A mortgage is one of the largest financial commitments your client will make in their lifetime. As a result, ensuring mortgage suitability is a top priority for provincial and federal regulators. Whether you’re a new or experienced mortgage broker, prioritizing mortgage suitability should be a paramount concern for you as well.
Mortgage suitability is essentially making sure that the product you recommend and the advice you provide to a client is appropriate. It hinges on three vital pillars: appropriateness of the solution based on the borrower’s needs and circumstances; affordability/ability to repay; and appropriateness of option(s) based on the products and lenders available to you, the mortgage broker. These principles are designed to ensure that when recommending a mortgage, brokers match solutions with the unique needs and circumstances of their clients.
As the Canadian housing market continues to evolve and the industry grapples with the challenges of the current economic climate, interest in private lending—specifically, private mortgages—is piquing. In fact, private money lenders now account for one in 10 mortgages across Canada. With more homeowners turning to private lending options to finance their home, it’s vital to build your knowledge and expertise in the space so that you can confidently recommend a private mortgage to the clients that need it most. While private mortgages are valuable financing tools, there are unique product features, regulations, risks, and fees that borrowers need to be aware of – and steps they should take to avoid any potentially negative impacts.
In Ontario, lack of mortgage suitability is one of the most common consumer complaints, according to the Financial Services Regulatory Authority of Ontario. To continue to provide clients with the best possible service and advice, there are best practices that mortgage brokers should always follow to ensure the suitability of any mortgage—especially a private mortgage. In addition, keeping a borrower’s best interest at the forefront and focusing on mortgage suitability in every transaction will help elevate the reputation of the mortgage industry as a whole.
To ensuring mortgage suitability, brokers should:
- Understand borrower’s needs, circumstances, and goals
- Understand the different types of lenders and how specific mortgage products can work for borrowers
- Prioritize clear communication, documentation, and disclosure
Understanding the borrower
When determining the suitability of a private mortgage for a borrower, you need to have a full and detailed picture of your client. Know your client (KYC) guidelines in financial services require that professionals do their due diligence to verify a client’s identity, source of funds, and potential risks.
The story behind the numbers is of particular importance in private lending underwriting. It’s important to ask specific questions upfront and look beyond the obvious. If you think a client could benefit from private lending, they are likely having challenges qualifying for financing from a bank or traditional lender. Very often, this is a result of having non-traditional employment or limited paperwork to support declared income. Even successfully self-employed borrowers may not have the proof of income that banks require. It’s important to talk about what led to a borrower’s current position in their financial journey, what their goals are, how a private mortgage can help achieve those goals, and what comes after the private mortgage.
Understanding lenders and mortgage products
Each mortgage financing option – across the spectrum, from traditional to private – comes with its own set of product features, regulations, risks, and fees, and you must be able to understand and clearly explain the nuances of each option to your borrower clients.
It’s important to explain to borrowers that a private mortgage is a short-term, typically interest-only financing solution and to ensure that they understand how it would differ from a traditional mortgage. That includes ensuring there is a plan in place for your client to move on to a traditional financing option, with a lower rate, at the end of their private mortgage term. A private lending solution can help set a borrower on the right track to get them to a place where they’re able to transition to traditional financing.
Private mortgages generally range from six months to three years, compared to five-year terms or longer at the bank. Unlike traditional mortgages, it is also possible to negotiate custom term lengths – as brief as just a few days – and flexible repayment such as pre-paid and interest-only options.
Private money lenders are also not constrained by the same strict regulations as bank lenders, This provides great flexibility and allows lenders like CMI to approve deals that traditional lenders simply cannot Also, a private money lender can typically offer an immediate solution to your client’s financial needs, compared to a traditional lender, which generally involves a lengthier process and heavier documentation requirements.
Prioritize communication, disclosure, and documentation
Private money lenders, like CMI, continue to exemplify ethical and transparent practices to help improve the reputation of the industry as a whole. When you share the mortgage rate and lender information with a borrower, emphasize that a private mortgage isn’t intended to be a long-term solution. This is also a good time to discuss potential exit strategies as well as mortgage terms and conditions that match their needs.
For example, it may not be in a homeowner’s best interest to do an equity take out refinance on their first mortgage if they are currently locked into a lower rate or would face a steep prepayment penalty. Discuss the advantages and disadvantages of other possible private lending financing options, such as a second mortgage, based on the facts of their specific situation.
It’s also important to disclose details beyond rate and term and make sure borrowers are aware of everything in “the small print.” CMI doesn’t have any hidden administration fees or discharge penalties—but that’s not the case for all lenders. Other private money lenders may offer a lower fee but levy higher penalties at the end of the term.
Beyond disclosure, it’s vital to keep proper records of all discussions and any decisions that your client makes along the way. Get into the habit of documenting the mortgage journey. With enhanced licensing and educational requirements coming into effect in Ontario and British Columbia, it’s likely that these types of “charting notes” could become mandatory in the future—much like investment advisors at the bank.
A simple reminder that you can use when keeping taking notes on a borrower’s mortgage journey is to “CARE”:
- Conversation: What did the conversation between you and your client look like? What kind of questions did they ask and what information did you provide?
- Analysis of needs: Why are they considering a private lending solution? Why are they facing credit challenges? Have they explored other options? What are their goals?
- Recommendation: What did you recommend? Why do you think a private lending solution is a good fit?
- Evidence: What supporting documentation have you collected?
These notes will also be helpful in structuring your private mortgage deal submission for success. In addition, with mortgage fraud on the rise, keeping thorough records can help protect your clients and your business.
When it comes to determining mortgage suitability, doing your due diligence is of utmost importance. Even though you’re advising clients on a solution that could work for them today, it’s also important to look at how this solution will improve your client’s situation in the future. Ensure you have a full understanding of what it means for your client to take on a private mortgage, but also how your client intends to exit the private mortgage.
For some of your clients, private lending may be the only option they have to access the financing they need. Whether your client has irregular income, credit challenges, is self-employed or temporarily out of work, CMI can help. We take a common-sense approach to every deal because we understand that every borrower has a unique story. We’re here to help you structure solutions customized to your clients’ specific needs. Reach out to us for advice on scenarios, to talk about possible options and to get help structuring your deal.
See why CMI is Canada’s premier private mortgage lender. Submit your deal today.