Mortgages and Alternate Energy Systems – the Ins and Outs and Pitfalls

Are you considering reducing your carbon footprint and living off the grid? Living off the grid has a lot of benefits – you’ll save money on energy costs over the long-term, you have more freedom of choosing where you want to live and you’ll have  a positive impact on the environment. However, living off the grid isn’t for everyone. Unfortunately, a lot of Canadians wouldn’t consider living this lifestyle, even if it meant helping Mother Nature. As such, if you’re looking at purchasing an off grid property, obtaining a mortgage will be a little more challenging, but with the right mortgage broker you can get the deal done.

 

Qualifying for a Mortgage

Before we talk about off grid properties, it helps to first understand how lenders qualify you for a mortgage. When qualifying for a mortgage, lenders consider four main factor: your income, your down payment, your credit and the property itself. When you’re pre-approved for a mortgage, the lender knowns the first three factors, but the unknown factor is the property.

Why do lenders care so much about the property? It’s simple. Lenders aren’t in the business of owning properties. If you were to run into financial difficulty and be unable to repay your mortgage, the lender wants to be able to sell the property quickly to recover the money that it’s owed.

With an off grid property, that poses a challenge. Lenders are concerned about the future re-salability of the property. Lenders like to think about a worst case scenario. Could the lender sell the property in a down real estate market for a reasonable amount and recoup its initial investment? If you live in a major urban centre like Toronto or Vancouver and you’re buying a detached house or condo, probably. But if you’re buying in a small town and/or you’re buying a property type with a limited market, such as an off grid property, those two factors alone tend to make lenders nervous.

(Many lenders don’t want to lend funds for properties in cities with a population under 50,000 or 100,000 because they’re concerned the property will have a limited market. Property type matters, too. That’s why some lenders tend to be more cautious when lending funds for micro-condos because they’re concerned they won’t be the easiest to sell late on.)

 

Alternative Lending

Before diving into alternative lending, it helps to understand the different types of mortgage lending in Canada. There are three main types: A or prime lending (those are the banks, credit unions and monoline lenders), alternative lending and private lending. If you’re looking to purchase an off grid property, you’re more than likely going to work with an alternative or private lender, since many prime lenders won’t consider a property type like this for the reasons mentioned above.

Whether you end up financing the deal through an alternative lender or a private lender largely depends on how strong of a borrower you are on paper. If you earn an above average income (you have at least two years of steady employment with the same company), you have a sizable down payment (your loan-to-value is 65 percent or below) and you have excellent credit (your beacon score is 680 or above), you may qualify with an alternative lender.

The advantage of working with an alternative lender over a private lender is that your cost of borrowing is typically less. Whereas your income, down payment and credit score tend to carry a lot of weight with A lenders, those still matter, but alternative and private lenders are more concerned with the property itself. Since lending mortgage funds for properties in the alternative and private space tends to carry more risk, these lenders want to see you have more skin in the game by way of a higher loan-to-value. As such, you’ll usually be required to come up with a larger down payment.

 

Private Lending

If your credit score is poor or you’re relying on stated income, alternative lending may not be an option. In this case, you’ll more than likely want to work with a private lender. The cost of borrowing of private lenders tends to be higher than alternative lenders, although it can help you get the deal done. A private lender can be especially helpful if the property has a high loan-to-value, since lenders ideally want the property to be sold quickly if you’re in default of the mortgage.

The biggest pitfall of working with an alternative or private lender is that your cost of borrowing is going to be higher. You may also be required to pay a fee to your lender and mortgage broker. But if you’re someone who’s really determined to live off the grid and reduce your impact on the environment, it may be worth it to you.

 

Working With a Mortgage Broker

If you’re looking for mortgage financing for an off grid property, it’s best to work with a mortgage broker. An independent mortgage broker has access to dozens of lenders. A broker has access to many lenders that you wouldn’t normally have access to on your own. More lending options means, a greater likelihood of finding a lending option that works.

A broker can look at the property you’re thinking of buying, look at the various lending options and help come up with a lending option that will not only help you close the deal, but cost you less in terms of financing. If you’re a strong borrower, a mortgage broker may even be able to get an exception with one of the big banks, so you can benefit from a lower cost of borrowing from a prime lender.

A unique property type like off the grid is the ideal situation to work with a mortgage broker. A broker can help you save time and money by shopping the mortgage market on your behalf and finding the lending solution that makes the most sense.

 

Disclaimer: Contact a mortgage professional to see if the strategies mentioned apply to your specific situation.

 

This post was written by Sean Cooper, bestselling author of the book, Burn Your Mortgage. 

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