During the spring of 2011, the rules governing institutional mortgage providers in Canada changed considerably including 1) a reduction in the maximum amortization period offered from 35 years to 30 years, 2) reduction in the amount of mortgage refinancing that can be obtained under and insured mortgage from 90% to 85%, and 3) discontinuance of mortgage insurance for a home equity line of credit.
One of the results of this change is that now there is very little difference if any in many cases between what a borrower can secure from an institutional lender versus a private lender.
In the past, those that could qualify for banks rates, would apply for a mortgage refinancing or a second mortgage, and get financed up to 90% through an insured mortgage.
But now with the change in the rules, for those individuals that are looking for the maximum potential home equity loan possible, private mortgage financing can sometimes become a better option.
We should mention at this point, that private lenders do not like to entertain debt leverage of more than 75% to 80% on most mortgage applications. But for “A” lenders that have great credit and solid income, second mortgages can go as high as 90% loan to value related to the risk associated to the property and the borrower.
So for the “A” lender that needs more capital than the bank can now give them, private mortgage financing has become more of an option, even at a higher cost of borrowing.
But there are also benefits that come with the higher cost of financing. First of all, no insured mortgage premiums to pay. Second, private mortgages are typically much faster to get in place and if time is of the essence, this can be a better solution anyway compared to losing out on a deal or defaulting on payments that may incur penalties or worse.
While the mortgage rule changes are not going to create a stampede to private second mortgages, for a number of “A” credit borrowers, there will be more interest in this type of financing if the amount required cannot be secured from the borrower’s traditional sources.
If you would like to know more about alternative mortgage financing options from both institutional lenders and private lenders, please give us a call to book a time to speak with a member of our team.