When planning a real estate project, securing a mortgage loan is crucial to achieving your goals. As an investor, you’ll want to ensure you get the best terms, including a competitive interest rate.
So, how can you make this happen? The key is finding the right mortgage lender to suit your needs.
What is a mortgage loan?
A mortgage loan is a loan provided by a financial institution where a real estate property is used as collateral. This means the borrower pledges the property as security for the loan, and the lender can take possession of it if the loan is not repaid.
These loans are typically repaid through monthly instalments over a set period. Mortgage loans can have either a fixed or variable interest rate, depending on the terms of the agreement. Before applying for a mortgage loan, it’s important to do thorough research. Take the time to carefully evaluate all available options to ensure you make an informed decision that aligns with your financial situation and goals.
Why obtain a mortgage?
A mortgage loan is a crucial step for individuals looking to achieve their life goals, especially when it comes to real estate. It is mainly used to finance the purchase of a property or to fund renovation projects.
Using the services of a mortgage broker
If you need assistance or are short on time, you can opt to work with a mortgage broker.
A mortgage broker helps by finding the best offers for you and providing a list of mortgage lenders ready to offer you a loan. This service not only saves you time, but it is also completely free of charge. The financial institution is responsible for paying the broker, not the borrower.
How to choose your mortgage lender?
A key question to ask yourself is: who can provide you with a mortgage loan? While banks are often the first option that comes to mind, they are not only competent institutions in this field.
A major financial institution
In Quebec, several major financial institutions are well established, including:
- Desjardins Group
- The National Bank of Canada
- The Royal Bank of Canada
- The Laurentian Bank of Canada
These institutions are recognized for their reliability and professionalism, offering mortgage loans that provide peace of mind. Most Canadians have a bank account with one of these organizations.
Your own bank
As mentioned, a bank is often the first traditional lender that comes to mind when choosing a mortgage provider. This could be either a local credit union or a major financial situation.
The main advantage of turning to your bank is its convenience. Many of us have out banks’ app on our smartphones, making it easy to schedule an appointment with your advisor to discuss obtaining a mortgage loan. You advisor has direct access to your financial status and credit score, allowing them to offer a quick financing solution.
While this option is convenient, it doesn’t always provide the best loan terms for borrowers. Therefore, it’s important to explore other alternatives available to you.
A private lender
Another option for choosing your mortgage lender is to work with private lenders. These are typically private companies that pool capital from investors or individuals who lend their own money.
In practice, private lenders generally offer loans with shorter repayment periods and typically higher mortgage payments compared to traditional lenders.
Why use a private lender?
There are several good reasons to consider using the services of private lenders.
You have a poor credit score
This option can be especially useful if you have a poor credit score, which can occur due to missed credit card payments or taking out a second mortgage shortly after the first. Private lenders are often more flexible and willing to work with individuals whose financial profiles may not meet the approval criteria of traditional financial institutions.
Little or no down payment
A down payment is typically required to show your commitment and financial strength as a borrower. However, if you don’t have a down payment available, perhaps due to a recent car purchase for example, traditional lenders may offer unfavourable loan conditions. Private lenders may be more willing to work with you, even without a substantial down payment.
Irregular income
Private lenders are also a good option for individuals with irregular income, such as self-employed workers. Traditional lenders may be hesitant to approve loans for those with fluctuating earnings, but private lenders are often more flexible in these cases.
You need fast financing
If you require quick financing and your situation is urgent, private lenders can be especially helpful. They typically offer faster approval and processing times compared to traditional financial institutions, making them a viable option when time is a critical factor.
Disadvantages of using a private lender?
The main disadvantage of going through a private lender is that the interest rate will be significantly higher than with a traditional lender. In fact, the rate is often 2 or 3 times higher than a standard mortgage through the amortization period is usually shorter. This result in much higher mortgage payments over the long term.
Additionally, private lenders tend to charge more extra fees than traditional lenders, such as legal or brokerage fees, which increase the overall cost of the loan.
Finally, this type of loan offers less security regarding the property you own. Mortgage payments are less regulated, and private lenders can more easily repossess your property if you fail to make repayments.
What are the risks associated with a mortgage loan?
There are several risks associated with mortgage loans. First and foremost, the risk of having your property or other assets repossessed if you default on payments is significant. This risk can arise more quickly, especially when dealing with a private lender.
Before reaching the point of default, another issue could occur. You may find it difficult to make your mortgage payments while still struggling to cover monthly expenses. This can happen if you haven’t fully accounted for your income and expenses before applying for the mortgage loan.
Finally, there are risks related to the loan-to-value (LTV) ratio. This ratio determines the risk level of the mortgage based on the account borrowed compared to the property’s value. A transaction is considered riskier when the outstanding balance of the loan exceeds 80% of the property’s value. This higher LTV ratio can lead to higher interest rates and tougher financial conditions.
What is the best mortgage lender?
There is no definitive "best" mortgage lender. The ideal choice depends on various factors, including your credit score, budget, and the nature and goals of your investment. It’s important to assess these elements before making a decision. Ultimately, your bank advisor or a mortgage broker can guide you in making the right choice and considering both options beforehand can help ensure you select the best lender for your needs.
Are you looking to secure a mortgage loan?
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