When private mortgage financing is mentioned, the first thing that comes to mind for most people is that the borrower has bad credit and there are no other options available to them.
But when it comes to mortgage refinancing, there are other situations where a private mortgage can be the solution of choice for the short term as for the most part, private money is short term money.
For instance, there are times when the mortgage company does not wish to renew the mortgage. Even if you’ve never missed a payment, you could still end up in this situation. If there isn’t enough equity in the property to move to another conventional mortgage product, then a higher ratio private mortgage may be the only solution available outside of selling off the property to retire the mortgage.
With the recent changes to some of the equity based programs for the self employed, there is the possibility that at some point you could not be able to acquire conventional financing due to the requirements around income verification for self employed individuals. And even though you have good credit and have cash flow available, it could be hard to transition from one mortgage holder to another if you were looking to either borrow more against your property, or move to a different property and pay out your existing mortgage.
With respect to bad credit, there are cases where someone’s credit can get bruised from one credit issue which could be very innocent in nature, but still one the reduces your credit score and sees you fall below the threshold for the lower cost mortgage programs.
Instead of signing up for higher conventional rates, it may make more sense to refinance with a private mortgage to provide you with time to clean up the issue with your credit versus getting locked in for a longer period of time with a higher rate.
Depending on the lender, private mortgages can be arranged to allow for open prepayment. And if you have strong cash flow and credit, you can also secure private rates that are close to bank rates.
The key here is the short term nature of the mortgage refinancing requirement.
Working through the numbers can sometimes point to a private mortgage solution, even if that may not seem obvious from the outset.
One way to determine your best mortgage refinancing options is to work with an experienced mortgage broker who deals with both bank and private lending sources.
If you are looking into mortgage refinancing for your home, I suggest that you give us a call and have a member of our team go over your requirements with you as well as potential solutions that are available to you.
News reports continue to be circulated as to how the levels of Canadian consumer debt are not going down and some even go so far as to say that the average level of Canadian consumer debt is higher than American or British consumer debt.
While I have a hard time believing the consumer debt comparisons among Canada, the U.S., and Great Britain, I do acknowledge that the average consumer debt in Canada is likely higher than it should be and that our current level of average consumer debt places a lot of financial risk on a large number of Canadians as well as the overall Canadian economy.
And while there have been many Canadians who have taken advantage of mortgage financing and/or mortgage refinancing to try and get their consumer debt reduced, there are still may Canadian’s who could be getting greater benefit out of mortgage financing to assist in reducing their overall debt load.
That being said, let’s make it clear that there is no magic bullet to reduce consumer debt outside of some type of debt write off by a lender which is going to have credit rating repercussions to any borrower receiving this benefit.
Any financing strategy to try and reduce consumer debt is likely going to require some changes in spending habits, some improved budgeting, and a more informed understanding of how personal credit markets work and can work to your advantage.
Assuming that there is a willingness to get better at managing personal financing, any consumer that has sufficient equity in a real estate property has the potential to improve their overall debt reduction strategy.
Here are just a few ways where mortgage financing or mortgage refinancing can be of benefit to reduce consumer debt.
First, and most obvious, is the fact that mortgage financing, because it is a secured form of financing, is lower cost on average than any other available sources of longer term financing out there.
So if you have the ability to borrower more against your personal property, then there is a good chance you can reduce your overall cost of capital, allowing more of your available cash to be used to reduce debt instead of make interest payments.
Second, a part of accessing lower cost forms of capital is going to depend on your personal credit score.
When you have higher levels of consumer credit in the form of lines of credit and credit cards, high levels of available credit utilization will reduce your credit score, making it harder to access the lower cost sources of financing.
When you have the ability to pay down the types of debts that are most impactful on your credit score, your credit score can rise rather quickly, providing you with greater ability to secure cheaper forms of capital in the future, which will reduce the amount you are paying to interest and increasing the amount available to pay down principal.
Once again, this will not happen without some improvements in spending discipline as what benefits that can be gain can just as quickly be lost through the very spending practices that created the high consumer debt load in the first place.
Every consumer debt scenario is going to be unique to some degree, so the best way to determine what if any mortgage financing or mortgage refinancing options may be available to you to assist with consumer debt reduction is to work with an experienced mortgage broker with a track record of helping their customers with consumer debt reduction strategies.
But its not always going to necessarily be the best way, or only way, to get access to additional funds.
For example, a common reason for requiring additional capital is for the consolidation of debts to lower the overall interest rate being paid and reduce the monthly cash flow burden.
A mortgage refinancing of your existing first mortgage may be an effective strategy to provide additional funds for debt consolidation, but only if the net effect of refinancing doesn’t cost more than not refinancing.
For instance, when individuals have debts that require consolidation they may also have strained or damaged credit from the excessive short term debt they are carrying. They may also have a first mortgage in place that they acquired prior to debt run and the first mortgage may have very favorable rates and terms.
If a borrower that fits this profile opts for a refinancing of their first mortgage to consolidate debt, their strained credit may force them into a higher cost first mortgage than what they presently hold. Plus, depending on where interest rates have moved since they signed up for their first mortgage, there may be a considerable prepayment penalty to pay as well when completing a mortgage refinance action.
An alternative to refinancing your mortgage in this particular situation is to secure a private second mortgage against your property which will be registered behind your existing first mortgage.
By doing this, the larger first mortgage remains intact, including the favorable rate, and not prepayment penalties are incurred.
The smaller incremental amount required will be done via a private second mortgage, which will have a higher interest rate than the first mortgage, but could allow the weighted average cost of capital to be lower than what you might end up with after a mortgage refinancing.
The private second mortgage will likely only be for one or two years, but this will give you time to get your credit score in order so that you can preform a refinancing at a more favorable date in the future.
The only way to know for sure which strategy will work the best is to crunch the numbers for both scenarios with an experienced mortgage broker that deals with both private lenders and bank and institutional mortgage lenders.
If you have a mortgage refinancing scenario you would like to go through, we suggest that you give us a call and a member of our team will go over your situation with you.
But a better interest rate may not end up resulting in a lower effective cost of capital either.
When interest rates drop, and your goal is to secure a lower rate than you already have, then it stands to reason that you likely have a fixed interest rate mortgage term.
If you had a variable interest rate mortgage, then a drop in interest rates would also drop your mortgage rate.
Unless the variable rate mortgage discount was lower with another lender, chances are you would stay put with your current mortgage.
In situations where you have fixed interest term and you want to reduce the interest rate you’re paying, then the first thing you will need to understand is what will be the prepayment penalties and mortgage transfer fees that you are going to incur to move from one lender to another.
Its certainly possible to secure a lower interest rate at another lender while paying a high enough prepayment penalty that you are no better offer or even worse off depending on the penalties incurred and the new mortgage term you sign up for.
Mortgage refinance for better rates should always start with a calculation of the net effective rate which will factor in all the costs of getting a new mortgage somewhere else and paying out an existing mortgage from the new mortgage proceeds.
If the calculation shows that your net effective rate is going to be less through a mortgage refinancing action, then its something to definitely consider.
But if the reverse is true, then getting a lower posted rate on a new mortgage, but paying a higher effective rate inclusive of all costs doesn’t make a great deal of sense.
The best way to approach a mortgage refinance assessment is to work through an experienced mortgage broker who can help you identify and understand all the relevant costs as well as work through the calculations with you to determine what are the best and most relevant options to consider.
If you would like to find out more about how to manage the mortgage refinance process for optimal results, I suggest that you give us a call and one of the members of our team will be happy to get all your questions answered right away.
Understanding your mortgage refinancing options at the time of mortgage renewal is not only going to be important in making the right decision going forward, but also for getting a very good market interest rate for years to come.
Most people pay their mortgage on time and have no issues with their mortgage lender as for the most part out of sight is out of mind.
So when a mortgage term comes up for renewal, most borrowers want to get the process completed and done with so that they can spend their time on other issues confronting them.
Because mortgage lenders also know that most borrowers want as little hassle with their mortgage renewal as possible, the process is streamlined for simplicity and speed.
But the process can also be stacked in the lenders favor in terms of their future profitability and your future cost of borrowing.
Let me explain.
Depending on which mortgage renewal statistics you want to believe, around 80% of mortgage holders will remain with their current mortgage lender.
Most of the larger mortgage lenders will also provide mortgage renewal options at their posted rates.
Typically, these mortgage providers are prepared to offer a lower rate to retain your business, but opt to provide the posted rate to basically see if you will blindly accept what is being offered.
In most cases, it is a quick sign back and the mortgage continues under the newly inked interest term.
The better approach from the borrower side would be to consider his or her mortgage refinancing options in order to have a market comparison available to them.
If their existing lender is providing a market competitive rate, then it likely makes good sense to stay where they are and not go through the hassle of moving their mortgage to another lender.
But if their current mortgage provider is not competitive to other offers, then the cost of changing over can be a small fraction of what can be saved in interest costs over time.
In some cases, competitive offers for mortgage refinancing will also be prepared to pick up the mortgage transfer costs in order to gain your business.
The key is to do some ground work to determine if the renewal you have in hand is providing you with a competitive mortgage rate.
The best and simplest way to determine this is to work with an experienced mortgage broker who can quickly provide you with mortgage pricing options that are relevant to your situation and requirements.