In this episode of Get Real Wealthy Season 2, Quentin talks about five mortgage traps real estate investors face and how to avoid them.
Quentin says that the first trap is a fixed closed mortgage with a five-year timeframe. You may get lower interest rates, but you will have problems accessing equity. Secondly, with a fixed closed mortgage, you will have a large prepayment penalty a large prepayment penalty if you want to break that mortgage after a year or two. He adds “lowest rate isn’t what real estate investors should be looking at.” The next mortgage trap is buying insurance on your mortgages. With insurance on a mortgage, where the mortgage amount is actually declining, you’re paying insurance at a higher rate for a declining coverage over time. Quentin suggests “get a term life insurance policy that would cover you for the same amount of the mortgage, and then you’re covered off in the same way.”
Number four is trap equity and the inability to access that equity. If you have a fixed closed mortgage with a five-year timeframe, your equity will be trapped. You will have to pay higher amounts to untrap that equity. Instead of being able to refinance the property with the same lender, you’ll probably have to get a second mortgage with a private lender at a steeper rate. Lastly, as a real estate investor, building a portfolio and not the lowest rate should be on your mind if you want to succeed as a real estate investor.
In conclusion, Quentin adds “if you think of mortgage brokers … and lenders that are out there, those ones that look at you from your goals, versus just qualifying on the next property is the type of mortgage broker or lender or mortgage agent that you want to work with.”
Important Links and Resources
Quentin D’Souza is the Chief Education Officer of the Durham Real Estate Investor Club. Author of The Action Taker's Real Estate Investing Planner, The Property Management Toolbox: A How-To Guide for Ontario Real Estate Investors and Landlords, The Filling Vacancies Toolbox: A Step-By-Step Guide for Ontario Real Estate Investors and Landlords for Renting Out Residential Real Estate, and The Ultimate Wealth Strategy: Your Complete Guide to Buying, Fixing, Refinancing, and Renting Real Estate.