A Detailed Guide to Short-Term Mortgage Financing in Ontario
Short-term mortgage financing is a critical tool for homebuyers, homeowners and investors in Ontario, especially in real estate transactions. It provides individuals with the flexibility to manage their finances effectively. This article explores various short-term financing options available in Ontario, including short-term mortgages, second mortgages, home equity loans, HELOCs, bridge financing, and open mortgages.
Understanding Short-Term Mortgage Financing
Short-term mortgage financing refers to a mortgage with a duration typically up to three years or less. These types of mortgages stand in contrast to long-term mortgages, which usually extend over a period of five years or longer. Short-term mortgages are characterized by their shorter duration, sometimes with variable interest rates, and the flexibility they offer borrowers. They can be an attractive option for those who anticipate a change in their financial situation or the economy, due to the ability to be paid off and discharged sooner, and their greater flexibility, especially when dealing with alternative and private lenders.
Advantages and Disadvantages of Short-Term Mortgages
Like any financial decision, opting for a short-term mortgage comes with its own set of benefits and potential risks. On the plus side, short-term mortgages offer many benefits, as you can see in the next section. They also offer greater flexibility, allowing borrowers to reassess their financial situation and adjust their mortgage strategy more frequently. However, these advantages come with potential risks such as exposure to interest rate fluctuations, which can increase regular payments, and the need for frequent renewals or refinancing, which can be time-consuming and costly.
Why Choose Short-Term Financing?
There are several reasons why someone might opt for short-term financing instead of a more common term of 5 years. Here are some of the reasons:
- Anticipated Changes: Life is unpredictable. If you anticipate a significant change in your financial situation or the economy, a short-term mortgage can provide the flexibility you need. For instance, if you’re planning to start a family, change careers, or retire in the next few years, a short-term mortgage allows you to reassess your financial situation and adjust your mortgage strategy accordingly.
- Job Related Reasons: If you require mortgage financing, but you recently changed jobs, or you are still in your probationary period, your current employment situation might not meet the requirements of traditional lenders. In situations like this a short term financing can bridge the time until you are fully employed, and a lender is satisfied with your employment status, so they can offer you a longer term mortgage.
- Moving Away: This could be due to relocating to another area, province, or country for employment, school, or family reasons.
- Strategic Response to Rate Fluctuations: If you anticipate that mortgage rates will decrease in the future, a short-term mortgage can be a strategic choice. It allows you to hedge against rate fluctuations by delaying the lock-in to a long-term rate, and it provides the opportunity to access potentially lower rates when you renew your mortgage.
- Frequent Refinancing: In periods of rapid property value increases, some owners do frequent refinancing. If you want to refinance your mortgage (for example, to take advantage of a lower interest rate or to borrow against your home equity), it’s typically easier to do this with a short-term mortgage. This allows them to avoid term penalties for early repayment. With a longer-term mortgage, you might have to pay a prepayment penalty to refinance before the end of your term.
- Avoiding Early Repayment Charges: If you plan to sell your home or refinance in the near future, a short-term mortgage can help you avoid early repayment charges. These charges apply when you pay off your mortgage before the end of the term.
- Temporary Funds: When a larger monetary windfall is coming, such as sale of larger asset or a property, inheritance, settlement, or similar, but you required funds fast, a short term financing could be an option.
- Emergency Funds Requirement: When an emergency happens (family, health, financial, etc.), and you need the funds fast. Some lenders can close fast and have the funds to you in just a few days.
- Renovation: If you’re planning a major renovation project, a short-term mortgage can provide the funds you need. Once the renovation is complete and has potentially increased the value of your home, you could refinance to a long-term mortgage.
- Property Investments: Real estate investors often use short-term mortgages to finance property purchases. The flexibility of short-term mortgages can be advantageous for investment properties. It offers investors the flexibility to manage their finances effectively while achieving their property investment goals.
- Short Term Property Purchases: This can be particularly beneficial if you’re planning to sell the property in the near future. Not everyone stays in their home for long periods of time, some people actively search for deals, and buy and sell frequently.
- BRRR Strategy: The Buy, Renovate, Rent, Refinance (BRRR) strategy is a common real estate investment strategy that often involves short-term financing. The goal is to buy a property, renovate it to add value, rent it out to tenants, and then refinance to a long-term mortgage based on the new, higher property value.
- Build Value Before Refinancing or Before Selling: Similar to BRRR, with this strategy the owners improve the property to increase the value before putting it on the market for sale or before refinancing, as the improved property will appraise for more than in the previous condition.
- Converting a Property Into More Than One Unit: Again similar to BRRR with this strategy the owners improve the property to add another unit, either in a basement or as an addition, and then have the opportunity of additional rental income. This can help in two ways, increased appraised value for refinancing or sale purposes, as well as higher income for easier mortgage qualification.
- Avoiding Power of Sale and Foreclosure: If you’re facing the threat of power of sale or foreclosure, a short-term mortgage can provide the funds you need to pay off your existing mortgage and avoid losing your home.
- Construction funds: When building a new home for yourself, or even as a home builder in the business of building and selling houses. This could be for the land purchase or for the cost of building.
- Deposit for the Next Purchase: If you’re planning to buy a new home or another type of property and need funds for the deposit, a short-term mortgage can provide the necessary funds.
Short-Term Financing Options Provided by TheBroker.ca Ltd
At TheBroker.ca Ltd, we offer a variety of short-term financing options to cater to the diverse needs of our clients. Here are some options you might consider:
- Fixed-Rate Mortgages: Duration 6 months to 3 years. These short-term mortgages have a fixed interest rate for the duration of the term. They are ideal for borrowers who prefer stability in their monthly payments.
- Variable-Rate Mortgages: The interest rates on these mortgages can fluctuate based on market conditions, which can make budgeting more challenging. They can be a good choice for those who can tolerate some risk for potentially lower interest rates.
- Open mortgages: Open mortgages offer the flexibility to make prepayments or pay off the entire mortgage at any time without penalty. This type of mortgage is ideal for homeowners who are planning to sell their home in the near future or those who are expecting to make a large lump-sum payment towards their mortgage.
- Second Mortgages: A second mortgage is when you take out a second loan on an already mortgaged property, allowing you to borrow against the equity built up behind your first mortgage. Second mortgages can be set up as a regular mortgage, home equity line of credit (HELOC) or a home equity loan.
- Home Equity Loans: Similar to a mortgage, home equity loans allow homeowners to borrow money secured against their home equity. Financial institutions will use the amount of home equity you have to determine how much money you may borrow.
- Home Equity Line of Credit (HELOC): A HELOC can serve as a short-term financing option, allowing you to borrow against the equity in your home. This option provides flexibility in terms of repayment and can be a good choice for those with significant home equity.
- Bridge financing: Bridge financing also known as a bridge loan, is a short-term loan with the term of only a few months, that helps homeowners purchase a new home by accessing the equity in their current homes. It basically helps “bridge” the gap between the time you buy your new home and sell your current home. They are particularly useful when the closing dates for both the home you’re selling and the home you’re buying aren’t in sync.
- Alternative Lenders: Alternative or B lenders can offer competitive rates and flexible terms, and they have terms of one to three years. They can be a good option for borrowers looking for more personalized loan products.
- Private Lenders: Private lenders can provide short-term loans quickly, often without the stringent requirements of traditional lenders. This can be a good option for borrowers with unique circumstances or those who need funds quickly. While the interest rates may be higher, the speed and flexibility of private lenders can be a valuable trade-off in certain situations. Some private lenders offer short-term mortgages for 3, 6, and 12 months.
Remember, the best choice depends on your specific circumstances, financial goals, and your risk tolerance. At TheBroker.ca Ltd, we’re here to help you navigate these options and make the decision that’s right for you.
Practical Steps in Securing a Short-Term Mortgage
Securing a short-term mortgage involves several steps, from talking to a mortgage broker, providing the required information and documents, having the broker assess your financial situation and shop around for lenders, to negotiating terms and closing the deal. It’s important to be well-prepared and informed throughout this process. Mortgage brokers can be vital in helping borrowers obtaining a short-term financing. The advantages of using a broker is that they have an access to a wide range of lenders and offer personalized service.
Word of Caution
Ensure that the lender is legitimate business that has the proper credentials to operate in your province. You can usually verify a lender’s licensing status through your province’s financial regulatory agency, as some lenders are also licensed as mortgage brokerages, or their financing is offered through licensed mortgage brokers. Avoid dealing with lenders that cannot be verified, and their only presence is on social media. If an offer sounds too good to be true, it most likely is. Remember to never send any upfront fees to anyone. At the time this article was written, regulations forbid anyone from charging any upfront fees if the financing is for less than $400,000. Finally, trust your gut. If a lender doesn’t feel right to you for any reason, it’s okay to walk away and find another one. You want to work with a lender who makes you feel comfortable and confident in your decision. The broker you choose to work with should be screening the lenders for you. It is their job to find you a suitable financing, but also to prevent any fraudulent lenders taking advantage of you. The broker will be able to explain each step of the process, the costs involved, and to make sure you fully understand everything before signing.
Your lawyer is also your secondary point of safety. All property related financing has to be properly registered, and this is where a lawyer comes in. Any exchange of money, from a lender to you, as well as any fees from you to a lender, will be done through a lawyer.
Informed decision-making is key when it comes to short-term mortgage financing. By following the information outlined in this article, and understanding the features, benefits, and risks of short-term mortgages, homeowners and investors can make decisions that best suit their financial needs. Choosing the right short-term financing option depends on various factors including your financial situation, your property goals, and the current market conditions. Remember, every financial situation is unique, so what works for others might not work for you. It’s always recommended to consult with a mortgage professional to understand which option is best suited for your needs.
For personalized advice and consultation on short-term mortgage financing, current mortgage rates, and more, reach out to us at TheBroker.ca Ltd. Contact us today for a free consultation! For any questions or further assistance, feel free to reach out to us via our website or call us at (519) 252-9665.
This article was brought to you by TheBroker.ca Ltd., a licensed mortgage brokerage. Our licensing status with the Financial Services Regulatory Authority of Ontario (FSRA) can be confirmed through this link.