Are Rural Mortgages More Affordable?

Are Rural Mortgages More Affordable?

Written by Lisa Rennie
Fact-checked by Caitlin Wood
Last Updated April 3, 2019

If you’re looking to buy real estate, odds are you’ll need to take out a mortgage to finance such a large purchase, unless you’ve got the funds to make an all-cash deal. That said, there isn’t just one type of mortgage out there. In fact, there are several varieties of mortgages available, depending on your needs, financial situation, and the type of property you plan to purchase.

Rural properties with lots of land are becoming increasingly popular among Canadians who are finding themselves being priced out of properties closer to urban areas. Buyers who are looking for a little more simplicity, quiet, and space to roam without having to pay an exorbitant price per square foot continue to seek out homes outside of the city.

Read this to learn more about the affordable housing crisis in Canada.

There’s little doubt that the further out you go from Toronto, Montreal, Vancouver, and other major metropolitan areas across the country, the cheaper homes are. If you’re planning to buy a property in rural parts, then you may be eligible to get approved for a rural mortgage.

The question is, what is a ‘rural mortgage’ and is it any more affordable than a conventional mortgage or any other home loan product?

What is a Rural Mortgage?

A rural mortgage is a loan product that lenders offer buyers who are planning to purchase land in a rural area outside of an urban centre.

The truth is, buying a rural property or acreage is a little more complicated than buying a typical home in the city, and the mortgages associated with financing such properties can be tricky. Even though the properties themselves are cheaper, lenders generally see rural properties – typically those on larger parcels of land – as riskier investments compared to the average mortgage. As such, these mortgages are harder to get approved for.

Why Do Rural Mortgages Come With Increased Risks For Lenders?

There are a handful of reasons why rural mortgages are seen as a risky endeavour for lenders to take on:

Rural mortgages don’t require a lot of equity from the borrower upfront – Since the borrower is not obligated to offer a large down payment, much of the financial burden lies with the lender.

Rural properties can be harder to resell – If the borrower is unable to make their mortgage payments, the bank will need to repossess the property and try to sell it on their own. The problem is, rural properties can be challenging to resell because of their remote location. Rural properties are notorious for taking much longer to sell compared to city homes, leaving lenders with the burden of holding onto the property and paying all its carrying costs until they’re able to find a willing and qualified buyer.

Considering how troublesome reselling a rural property can be, lenders may be willing to arrange to have your future wages garnished to recoup the cost of the mortgage. Lenders will consider this option simply because of the tediousness of finding another buyer who will pay as much for the property as the original sale in a timely fashion.

Are Rural Mortgages More Expensive Than Conventional Mortgages?

Financing rural properties with a standard mortgage is a common mistake made by many Canadians who buy farmland or acreage in rural areas. This blunder can end up costing borrowers thousands of dollars. Qualified and experienced mortgage specialists are aware of this and will look at all options, then connect you with a lender who will be able to offer you the best mortgage options.

That said, rural mortgages can be expensive. Since rural mortgages are considered one of the more risky loan types, they may end up costing a little more than your average mortgage. The higher the level of perceived risk for the lender, the more expensive you can expect the mortgage to be.

Need a better idea of how much mortgage you can afford? Click here.

One way to avoid paying more than necessary is to steer clear of any unnecessary clauses in the mortgage contract that could end up making the mortgage even more expensive. Some banks and lenders charge exorbitant fees for the simple act of processing your application. You can always find another bank or private lender that will charge lower fees. Always read the fine print.

Buying a House in CanadaInterested in know how much it costs to buy a house in your city? Check out this infographic.

Should You Choose a Fixed-Rate or Variable-Rate Rural Mortgage?

Rates on rural mortgages rise and fall according to market conditions at any given time, just like they would fluctuate with conventional mortgages. This is why it’s important to determine whether or not you prefer a variable rate or a fixed-rate rural mortgage. There are pros and cons to both options.

Fixed-rate mortgages provide more stability over the life of the mortgage, as each payment you make every month, stays the same because the rate stays the same. If rates increase after you are locked into a fixed-rate mortgage, you’re saving money. However, if the opposite happens and the rates decrease, you might lose out on savings during the life of your mortgage.

Why do different lenders offer different mortgage rates? Find out here.

If you have reason to believe that rates are on their way down sometime soon, then a variable-rate mortgage may be right for you. A variable-rate mortgage does not lock you into a particular mortgage rate, but rather stays open. Variable-rate mortgages are attractive to some borrowers because the rate is calculated according to the prime rate and is often lower than the fixed rate.

Payments are typically fixed over a certain time period, but as interest rates fluctuate, the amount that goes towards the principal will fluctuate too. For instance, the higher the rate goes, the more money would go towards interest. If rates continue to fall, a variable-rate mortgage could offer savings over time. But if rates increase, your interest payments could increase significantly.

If you’re on a tight budget, you might want to opt for something more stable with a more predictable payment structure. In this case, a fixed-rate rural mortgage might be best. That way you’ll be better able to budget accordingly and keep your finances in check.  

What if You Can’t Get Approved?

As we mentioned earlier, it can be tougher to get approved for a rural mortgage than other types of home loans. It can be very disheartening to be turned down for a mortgage that you need to make a real estate purchase.

Fortunately, there are other avenues that borrowers can take if they find that conventional banks and lenders are unwilling to loan out the money needed to finance a rural property.

More and more alternative lending resources are popping up in the mortgage realm for borrowers to take advantage of. Lending rules have become tougher ever since the housing bubble a decade ago, and as such, lenders have tightened the nooses when it comes to approving borrowers for home loans.

However, as more stringent lending rules are making it tough for many people to get a mortgage for a rural property, private lenders are filling the void and offering an alternate route. That said, working with private lenders comes with its own set of disadvantages.

Rural properties financed by private lenders come under heightened scrutiny. For this reason, rural properties are often unable to qualify for the same amount of capital compared to properties in urban centres. For instance, urban properties can usually be approved for a higher loan-to-value ratio (LTV – the ratio of a loan compared to the value of the home being purchased), sometimes as high as 95%. In comparison, rural properties are usually only eligible for no more than a 65% LTV ratio.

Want to know when you should consider a private lender? Click here.

What Factors Do Lenders Look at Before Approving a Borrower For a Rural Mortgage?

Aside from the loan-to-value ratio and the borrower’s financial history and health, the property itself is heavily examined before loan approval is granted. In fact, the property’s eligibility is more important than the borrower’s financial health and personal details.

Lenders look at a number of factors when determining whether or not a property is eligible for approval, such as:

  • The condition of the property (land, structures, water potability, etc.)
  • The location of the property (distance from nearest urban area, country/region, etc.)
  • How easy it is to resell the property if the borrower is unable to make their mortgage payments

Once the property passes these criteria, the lender will then determine whether or not the borrower is eligible to be approved for a rural mortgage.

The Bottom Line

A rural mortgage might be your best option when it comes to financing a rural plot of land. That said, it’s important to understand what a rural mortgage is and what it could cost you to obtain one. It’s also essential to gain some insight into what it takes to get approved for such a mortgage and why it may be tougher to secure than a conventional mortgage for a home in the city.

At the end of the day, your best bet is to pair up with a seasoned mortgage specialist who can guide you in the right direction and let you know which lender to work with. This professional will be able to provide you with the right mortgage terms and conditions, ones that will suit your financial situation best and boost your chances of mortgage approval.

Rating of 4/5 based on 5 votes.

Lisa has been working as a writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same. She's used a variety of financial tools over the years and is currently growing her money with Wealthsimple, while stashing some capital in a liquid high-interest savings account so that she always has a financial cushion to fall back on. She's also been avidly using her Aeroplan TD credit card to collect as many Aeroplan points as possible to put towards her travels!

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