Mortgage FAQ time!

This is an excellent question. Kudos to Stan for being rather innovative in his financing, however there are two major drawbacks to why this can’t work:

1 / The secondary lender market usually charges 6.99% on exception, or 10% to 14% as a standard, for their rates. Remember, secondary lenders stand behind the first lender - the bank - and are more open to risk. They are exposed to a change in the marketplace, and the primary takes their money first if a power-of-sale situation happens. Therefore, the rates are high and the lender fees can be quite prohibitive also.


2 / Primary lenders almost always as a rule do not allow for secondary financing in their contract commitments. By most, I mean the “Big5” and typical mortgage lenders such as MCAP, Laurentian Bank, National Bank, Merix Financial etc. Home Trust and Equitable Trust explicity do allow for secondary financing but must be first made aware of it.

Therefore, it couldn’t and wouldn’t work, but I respect the attempt!


A Note On Construction Financing

Generally speaking Construction Financing is given based on end value of the property. The maximum that most private lenders will finance is to a maximum of 75% of the value on the finished product. To give numbers to this scenario:

Let’s say you have a piece of land that’s worth $600K with a mortgage of $300K (most land financing goes up to maximum of 50%). The project you wish to build will have an end value of $1M. The end value is determined by an appraiser and is based on drawings, plans, permits and cost estimates. A lender may be willing to go to 75% of that total minus the value of the 1st mortgage, so in this scenario that would lend up to $450K to finish your project. However, you never get all the money in one lump sum. Instead, in order to make sure the construction program is being executed appropriately, the money is given in a series of draws with a 10% hold-back each time, based on the appraisal at the time of each draw. In our situation here, the lender would give 33% of $450K each time a phase of the project is finished, and 10% of that is held back until the end. As such, a client must have at least some capital in order to undertake this so they are able to pay their contractors and continue on.
Private lenders may go to 75% of end value, where as institutional lenders like CMHC will go to 65%. Private lenders are more expensive but are also able to provide more funds.

Construction financing is also not cheap. Privately, it’ll run you to 9% to 15% in interest (interest-only payments), and 2-4% lender fees. Institutionally would usually be about 3 points less in the rate…


Now That You’re Approved…

Getting an approval can sometimes be easier than closing a deal. I’ve seen times where an approval comes to me within an hour, but closing the deal can take weeks. Here’s a primer on how to ensure a smooth closing:

  • Employment
  • Most lenders require a recent job letter (30 days old), and recent paystub. If you are an hourly-wage employee, 2 years of T4s or Notices of Assessment may be required. Keep in mind if your representative in HR is going away on vacation, the bank must have someone to verify the employment with, therefore the sooner we get the employment letter, the sooner the bank can cross this off their “to-do” list.


  • Down Payment
  • There are many options to satisfy the downpayment condition, including: GICs, RRSPs, Home Equity Lines of Credit, and regular savings. If your downpayment is coming from an immediate family member, a gift letter is required. To satisfy the downpayment condition, banks must see 90-days history from all accounts where the moneys are coming from and/or a downpayment along with deposit to account from that source.


  • Photo ID, Void Cheque, Lawyer
  • These three are mandatory for us as mortgage agents at Mortgage Edge.


  • Maintaining Clean Credit
  • I have seen a few deals collapse at the last minute because of this. Say a client is on the line with qualifying, they have some debts but are still in line with the numbers. They get approved, and suddenly take on a new car lease of $600/month. This suddenly takes them out of the qualifying range! A bank is allowed to check the credit 5 days prior to closing (as per their contracts), so it is essential that the credit remain clean.





    How To Reduce Amortization

    Simply put, amortization is defined as the term at which you have to repay your mortgage. Until April 19th, the maximum amortization allowed was 40 years. Since then, 35 years is the maximum that a client can amortize their mortgage in Canada, with the exception being Equitable Trust - allowing for 40 years under their product guidelines. As soon as the extended amortization was introduced, clients jumped on it in order to reduce cash flow - however the “forced savings” model went out the window. Even though a great majority of mortgage products allow for some form of pre-payment (10 to 25%), a great majority of clients do not take advantage of these.

    Think about it: 35 years is a very very long time to pay off a mortgage. I’ve had clients who have managed to do it in under 10 years, normal working people with normal paying jobs. I’m not here to argue that you should sacrifice the next decade of your life to do the same, but I want to show you just how easy it can be to pay down the mortgage quicker, and almost without noticing you are doing so. Now that rates are low, I will use the example of a 3.59% 5-year fixed, simply because it is a standard rate, and one that will give us a 5-year window into potential savings (as opposed to a variable rate mortgage, which can go up in the next 5 years)

    Example: $250,000 mortgage (pretty standard across the board) - at 3.59% with a 35 year amortization schedule gives us monthly payments of $1042/month. By paying this bi-weekly instead of monthly, we’ve already reduced amortization down to 29 years and 11 months - and this just means one extra months’ worth of payment per year. Now,…


    Getting Married? Contact The Credit Bureau

    If you are thinking of getting married, one very important question you’ll have to face (besides where will your mother-in-law sit), is if you are going to change your last name, or even hyphenate it. One of my best friends (and a client) got married and changed her last name. Lo and behold when it came time to arranging her mortgage financing, I did a quick check on her new last name, and sure enough the credit was brand new (active for 3 months). Trouble was, her old credit was 10 years active (and fantastic). We had to make a call to equifax and transunion to consolidate these two, and the lender totally understood our situation (using her new credit, she would not have qualified for 5% down).

    If this sounds like your situation, here’s where to contact Equifax http://www.equifax.com/contact_us/en_ca and TransUnion http://www.transunion.ca/ca/aboutus/contactus_en.page

    Keep in mind you’re contacting the credit agencies, so have all your personal information on file when you make that call.

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