Whether you hold acres of farmland or untouched wilderness, you owe a valuable asset. Learning more about the real value of your land can give you a rough idea of how you can use a rural mortgage to your advantage. Even small parcels may have great value if there are water or mineral resources found on them.
There are three major types of financial transactions which can sometimes be tricky when dealing with banks. These are land title loans, land mortgages, and rural property mortgages. They are tricky because banks often try to avoid granting them due to the perceived risk.
Here is a look at each one and why banks are reluctant to lend in each situation:
Land Title Loans
Banks are leery about these types of loans due to the risk in the event that the borrower cannot pay off their loan. A land title loan works in the same way that any title loan does, the title to the land is provided as collateral to secure a loan. The main reason why banks and other traditional lenders may think this type of loan comes with a high level of risk occurs when the borrower defaults on their loan. If a borrower cannot pay back the loan, the bank would be required to foreclose on the land and resell it to recoup its loses. The problem here is that depending on where the land is located it may be difficult to resell and thus has little to no value for the lender.
This is a type of mortgage loan that is used to a plot of land. The focus is again on the land itself, not what is on the land. This is one of the problems banks have with land mortgages. The investment is only on the lot itself. Land by itself is seen by banks as a less secure investment than land with a house or a farm on it (unless the location is great). If the debt cannot be paid down by the owner, then the land has to be resold, rented out, or have something built on it to increase its value, leaving the bank with nothing but a piece of land to sell if they have to foreclose on it. If you can get a bank to give you a land mortgage, it will tend to require a larger down payment than a normal mortgage does. This is so the buyer has a larger amount of equity in the land and the bank does not have to risk as much in upfront capital.
Rural Property Mortgages
These are mortgages granted by lending institutions which focus on properties typically located outside of an urban area, and in a rural development area. Such loans are considered among the riskiest to banks due to a number of factors. One is that many of these mortgages do not require much equity upfront from the borrower. That is, the owner of the property does not have to offer much of a down payment so the bulk of the financial transaction rests with the bank.
Secondly, if something happens and the buyer cannot pay back the loan, it is much harder to resell the property since it is often in a remote location.
These are the three major types of mortgages that banks avoid. Let’s face it. Banks don’t like risk, and these three categories represent more risk to them due to the fact that these types of properties are much tougher to resell if the borrower defaults on the loan.
So what is the solution for you if you need these types of mortgages? Don’t agree to unrealistic “clauses” that can set you back even further.
For those looking to invest in a plot of land to expand a business, purchase a farm, or simply want to own a home outside the city, it may be in your best interest to speak with an alternative or private lender. These types of lenders are able to offer more personalized mortgage products and cater to a wider range of clients.
An alternative lender is often the best choice for those consumers looking to use the land as collateral to gain access to a larger loan or a more favourable interest rate.
About Private Mortgage Lenders
Private mortgage lenders are not like banks. They can decide as they go how much risk they are willing to take on. They are not under the same overly structured regulations as banks and other traditional financial institutions, nor do they have to require unrealistic upfront equity payments if they don’t want to. They have the freedom to choose what they are willing to do, based on your ability to pay, and other factors. They can work with you to decide what you can reasonably afford and work out an arrangement that is good for both parties.
We Can Match Your With The Right Private Mortgage Lender
If you have been to the banks but they have turned you down, and you are in need of a land title loan, land mortgage, or rural property mortgage in Canada, contact us. Let us match you with the right licensed specialist who understands your needs and is willing to work with you to find a solution that fits.
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.