Financing question: 2nd Mortgages

[fumbrunner]

A question for all you brokers (and others) out there.



I am currently involved with a nonprofit looking to establish a child care centre in our area. The building that we are purchasing is being sold below the assessed value for tax purposes and while we have not had an appraisal done, the purchase price would be well below the appraised value as well. Looking at a purchase plus improvements mortgage.



The potential sticking point is that we will likely need to use borrowed funds for the down payment. The board of directors have access to funds at a reasonable rate through one of the directors. Our business plan demonstrates that both this loan and the mortgage payments could be easily met. Are there any ways in which something like this could be funded without the "funds in the bank" so to speak. Is there a difference between a loan and a second mortgage in a secondary position?



Thanks in advance.

 

[Thomas Beyer]

The cheapest money is CHMC insured money, in 1st position, around 4% today. You can borrow up to 85% of PRICE or CMHC VALUE.



To get better than that you must buy with some more cash, say 25-30% down and get a 70-75% SHORT TERM mortgage, say for a year, say at around 5%. You do some improvements, fix things .. and get a new appraisal in a year. Then you go to a new lender with a CMHC mortgage at 80-85% of that new (higher) value .. and you may own the building with no cash invested, i.e. all funds repaid !



That said, CMHC may not apply here as it may be deemed commercial. You can get up to 70-75% commercial mortgages, probably about 1 to 1.5% above CMHC rates, on appraised value, as you buy or as you re-finance a year down the road.



Money in 2nd position will be 8-10% at least plus 1-3% fees upfront, so 11%+ for the first year !

 

[fumbrunner]

Hi Thomas, yes it is being considered commercial and therefore CMHC is out.



As mentioned, we have money in second position through a loan by one of the directors (under 5%). I guess to simplify the quesiton, are there institutions out there that will lend on the first position, knowing that the second position is borrowed funds.

 

[Thomas Beyer]

[quote user=fumbrunner]I guess to simplify the quesiton, are there institutions out there that will lend on the first position, knowing that the second position is borrowed funds.


yes, quite a few

 

[fumbrunner]

Can you point me to a few? We are struggling the exisitng financial institutions that we are using.

 

[Thomas Beyer]

[quote user=fumbrunner]Can you point me to a few?


Use a mortgage broker. NEVER go to a bank directly for a loan unless you

a) know them well, and

b) have used them and

c) are happy with service & terms, and

d) they offer the best terms in the industry for the mortgage you need!