Getting out When you’re Upside down on your Mortgage

High Ratio – with new relaxed banking rules, it is now possible to put as little as 5% down payment towards a rental property purchase. If contributing less than 20% down payment (or equity) for a purchase or refinance, this mortgage would require special mortgage risk insurance with Canada Mortgage and Housing Corporation (CMHC) or one of the other insurance providers (ex. Genworth or AIG).Mortgage Terms: What You Need To Know – Forbes Advisor

Conventional – depending on the lender, it is potentially possible to finance a rental up to 80% Loan to Value (LTV), without the need for High Ratio (ex. CMHC) insurance. Of course, this would require 20% down payment from your own resources typically. 二按 Some lenders still only lend 65% to 75% on a conventional rental mortgage, requiring 25% to 35% down payment.

Second Mortgage – another mortgage that can be financed in 2nd position to the above 1st Conventional mortgage. This type of mortgage is usually from private or smaller lender sources. Such lenders will potentially advance up to 75% to 80% LTV (with some Vendor Take back sources going up to 90%, see below).

Vendor Take back (VTB) – can be in the form of a 1st or 2nd mortgage, where the seller lends part (or all) of their equity to the buyer. Sellers have been know to extend up to 90% LTV. It’s important to note, that only a select few 1st mortgage lenders will allow a 2nd mortgage in behind their 1st mortgage at the purchase stage. If a 2nd mortgage is allowed, it usually is limited to 85% to 90% LTV.

Fixed Rate Mortgage – has a fixed rate and a fixed payment for a specified number of years (referred to as the Term). Terms range from 6 months to as high as 18 years in Canada. Generally, the longer the term the higher the rate in exchange for the privilege of knowing exactly what your rate and payment will be for many years (stability). If a property is sold and another is purchased more or less at the same time, then a fixed rate mortgage can be potentially ported (moved) to the new purchase. Otherwise, if a property is sold before the term on a fixed rate mortgage is up, then an early payout penalty may apply. Fixed rate mortgages can be Open or Closed.

Variable Rate Mortgage – has a floating rate and either a fixed or floating payment (depends on the lender) for a specified term (often 5 years). The floating rate is tied to the Prime Lending Rate of the major banks (which is tied to the target rate of the Bank of Canada). In the past, we have seen variable spreads as low as Prime less 1. 00%. During the international credit crisis of 2008/2009, we saw rates as high as Prime plus 2. 00% (yet prime was so low, the actual rate was still attractive). Variable terms are usually 3 or 5 years. Variable rate mortgages can be Open or Closed.

Home Equity Line of credit (HELOC) – a floating rate loan that often can have a higher rate than a variable mortgage, but offers the flexibility of paying off a balance without penalty and then re-advancing funds again later if needed. It can be used much like a credit card, but with much higher lending limits and much lower interest rates (since the loan is secured by real estate). Rates are again usually tied to prime.

Open Mortgage – often confused with the variable rate mortgage, this refers to a mortgage where the borrower is able to partially or fully payout the mortgage without incurring an early payment penalty. Rates are often much higher for an “open” feature, so unless the goal is to finance and own a property for a short term (typically a year or less), an open mortgage can be an expensive option. Occasionally, on a promotional basis, lenders are offering Open Rates that are nearly as attractive as Closed Rates (offering the best of both worlds: a great rate and good flexibility). Open mortgages can be Fixed or Variable.

Closed Mortgage – a borrower engages in a commitment with a lender for a certain number of years. In exchange for this commitment, the lender is usually able to offer a much more attractive rate. As mentioned, fixed terms can be 6 months to 18 years and variable terms are usually 3 or 5 years. If a closed mortgage is paid out in full before the terms is up, then an early payment penalty may apply. Many closed mortgages allow partial early payments (typically 15% or your original mortgage balance) each year without penalty.

Collateral Mortgage or Loan – these are becoming more and more popular with lenders and are legally very different from regular mortgages. HELOC’s for example, are a form of a Collateral Mortgage. A collateral mortgage is available as a fixed or variable rate and may appear to be a “regular” mortgage. Essentially they are personal loans secured by real estate. Borrowers may like them due to their flexibility (the possibility of re-advancing funds down the road) and lenders like them since borrowers are more likely to stay committed (since they are not easily transferred to a new lender in the future) and they are not assumable to new borrowers. We will cover much more on these creative products later. Examples of lender names for these products are the Matrix, STEP, All-in-One or simply HELOC.

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