Types of mortgage loans
Lenders typically offer borrowers different types of mortgage loans (commonly referred to as simply “mortgages”), including traditional mortgage loans and umbrella mortgage loans. Along with financial institutions, individuals and other businesses may also offer mortgage-secured loans. In their case, the loans are sometimes called alternative loans or private loans.
Lenders require a mortgage on the property to cover the risks involved in making the loan. There therefore has to be equity in the propertyThe equity in the property is the difference between the property’s market value and all debts secured by that value. For example, if your property is worth $300,000 and you still owe $180,000, the equity is $120,000. (i.e., the property’s current market value must be greater than the loan amount).
If the down payment for the purchase of a property is less than 20% of its purchase price, the loan must be insured by the CMHC or another mortgage insurer.
The AMF does not regulate mortgage loans.
However, it does regulate Québec provincially chartered financial institutions and mortgage brokers in Québec.
With a traditional mortgage, the property is mortgaged only for the amount of the loan granted by the lender. For example, if you buy a property worth $300,000 by borrowing $270,000, the mortgage will be $270,000.
A traditional mortgage doesn’t secure other types of credit such as a home equity line of credit. However, you could register a second mortgageA second mortgage is an additional mortgage on the same property. This mortgage can be granted by the same lender as for the first mortgage or by another lender. The interest rate charged on a second mortgage is often considerably higher than on a first mortgage. This is because the second mortgage lender is repaid after the first mortgage lender if ever you’re no longer able to pay. The second mortgage lender is therefore at greater risk of not being paid back. Fees may apply, and the lender could refuse to lend you an additional amount if, among other things, you don’t meet its requirements for obtaining a loan. in order to borrow more money.
The umbrella mortgage is also known as a collateral mortgage, wraparound, mortgage security deed or equity release.
An umbrella mortgage gives the lender a much broader right than a traditional mortgage. Its right in the property covers not only the borrowed amount, but also any other current or future debts you may contract with the lender, such as a line of credit, a personal loan or a car loan. The other debts each have their own contractual terms, such as their own interest rate.
Some financial institutions offer only umbrella mortgages.
There are both pros and cons to umbrella mortgages. Before deciding on a mortgage, be sure to compare several offers and ask questions that will help you understand what is being offered to you.
Pros
- Can make it easer to obtain credit such as a home equity line of credit by leveraging the value of a residential property.
- Can provide lower interest rates for loans covered by mortgage security.
- Makes it possible to secure several loans without your having to have the mortgage re-registered by a notary, because the security can be reused up to the maximum allowed amount.
Cons
- Easier access to credit can lead to overborrowing.
- If the loan involves several co-borrowers, an umbrella mortgage secures all the current and future debts of each co-borrower. You could therefore be held liable for debts that did not exist when the contract was signed. The same is true if you endorse someone who takes out an umbrella loan (guarantee).
- Before finalizing the sale of your home and obtaining a mortgage discharge, you may have to repay all the debts you’ve contracted with the institution, since the loans it granted are covered by the umbrella mortgage.
- Changing lenders when the term expires may be more difficult because all the loans granted by the institution are secured by an umbrella mortgage. When renewing your mortgage, you may lose some of your power to negotiate credit terms. A borrower with a good credit report and a solid financial situation can often get a lower rate.
A private mortgage loan, sometimes called an "alternative mortgage loan", is a loan made between a borrower and a lender that is not a financial institution. The lender may be an individual or a business that has cash assets and that agrees to grant a loan to another individual or business.
In general, the maximum amount of the loan may not exceed 75% of the value of the property for which the loan is granted. A borrower may apply directly to a private lender for a loan or use the services of a mortgage broker.
Private mortgage loans and the mortgage broker
A mortgage broker could help you determine whether a private mortgage loan is the right solution for you. Here are a few tips:
- Opt for a mortgage broker who is familiar with private mortgage loans
- Be vigilant—the broker you choose cannot advise you and also lend you money. A mortgage broker who is also a mortgage lender is not allowed to act as both with the same client.
The cost of a private mortgage loan: What you need to know
Some people who get turned down for a mortgage loan by financial institutions may opt for a private mortgage lender. However, this is often a more expensive solution for the borrower. Private mortgage lenders tend to charge higher interest ratesAn interest rate is the percentage applied to an amount that is invested or borrowed; it enables you to calculate the interest earned or the cost incurred on this amount for a given period.
For example, a $1,000 investment bearing 6% interest per year will earn $60 in interest per year. than financial institutions. They may also charge administration fees such as a file opening or closing fee. These costs are in addition to the interest charged on the loan. In many cases, the borrower is also charged for the mortgage broker’s services.
It is important to know the payment dates and the terms of any prepayment penalties.
A clear understanding of all these costs will help you accurately determine the total amount to be repaid.
See the private mortgage loan as a temporary financing solution
Given the high cost of private mortgage loans, you should have a repayment plan before committing to one. For example, if you’re considering using a private mortgage loan to help you get through a period of financial hardship, you should only use it until your financial situation improves. Once your finances are back in shape, you can get a mortgage loan from a financial institution or sell the property.
You should also find out the conditions on which the private mortgage loan may be renewed if you’re unable to repay it at the end of the term. For example, the mortgage lender's interest rate could be higher at renewal.
By anticipating the steps you’ll need to take to pay back your loan, you will avoid piling up more debt. In short, although a private mortgage can be useful, you need to be thoughtful when using it and plan for the future.
Tips before taking out a private mortgage loan
Before you do anything else, you’ll need to take stock of your finances. This will clarify your options and allow you to choose the best solution for you. If a private mortgage loan seems to be the best option for the short- or medium-term, remember to:
- Carefully read all the contract terms and don’t just focus on the interest rate. Insist on having the key provisions mentioned during negotiations written into the agreement. Don’t rely on verbal promises.
- Also, make sure you’re clear on what will happen when the agreement ends. For example, if the contract requires you to repay the loan within six months, will you have sufficient funds at that time? Find out about what the consequences will be if you can’t repay the loan.
- Ask the lender about file opening and closing fees and any other applicable charges.
- If you need to, ask an independent legal advisor to help you interpret the terms of the agreement, especially the aspects you find complex.
Taking these precautions can help you better manage your finances and make informed choices.
End of the insight