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Conventional mortgages are not for everyone. Sometimes a private mortgage is the best or only way to finance the property of your dreams. Private mortgages are tailored to the needs of the individual. They come all shapes and sizes. Most importantly, private lenders are more concerned with the value of the property that will secure the loan than in the credit rating of the lender.

Private mortgages are short term loans. Typically, they run for terms of between six months and three years. They are also interest only loans. The interest rate on a private mortgage will be higher than you’ll pay on a conventional mortgage. The higher interest rate reflects the higher risk to the lender.

You will also have to pay closing fees for the loan. You should budget for between 1% and 3% for these fees, but most lenders will include the fees in the mortgage. You will also need a down payment of at least 15%.

A private mortgage is the best fit for you under the following circumstances

• You have a low credit rating and have been turned down by a conventional bank
• You are self-employed or working off commission and have difficulty proving your income
• You plan to buy an unconventional property that the banks won’t finance
• You need the money quickly to take advantage of an investment opportunity.

Applying for a private mortgage is quick and easy. Private lenders do not have to wade through the bureaucracy common amongst the bigger institutions.
Your private lender will help you with an exit strategy because at the end of the term you should be in a position to pay back the capital amount and refinance through a cheaper conventional loan.

A second mortgage is a loan secured by a property against which you already have a mortgage. It is a convenient way to convert the equity in your home into cash, since you can use up to 85% of your home equity for this purpose.

Equity is that portion of your home which you own. It is the difference between the market value of the property and the amount that you owe on it. Every time you make a payment, a portion of that payment goes to interest and the rest comes off the principal, growing your equity. When the value of property increases over time, so too, does your home equity.

If you’re thinking of renovating or extending your home, need money to send your children to college or simply wish to consolidate your debts through a cheaper secured loan, a second mortgage could provide you with the cash to do just that.

A second mortgage is subservient to the first, meaning that if you default on payments and the house is sold as a result, the holder of the first mortgage will receive payment before the second mortgage holder. For this reason, the interest on a second mortgage will be higher than on your primary mortgage. It is, nonetheless, still a lot lower that the interest on unsecured debts.

Depending on your needs you can take the money in a lump sum, or you may opt for a Home Equity Line of Credit or HELOC. A HELOC offers revolving credit, where you can take the money that you need when you need it. You pay interest only on the amount that you have withdrawn.

If you’re planning to buy commercial rather than residential property, unless it’s for investment purposes, you’ll need a commercial mortgage.

Applying for a commercial mortgage can be complex because when it comes to suitability, it is not the individual that is assessed but the business. Because of this complexity it can take up to a year to obtain approval on the mortgage. You’ll have to provide financial statements and income forecasts. As the owner of the business your own creditworthiness is also paramount.

Commercial mortgage interest rates are also considerably higher than the residential mortgage, reflecting the higher risk inherent in the commercial mortgage. The risk is higher because the payment ability depends on the business’ success.

It is difficult to gauge what a market related interest rate is because rates differ between industries and businesses. A certified mortgage broker that specialises in commercial mortgages is invaluable when it comes to estimating what a fair interest rate is for the property that you want to buy.

The term of a commercial mortgage is typically anywhere between three and ten years.

Lenders financing a commercial mortgage generally require a fairly large down payment to reduce their risk. A loan to value ratio of between 80% and 65% is what they’ll look for.

Before the lender approves the mortgage, he’ll want an appraisal and a survey of the property.

If you’re older than 55 and your home is fully paid-up you may be eligible for a reverse mortgage. A reverse mortgage is a financial tool that many home owners use to make a secured loan against their property. It is designed for older people who may find it difficult to cope with the cost of living. By accessing your home equity, you can fund your way of life without having to sell your home.

If you opt for a reverse mortgage you can access up to 55% of the value of your home. How much it is worth will depend on your age, the appraised value of your property and the mortgage provider. You can take a lump sum or smaller amounts as you need them. You could even use the lump sum to buy an annuity, ensuring yourself a regular income.

With a reverse mortgage you are not required to make regular payments. You only have to pay back the loan if you sell the house or move out. At which time you will have to pay back the value of the loan and any accumulated interest.

On your death the bank will sell your home and use the proceeds to pay back the amounts owing on the reverse mortgage. Your beneficiaries will receive what remains of the money.

A reverse mortgage offers home owners a handy way to improve their standard of living, giving you control of your finances. On the downside, they are more expensive than conventional mortgages as they have higher interest rates. There are also other costs involved including appraisal and closing costs.

When you refinance your mortgage, you replace one with another. The new mortgage with have different terms and conditions and a different interest rate. There are many reasons that home owners choose to refinance their mortgage. These include

• Taking advantage of lower interest rates – when interest rates drop it may pay you to refinance, even at the expense of the penalties on your existing mortgage. Savings on interest can mount up when calculated over the term of the mortgage.
• To cash in on home equity – You can borrow up to 80% of the equity in your home. Cashing in on your home equity can help you to realise your dreams like furthering your education or extending or renovating your home.
• Consolidate debt – You can use the equity in your home to save money. Secured debt attracts substantially lower interest rates than unsecured personal loans and credit card debt. Using your home equity to consolidate debt can therefore save you loads of money.

When you choose to refinance there are several choices you can make

• A new mortgage – A cash-out mortgage with new terms and conditions
• A Home Equity Line of Credit or HELOC – A revolving credit agreement where you withdraw money when you need it and you only pay interest on the amounts that you have withdrawn.
• Blend and extend – A mortgage agreement whereby you add to your current mortgage amount and combine the interest rates. Blend and extend mortgages attract higher interest rates, so you should get expert advice before opting for this type of mortgage.

Certified Mortgage Brokers Barrie can help you to make the choices that will suit your long-term financial strategy

A construction mortgage is designed to finance a property planned for or under construction. There are two basic types of construction mortgage:

A completion mortgage
A completion mortgage is one where a single payment is made on completion or on occupation. To qualify for a completion mortgage, you would have to make a down payment, but your lender may allow you pay it in instalments.

An advantage of the completion mortgage is that you can make changes to the mortgage up to 30 days before completion. This means that if there are any upgrades required or errors in costing you can adjust the mortgage to take account of these.

Also beneficial is the fact that the lender generally insists on completion of the project within 120 days of starting. On the downside, if your personal circumstances take an unfortunate change you may no longer qualify for the amount of money that you need.

A draw or progress draw mortgage
Many owner/ builders choose a draw or progress draw mortgage. As the name suggests the loan is paid out at various points of progress in the construction process. This ensures that the builder has a regular cash flow.

On the downside you can’t change the mortgage once it has been approved. You will pay interest from the first payment and it could be a long time before you take occupation. Finally, you are liable for the appraisal costs necessary to ensure that progress payments are made.

A HELOC is a secured loan under which the home serves as security. A Line of Credit is a form of revolving credit whereby you can borrow incrementally up to a pre-determined maximum. You only have to repay the interest and you only pay interest on the amounts that you have borrowed.

You can access up to 65% of your home equity through a HELOC. In addition, the HELOC and fixed mortgage may not exceed 80% of your home equity. Interest on a HELOC is variable and is attached to Prime. This means that the interest rate moves up and down with movements in the prime interest rate. The rate you pay is typically higher than the rate that you would pay on a fixed mortgage, but the flexibility is well worth the cost.

Advantages of HELOC’s

• These are easily accessible loans at relatively low interest rates
• Because they are secured loans the interest rates are lower than the interest rates on unsecured personal loans or credit cards
• Access to cash is flexible – you can access the money as you need it.

Disadvantages of HELOC’s

• Concluding a HELOC attracts fees including appraisal, legal and application fees
• Interest rates could increase
• The bank could reconsider your loan and reduce the loan amount
• If you are undisciplined and choose not to pay anything off the principal amount you could run up your debt.

Mortgage porting is the act of taking your mortgage with all its current terms and conditions from one home to another when you buy and sell.

If, as is quite often the case, the new property is more expensive than the old, you can still port it and get the lender to arrange a blend and extend mortgage. If you choose this option and you qualify for the additional amount, your lender will add the additional principal onto the loan amount and then combine the interest rates. More often than not the lender will also increase the fixed term of the contract.

It makes sense to port your mortgage if the interest rate on your current mortgage is lower than the interest rates currently on offer for new mortgages. If it isn’t you may want to consider breaking the current mortgage, paying the penalties and getting a new mortgage at better interest rates.

Not all mortgages are portable and even if they are, they have a window period of 30 to 120 days in which to sell and the buy a new property. Typically, only fixed rate mortgages are portable. Most lenders will allow you to change your variable rate mortgage to a fixed rate and then port it.

Before you decide on whether to port your mortgage or to refinance you should consider all of the benefits and shortfalls. Porting can save you having to pay penalties and it can preserve the low interest rates that you enjoy. Porting a mortgage is only possible if you buy and sell the old and new properties at the same time.