply decides there’s a greater chance you’ll default on the second mortgage.

Credit Score: The higher the credit score, the lower the interest rates.

Property: Because a second mortgage is secured to the property, lenders want to see what kind of property they are investing in. A bank might not give you a second mortgage if they don’t like the property.

What are the risks associated with a second mortgage?

The biggest risk associated with applying for a second mortgage is the possibility of foreclosure. If you run into trouble paying back the first or second mortgage, your home is at risk of being foreclosed. A private, licensed mortgage broker can help you analyze the risks of taking out a second mortgage.

Canadalend.com, Helping You Secure a Second Mortgage

Stricter lending rules mean big banks and trust companies want to make sure you have a lot of equity built up in the property, high income, high credit score, and as much documentation as possible. Canadalend.com simplifies the process, making it easier for you to get a second mortgage.

How can we provide better service than the big banks, trust companies, and other private lenders? The independent, licensed mortgage experts at Canadalend.com work with hundreds of different private lenders. Many of whom specialize in helping those who are self-employed, have unreliable income, or have poor credit secure a second mortgage.

If you are interested in finding out what kind of second 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.