Are rural mortgages more affordable?
August 25, 2019
Buy real estate
If you want to buy real estate, it is likely that you will need to take out a mortgage to finance a purchase of this size, unless you have the funds to complete a transaction entirely in cash. That said, there is not one type of mortgage. In fact, several types of mortgages are available, depending on your needs, your financial situation and the type of property you plan to acquire.
Rural properties with lots of land are becoming more and more popular among Canadians who are being charged exorbitant prices for properties closer to urban areas. Buyers looking for a little more simplicity, tranquility and space to walk without having to pay an exorbitant price per square foot continue to look for accommodation outside the city.
There is little doubt that the further you get from Toronto, Montreal, Vancouver and other major metropolitan areas of the country, the cheaper the houses are. If you are considering buying a property in rural areas, then you can qualify for a rural mortgage loan. The question is what is a “rural mortgage” and is it more affordable than a conventional mortgage or other housing loan product?
What is a rural mortgage?
A rural mortgage is a loan product that lenders offer to buyers who are considering buying land in a rural area outside of an urban center. In reality, buying a rural property or an area 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 consider rural properties, usually located on large parcels, to be riskier investments than the average mortgage. As such, these mortgages are more difficult to approve.
Why do rural mortgages entail greater risks for lenders?
There are a handful of reasons why rural mortgages are considered a risky business for lenders:
Rural mortgage loans do not require much equity on the part of the borrower – Since the borrower is not required to provide a large down payment, the financial burden is largely on the lender.
Rural properties may be more difficult to sell – if the borrower is unable to make mortgage payments, the bank will have to repossess the property and try to sell it on its own. The problem is that rural properties can be difficult to resell because of their remote location. It is notorious that rural properties take much longer to sell than townhouses, leaving lenders the burden of sticking to the property and paying all the shipping costs until they are in able to find a willing and qualified buyer.
Given the difficulties in reselling a rural property, lenders may be willing to arrange for your future salary to be seized in order to recover the cost of the mortgage. Lenders will consider this option simply because of the hassle of finding another buyer who will pay as much as possible for the property at the initial sale.
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 land in rural areas. This blunder can cost the borrowers thousands of dollars. Qualified and experienced mortgage professionals are aware of this and will look at all the 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 most risky types of loans, they can cost a little more than your average mortgage. The higher the level of risk perceived by the lender, the more expensive the mortgage will be.
One way to avoid paying more than necessary is to avoid any unnecessary clause in the mortgage loan agreement that could make the loan even more expensive. Some banks and lenders charge exorbitant fees for simply processing your request. You can always find another bank or private lender that will charge lower fees. Always read the fine print.
Should you choose a fixed or variable rate rural mortgage?
Rural mortgage rates rise and fall according to market conditions at any time, just as they would fluctuate with conventional mortgages. That’s why it’s important to determine whether or not you prefer a variable or fixed rate rural mortgage. There are advantages and disadvantages to both options. Fixed rate mortgages provide greater stability over the life of the mortgage because each payment you make every month stays the same because the rate stays the same. If rates go up after being locked into a fixed rate mortgage, you save money. However, if the opposite happens and rates go down, you could lose money over the life of your mortgage. If you have reason to believe that rates will soon drop, a variable rate mortgage may be right for you. A variable rate mortgage does not lock you into a particular mortgage rate, but stays open. Variable rate mortgages are attractive for some borrowers because the rate is based on the prime rate and is often lower than the fixed rate.
Payments are generally fixed over a period of time, but as interest rates fluctuate, the amount allocated to the principal also fluctuates. For example, the higher the rate, the more money will go to interest. If rates continue to fall, a variable rate mortgage could save money in the future. But if rates go up, your interest could go up considerably. If your budget is tight, you may want to opt for something more stable with a more predictable payment structure. In this case, a fixed rate rural mortgage might be preferable. Thus, you can better budget accordingly and control your finances.
What if you can not get approval?
As mentioned earlier, it may be more difficult to get approval for a rural mortgage than other types of home loans. It can be very discouraging to be denied a mortgage you need to make a real estate purchase. Fortunately, borrowers can use other channels if they find that banks and conventional lenders do not want to lend money to finance a rural property. More and more alternative lending resources are emerging in the mortgage lending business for the benefit of borrowers. Loan rules have become stricter since the real estate bubble a decade ago and, as such, lenders have tightened the bases for borrower approval for home loans.
However, because stricter lending rules prevent many people from obtaining a mortgage loan for a rural property, private lenders fill a void and offer another route. That said, working with private lenders has its own disadvantages. Rural properties financed by private lenders are subject to increased scrutiny. For this reason, rural properties are often unable to benefit from the same capital as properties located in urban centers. For example, urban properties can generally be approved for a higher loan-to-value ratio (LTV – the ratio of a loan to the value of the home purchased), up to 95%. In comparison, rural properties are generally only eligible for a maximum LTV ratio of 65%.
What factors do lenders consider before approving a borrower for a rural mortgage?
In addition to the loan-to-value ratio and the financial history and health of the borrower, the property itself is thoroughly examined before the loan is approved. In fact, the eligibility of the property is more important than the financial health and personal data of the borrower. Lenders consider a number of factors in determining whether a property is eligible for approval, such as:
- The state of the property (land, structures, water potability, etc.)
- the location of the property (distance from the nearest urban area, country / region, etc.)
- how easy it is to resell the property if the borrower is unable to make mortgage payments
Once the property has met these criteria, the lender will determine whether the borrower is eligible for a rural mortgage.
A rural mortgage may be your best option for financing rural land. Having said that, it’s important to understand what a rural mortgage is and what it might cost you to get it. It is also essential to understand what is needed to obtain approval for such a mortgage and why it may be more difficult to obtain than a conventional mortgage for a home in town.
Ultimately, your best bet is to partner with a seasoned mortgage specialist who will guide you in the right direction and tell you which lender to work with. This professional will be able to provide you with the appropriate mortgage terms, which will best suit your financial situation and increase your chances of getting approved for your mortgage.