Although economists aren’t convinced it’s the end of the central bank’s interest rate hikes, securing a mortgage in these uncertain economic conditions will continue to be challenging. More than ever, borrowers will be turning to their mortgage brokers for advice on the best financing solution for their unique situation.
It is increasingly important for brokers to understand the features and benefits of alternative financing solutions like private mortgages, especially in these times where flexibility is key. Private lenders don’t have the same rigid rules and guidelines as banks and other traditional lenders, and provide a vital alternative for your clients that can’t quite make the cut for a prime mortgage. Knowledge of the complete lending landscape, including private options, will enable you to better assist this growing segment of borrowers, providing you with a competitive advantage through creative and alternative financing sources, and equipping you to provide the best possible advice to your clients.
This first-timer’s guide is designed to help you and your clients weigh their options and understand whether a private mortgage is the right solution for them.
The borrower
With the recent spike in borrowing rates and increasingly stringent mortgage lending guidelines – including a stress test requiring borrowers to qualify at a higher rate to ensure they can afford their mortgage if interest rates were to rise – the pool of borrowers able to access traditional financing is shrinking. Banks and other traditional lenders often require a high credit score, a pristine financial record, and lengthy employment history in a traditional job. Despite the growing number of self-employed, freelance and gig workers, many of these roles are considered non-traditional income sources by banks and fall outside of B20 lending regulations. This creates a further challenge for homeowners and buyers looking to qualify for mortgage financing,
Private lenders have the ability to be more flexible with their lending criteria because they aren’t bound by the same stringent regulations. There are several different types of clients that would likely be turned away by a traditional lender and could benefit from a private mortgage. For example, borrowers that are newcomers to Canada, owe taxes to the CRA, have liens on their property, or clients with debt in collections. You can also recommend a private mortgage to borrowers that want to consolidate their debt to improve their credit score or need to pay out their credit proposals. A private mortgage could also be a good option for clients who are going through challenging transitions, such as a divorce or separation, or a potential borrower that is in between jobs.
A private mortgage could also benefit borrowers that have a healthy financial history but still can’t secure traditional financing. This may be because they are self-employed, seasonally-employed or an independent contractor. Private financing could also be a valuable option for borrowers looking to finance unique or rural properties, or properties under construction.
A private mortgage could also be a great option for AAA borrowers who need fast financing or want to avoid breaking an existing mortgage due to a potentially significant prepayment penalty.
Source of funds
With more home buyers struggling to come up with a sufficient down payment, many are turning to family and friends for financial help. Private lenders are much more flexible when it comes to gifted down payments, whereas traditional lenders have strict rules around the source of funds to purchase a home. Banks require an official gift letter for a downpayment and documentation about the person providing the gift. In addition, banks and traditional lenders will generally only approve a gift from an immediate family member—not friends or significant others.
Underwriting guidelines
Banks and traditional lenders are rigid with how much they’re willing to lend and the criteria that a borrower must meet to qualify for financing. Generally, banks have a firm minimum Beacon score and base their lending decisions heavily on the gross debt service ratio (GDS) and total debt service ratio (TDS)—i.e., how much of a borrower’s income goes toward their mortgage, property taxes, condo fees, and utilities alongside how much goes toward other debts like car loans, student loans, and credit card payments.
Private lenders like CMI have the flexibility to take a much more common sense approach. With many families and individuals trying to keep up with the cost of living, private lenders can help those with damaged credit or who aren’t able to meet the GDS/TDS ratios that the bank requires to approve a mortgage. With flexible underwriting guidelines, private lenders can place less emphasis on metrics and more on the story behind the numbers, provided a borrower can demonstrate their ability to repay. Private lenders don’t require as much documentation, making it easier to put together a complete borrower profile for faster deal submission and approval.
Products
Banks and traditional lenders are often limited by the mortgage solutions they’re able to provide, as well as the features and parameters of those products. Private lenders are yet again able to flex their flexibility. CMI, for example, has six niche products that can be tailored to specific borrower situations. These include a first mortgage, second mortgage, and a mortgage bundle (which combines both). CMI also offers borrowers an equity take-out based on their loan to value, bridge financing, and a home renovation mortgage. Custom features are also available, such as prepaid mortgages and terms as short as just a few days.
Pricing
Overall, rates are higher in the private space due to the typical risk profile of the borrower, but that doesn’t automatically mean rates are going to be significantly higher than the traditional space. Deals are typically priced on a case-by-case basis according to a number of factors, including the property type and location, the loan-to-value, security position, as well as the client’s credit worthiness and their ability to make payments.
At CMI, we consider the unique circumstances of every borrower and make a pricing decision. We price to risk – the higher the quality of the borrower or the more equity in the property, the lower the rate will be relative to a borrower with higher credit risk or less equity.
Exit strategy
A private mortgage is a valuable option for borrowers unable to qualify with a traditional lender – whatever the reason. But by design, it is short-term in nature – usually not more than 12 months. It’s a valuable temporary solution intended as a “bridge” to help a borrower move back to a conventional lender, with lower rates and fees.
Particularly with a private borrowing solution, you should look at your client’s overall financial picture to anticipate what a deal is going to look like over the long-term, rather than simply considering what the best solution might appear to be today. Right from the time of deal submission, an exit strategy – or a plan to move from the private space back to a mainstream lender – should be in place, and it should be detailed in the notes that accompany your deal submission.
The most common exit strategies include refinancing with a traditional lender at the end of the term or selling the property.
Your private deal
Working with a private lender is generally a much more collaborative experience compared to conventional lenders. Private lenders, like CMI, can provide advice and even customize solutions to help you get more deals approved, especially in uncertain market and economic conditions. CMI can also work with you to ensure you have all the information you need when structuring your private mortgage deal submission for success.
Which is right for your client?
You can help borrowers carefully evaluate their options and consider their individual financial situations before choosing between traditional and private mortgages. If your client is someone that can meet the strict criteria that the bank requires, a traditional lender can likely offer the lowest rates. However, as we know, the pool of borrowers that can fit the mold is shrinking.
If your client is struggling to get the financing they need, a private lender may be able to help. A private mortgage can be a valuable short-term solution to bridge the gap and help a borrower get to a place where they can move their mortgage to a traditional lender.
