Know Everything About Multiple Mortgages In Canada

Multiple Mortgages in Canada Real estate is the go-to investment avenue. It is an all-weather investment opportunity to create wealth and future income. You can always park a pie of your surplus income in buying properties. To do this, you will certainly need one or more mortgages. Let us know everything about multiple mortgages.

“Owning over one condominium or having a diversified real estate investment in rental homes, vacation properties, commercial estates, etc. is something I have always aspired for,” said Oliver, in his mid-30s and lives in the Greater Toronto Area.

But why are Canadians going to own several real estate properties and increase their financial burden? Let us find this out and know more about multiple mortgages.

Should Canadians Invest in Real Estate and Own Several Properties?

Investments made in real estate are tangible. It prompts many conservative investors to get attracted to the sector. It has several other advantages, such as:

1. Helps in Generating Cash Flow

In a general sense, cash flow refers to the movement of money, including both inflows and outflows. This term in real estate refers to the net income you can generate through real estate investment.

It refers to the profits you can bring home after meeting all the mortgage payments and operating expenses, such as repair costs, renovations, etc.

For the investors who follow the ideology of buy-and-hold, cash flows help them immensely boost their income.

2. Capital Appreciation

“Why do people invest in real estate? Is it not too costly?” asked Noah, a young investor from a veteran real estate agent, Michael.

“Real estate appreciates and can generate returns to outperform the stock market by a long margin,” replies Michael.

Over a period, real estate never stops increasing in value. A constant rise in the population and inflation causes the ever-rising demand for real estate properties, keeping the prices moving north.

3. Creates Wealth and Equity

Real estate is a tangible asset and does not exist merely on paper, like most stocks, debentures, or units of different funds.

Because of its visibility, most financial institutions, private lenders, and mortgage companies readily accept it as collateral. By making a 20% down payment and buying some insurance policies, you own 100% of the residential house, which you can leverage to buy more properties and enhance wealth.

Buy Additional Properties Using Second or Third Mortgage

The reasons mentioned above might tempt enough for you to go to a few real estate agents.

Well, to do it, you will need finances. And if you are short on savings but have an excellent source of income, you will need a second or third mortgage to build your wealth.

You want to take additional mortgages over your primary mortgage, pass various tests and challenges. Let us have a closer look at all of them.

Challenges While Taking Multiple Mortgages

Leveraging your real estate to build your equity is a worthwhile activity that helps you eventually. However, there are challenges that you will face while obtaining multiple mortgage loans, which are:      

1. The Stress Test

“Getting a mortgage loan is not a piece of cake anymore. The revised stress test introduced by the federal government applies to everyone, whether you are getting your first mortgage loan or the tenth,” said Noah Crawford, a veteran mortgage broker presently operating in the Greater Toronto Area.

As per the latest stress test, if you secure a mortgage loan, you will be required to prove that you can meet the mortgage payments calculated at a much higher rate than your contracted rate.

This mortgage rate for a stress test is higher than:

• The lending rate of the Bank of Canada for five years

or

• The mortgage rate offered to you by your lender plus 2%

Let us understand this proposition with the following example:

• Leo is a salaried professional working as a software engineer with a multinational corporation.
• He purchased a condominium in the Greater Toronto Area three summers by securing a mortgage loan
• He is getting a good appreciation for his existing purchase
• It prompted him to add one more condominium to his kitty 
• He is looking for a second mortgage loan
• He has an offer from a leading bank at 2.75% per annum for $500,000 for 20 years

If Leo wants to secure another mortgage loan, he faces the stress test (which he must have cleared while obtaining the primary mortgage).

Leo will be required to prove that he can afford to pay the mortgage payments, calculated at a mortgage rate higher than:

1. Bank of Canada’s 5-year lending rate (as of 1^st June 2021) – 5.25%
2. 4.75% (2% + 2.75%)

Leo must prove that he can pay monthly mortgage payments of $3,369 (calculated at 5.25%) as against the original $2,711 (at 2.75%) to get his second mortgage loan.

2. Paperwork, Documentations, and Statements

If you have a mortgage loan already running and wish to secure a new one, the banks will be more cautious and want to assess your financial worth thoroughly. The requisite documents or statements will differ as per your type of employment. Let us have a quick look at them from the table below:

Nature of Income	Name of Document/ Statement	Preferred Number of Years
Salaried Professional	Pay StubsT1 General (it exhibits your annual income)	2 to 3 years
Self-employed	Notice of Assessment	3 years
Rental Income	Statement of Real Estate Rental	At least 2 years

* Miscellaneous documents include Heating bills, Property tax bills, Lease agreements, etc.

3. The Features of Real Estate Property Matters

“I wanted to buy a property in Fort Severn (a remote area), Ontario, but I find it tough to secure a good mortgage deal. The lenders say it is risky.,” said Liam Smith, a resident of the Greater Toronto Area.

It is difficult to get a mortgage loan for purchasing cottages, residential dwellings in flood zones, island paradises, and properties in rural/ remote areas, as most lenders consider such investments too risky.

“The bankers even want clear access to the mortgaged property during winters,” said Smith.

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