Sometimes your profile doesn’t quite fit into the banks’ or other ‘A lenders’ lending guidelines. But in all respects, you feel ready and capable of buying a home and taking on a mortgage.

There are alternative institutional lenders who play a valuable role in funding people like you. And they are the fastest growing segment of the market, as the government seems to be making qualification tougher with each passing year. From 2016 to 2019, the value of outstanding mortgages held by alternative lenders grew by approximately 50% in Canada according to CMHC data, and their total share of the mortgage market continues to grow at the expense of ‘A’ lenders (primarily large banks).

The interest rates are higher and there are often lender and broker fees associated with these mortgages, but they get the job done.

Most people pick a mortgage term of one or two years with these lenders, hoping their circumstances may have changed sufficiently to switch back over to the “A side” at renewal time.

These lenders do not insure their mortgages, and will only lend up to 80% loan to value. If your covenant is strong though, they may allow you to place a second mortgage behind them for another five, maybe even ten percent of the purchase price.

Lenders in this space include Equitable Bank, HomeTrust Company, XCEED mortgages, IC Savings, and many more.

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Mortgage professionals often fall into the trap of presuming knowledge and understanding of our terminology that simply isn’t there – especially with first time home buyers. I was reminded of this when a financially responsible new buyer recently asked us how come her mortgage rate was going to change in five years – after all, she had signed up for a twenty-five year amortization period.

In Canada, most mortgages have a term of five years or less. This means your interest rate is set for say five years and is renegotiated at the end of the term you have chosen.

However, most of us will need many years to be able to repay this debt. Typically we want the option to take as long as 25 or even 30 years. This allows us to make manageable monthly payments, as the loan repayment is ‘stretched out’.

Your lender basically says “Look, you only have this interest rate guaranteed for five years (the term of the loan), but to make your monthly payment affordable, let’s pretend it was for 25 years (the amortization period), and we will set your monthly payment on that basis.”

This amortization period is the total amount of time you will take to repay the mortgage loan.

Even when your mortgage matures at the end of its term, it will renew (almost certainly) at a different interest rate, but your amortization period will remain on track.

Some people routinely refinance their mortgages, and especially at renewal time (when there are no prepayment penalties) and extend their amortization period as long as is allowed. They do this because they want to keep their monthly payment as small as possible. But the downside is they will reduce the actual balance owing by less than their friends with shorter amortization periods.

As time goes by, your financial circumstances change, and you may well move into a different home. You will always have choices how to structure your amortization, your payment, and the term of your mortgage as your needs evolve.

The most common initial amortization is 25 years in Canada. Provided you put down at least 20%, you can go up to 30 years. You can shorten your amortization period on the fly if you want to, simply by making bigger payments. The more you pay on each payment, the quicker you’ll pay down the loan.

And if you really want, your mortgage broker/agent can arrange a thirty five year amortization from one of a handful of lenders still offering this. A slight rate premium will likely be applied.

As one might expect, an appraiser appraises the value of a property (tells you what it’s worth).

Your mortgage lender often requires your property be appraised before funding your mortgage. Many lenders have lists of specific appraisers they will work with, so let your mortgage agent/broker arrange it for you.

The appraiser will carefully examine all of the home’s characteristics before comparing it to other recent sales in your area. Appraisals range from $250 to $500 or more for outlying areas or unique properties.

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An assumable mortgage is one in which the buyer is permitted to take over the seller’s original loan, provided they meet the bank’s requirements. Most mortgages are not assumable, so it’s important to see the seller’s mortgage documents to know whether it’s possible and under what terms. Since you are assuming the seller’s mortgage lock, stock and barrel, this can be a very valuable optioin for both buyer and seller.

It can save the seller from a prepayment penalty, and may enhance the perceived value of the home if the mortgage terms are very favourable. For the buyer, if the seller’s mortgage is at a lower than market rate and/or renews a few years in the future, it can significantly reduce their monthly payments versus currently available mortgage terms.

This is a very similar to portability – but rather than the seller taking their mortgage with them, it stays with the house for the buyer to take over if they wish.

A collateral charge is a method of securing a mortgage or loan against your property. The main rub with collateral charges is that it’s harder to switch lenders without paying legal fees.

Collateral charges also impact people’s negotiating leverage at renewal and restrict borrowers from taking out second mortgages or HELOCs elsewhere (unless one’s property value skyrockets). Read more…

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Fixtures are items that are securely attached to the house; such as chandeliers and kitchen sinks.

Chattels are any moveable pieces of personal property including kitchen appliances and the furniture in the home.

When you are deciding on the home you want to buy, it’s important to remember that many of the things that appeal to you, and which contribute to the overall attractiveness might not be part of the final purchase. In fact, fixtures and chattels are commonly excluded either by default, or by language in the Purchase Agreement.

In standard purchase agreements, fixtures are included with the house by default, and chattels are excluded. However, there are circumstances you should look out for if you want to avoid unpleasant surprises when you move in.

As the buyer, it’s up to you to make sure you get what you want, and you need to pay attention to the fine print.

Look specifically for excluded fixtures. Often there are items which the sellers want to keep, whether because of sentimental value, like an heirloom chandelier, or monetary value, or simply because they like them (how many century homes still have their original fireplace mantel and ceramic tile inlay?). If the sellers want to keep their heirloom fixture(s), they must specifically exclude it in the Purchase Agreement. So if you are blown away by the light fixtures, or fireplace or any other fixture when touring a home, make sure the purchase agreement doesn’t have a clause that excludes them.

If you want any chattels, you have to include them in the purchase agreement. We all know that a great kitchen can sell a home. If you find a house where everything is just as you’d like it, and you don’t want to change a thing, you have to specify any things you want that aren’t attached. Kitchen appliances, for example are often included in a sale, but the sellers have the right to take them if they aren’t included in the purchase agreement. If you want to have kitchen appliances, or particular pieces of furniture, or mirrors that are hung (i.e. not attached) or any other chattel included in the sale, the only way to be sure it will be there when you move it is to ask for it in the purchase agreement.

With chattels, the specifics matter. If you add a clause to the purchase agreement that says “kitchen appliances to be included”, and you’re expecting to see that Sub-Zero refrigerator, or Viking stove when you move in, then you need to actually name them, right down to including appliance model names and numbers. Otherwise you might be in for an unpleasant surprise, because the sellers could replace what you saw with different (and potentially much lower quality) appliances.

Remember to carefully note anything that you want to be included in the purchase and make sure that you include it in your offer. And even though fixtures are supposed to be included, if they are notable, it doesn’t hurt to specifically mention them as well to protect yourself if there’s a dispute about what was there and what wasn’t. And, make sure everything you expected is there when you move in.

A home equity line of credit (often called HELOC and pronounced Hee-lock) is a special form of mortgage. Think of it as a pre-arranged credit facility secured by the equity in your home (just like a personal line of credit, though usually for a much larger amount)

HELOC’s are revolving credit – which means you only incur interest charges if you use it, and only to the extent of your actual balance, not your approved limit. Minimum payments vary from lender to lender – some are as little as interest only, if that is your wish.

Most HELOC’s are priced at Prime plus 0.5%, which in today’s market is 3.20%. Compared to a VARIABLE RATE MORTGAGE, your rate is almost one percent higher – that’s the trade-off for a HELOC’s incredible flexibility.

Many people like to have a HELOC and a first mortgage. The best kind are readvanceable, which means that every time you make a mortgage payment, your HELOC limit increases by the amount of principal you just paid.

A home inspector conducts a visual inspection where they walk through the house and look at everything from plumbing and electrical, to looking at what problems the drainage pattern of a property could present. Their job is to identify unexpected surprises like structural problems, termite damage, or anything functionally wrong with the property that needs attention or may cause you problems.

In some cases, you don’t technically need a home inspector, but one can never be too careful when making such a large and important purchase.

Ask your professional experts for a referral. Unless you’re a construction expert, this member of your team will be your eyes and ears when it comes to looking at the most important stuff (no, not the granite countertops and walk-in closets). I’m talking about whether the foundation is stable, what (if any) repairs need to be done, and if there were problems in the past.

They will even be able to give you an educated guess on when certain parts of a building will likely need to be replaced. Often, homebuyers fall in love with a new paint job and hardwood floors right away. Unfortunately, their souls are sometimes crushed when they find out that $30,000 in repairs are needed just to keep the basement from collapsing, or to keep water from pouring in during the next heavy rain.

A decent home inspection should cost no more than $500, depending on your region, and it’s usually worth every penny.

Mortgage portability means that if you decide to buy another home, you take your mortgage with you. This can be great if you have awesome terms or if you want to avoid paying a prepayment penalty.

It is something that is easy to overlook when going over the terms and details of your mortgage offer, but can have huge financial benefits down the road when you need to move before your mortgage term is up. For example, in one example that I wrote about, a homeowner saved $13,000 in prepayment penalties because they had portability as a feature of their mortgage.

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When you don’t fit the guidelines for either ‘A’ or alternative lenders, there is a third tier of lenders comprised of wealthy individuals and niche mortgage companies who are willing to accept more risk and may still lend you money when everyone else says “no”. These are private mortgage lenders.

Private lenders are usually lenders of last resort, since the interest rates and fees are much higher than conventional lenders. You will be paying your broker a fee and most likely your lender too. And you will have to pay the lender’s legal costs, your legal costs, and likely the appraisal costs. On the other hand, they fill an important role in the market, providing money to solve problems in the short term. They generally don’t want to be the long-term holder of your mortgage, nor should you want that.

That’s why reputable mortgage specialists who place you with a private lender will always want to know your ‘exit strategy” to get back to more mainstream lenders.

This all said, we do regularly place mortgages with private lenders, and are thankful they are in the marketplace. The articles below provide in-depth explanations of the reasons why a private mortgage might be needed, how it works, and what the costs are. If you think you might need a private mortgage, these are “must read”.

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House insurance is required to be in place before you get the keys. Your mortgage lender will insist on this because it’s the only protection for them should you have a major disaster such as a fire or flooding. Your real estate agent or mortgage broker/agent can refer you to a property insurer if you don’t have one.

An insurance broker will explain the various types of scenarios that you need to be insured for, and work with you to find a package that fits your needs. The insurance broker’s costs are almost always included in the insurance they provide.

Rent to own simply means you rent the home with an option to buy it within a pre-defined period of time. The deal involves an ‘Option to Purchase Agreement’ plus an Occupancy Agreement. The future purchase price of the home is set in the agreement as well making it a long-term rent plus mortgage hybrid combination.

This niche strategy for getting into a home is most often used by people who cannot get a conventional or high-ratio mortgage for the time being but are hoping that after a period of renting they will qualify.

Some experts claim that renting to own is never a great option. Others think that for people in a very small percentage of situations (such as a recent divorcee), it makes some sense.

Michael Sugar from Mortgage Intelligence says “Rent to own can be a great option for some people who aren’t yet ready for home ownership. Most of the time it’s because their credit history is in recovery mode.”

To qualify for a Rent-to-Own program you must already have saved up at least five percent of the required down payment. You enter into a contract to purchase the property in a specified period of time (typically three years) for a pre-agreed price.

The basic idea is that if a buyer finds a home they like, they pre-negotiate a deal with the seller whereby they will rent the home for a certain amount of time. Sellers sometimes use a deal like this as a “carrot-on-the-stick” incentive to get people into their house.

Most of the time buyers will pay an upfront fee of 2% the house’s appraised value +/-, in order to give themselves the “option to purchase” at the end of the agreement. Sometimes an extra premium is also added into the monthly rent. That goes towards the prospective buyer’s down payment at the end of the agreement.

Title insurance protects you and your lender against claims of ownership to your house by other parties. Such claims could arise from problems like legal claims, record-keeping mistakes, liens against the property, unpaid taxes, conflicting wills or other unforeseen issues that could affect your legal right to the property title.

Unlike most types of insurance, title insurance is designed to protect you from past problems or mistakes, rather than future incidents. In other words, it covers you against potentially very costly losses from problems that arose before you bought the property.

Title insurance is usually an afterthought for people getting a mortgage, and it used to be fairly uncommon to buy it. But it’s become more prevalent today since so many lenders now require it.

Although there is a very small chance that you will ever encounter the kinds of title problems that title insurance cover, those problems can turn into expensive nightmares. For the small amount of money that it costs, you’ll be very happy you have it if a claim against your title ever pops out of the woodwork.

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