Stricter mortgage rules and peaking interest rates have affected a lionshare of borrowers in Canada. In its plan to tame high inflation, the Bank of Canada kicked off 2023 with another increase to its overnight rate by 25 basis points to 4.5% – the eighth increase in less than a year. As a result, mortgage costs for prospective and existing home buyers have skyrocketed, making it difficult for borrowers—even those with a strong financial profile. In addition, tight rules and qualifying requirements, including the mortgage stress test, remain in place. Canada’s mortgage stress test requires home buyers to qualify for a mortgage at 2% above their contracted mortgage interest rate or at 5.25%—whichever is higher. As a result, even low-risk borrowers are now struggling to qualify for a mortgage at all, or for the amounts they need for the homes they want.
As a result, Canadian home buyers are increasingly seeking non-traditional mortgage solutions, and renewing their mortgages – one in three, according to the Canadian Mortgage and Housing Corporation (CMHC) – in the alternative lending space. In this volatile market, borrowers are beginning to realize that a private mortgage can be a valuable tool, as it becomes increasingly difficult to get financing approved by the bank. Here are some of the ways that AAA borrowers can benefit from private lending.
Access additional fundsAs borrowing and living costs are both higher than normal, many Canadians could use some extra cash in their pockets. In different times, a cash-out refinance would have been the obvious choice for many because it allows borrowers to take out a new loan at a potentially lower rate, and keep the difference in cash. However, in this peak interest rate environment, it likely makes more sense for borrowers to stay locked in at a lower rate. In other cases, banks simply won’t offer additional financing to a borrower that already has a 40% debt-to-income (DTI) ratio or greater.
A private lender can offer a totally different avenue of funding through a second mortgage, without affecting an existing first mortgage with a bank. Private lenders like CMI are more interested in the story behind the numbers. Unlike banks, they are able to look beyond a borrower’s DTI and other ratios to find creative financing solutions.
Private lending has steadily grown in popularity over recent years, but pandemic-related job losses and other employment changes pushed even more borrowers to explore the alternative space. In April 2020 alone, almost two million Canadians lost their jobs. More recently, some of the biggest global tech companies have announced significant layoffs. Microsoft, Amazon, Salesforce and Alphabet, Google’s parent company, cut a combined 40,000 jobs in January 2023, adding up to more than 200,000 eliminated tech jobs since the summer of 2022. Tech teams in Canada have also been affected by some of these cuts, according to Betakit.
These unexpected changes have caused many Canadians to pivot their careers in a different direction, leading to a rise in self-employment and growth in the gig economy. As a result, otherwise strong borrowers have struggled to provide the income history needed to qualify for a bank mortgage, and found themselves looking for other options. Even though banks and other traditional lenders have programs for self-employed clients, borrowers need near perfect credit, as well as a history of business tax returns that can prove income. Private lenders, like CMI, can take a more reasonable approach, accepting bank statements to verify income.
With mortgage costs more than doubling over the past year, the Bank of Canada’s January 2023 announcement that it could be ready to press pause on rate hikes may come as a relief. While not a guarantee, this could mean that mortgage rates have reached their peak. With the economy in a state of uncertainty, and the possibility of a gradual decline in rates on the horizon, borrowers may be concerned about committing to a long-term mortgage. Instead, clients may want to consider shorter-term financing to get the funds they need now, without locking in the current peak rate for five or more years. A shorter-term mortgage would give borrowers the option to move to a lower rate a year or two down the line when it’s time to renew, and there’s potentially more clarity in the market.
Borrowers can also benefit from short-term financing in several other situations. Clients may need a bridge loan to close on the purchase of a new home before the sale of their current home closes, or perhaps help their kids with a down payment on their first home, to help lift them out of a tight rental market. While the banks sometimes offer shorter-term loans, it’s much harder to qualify, and can even be at a higher rate compared to a private lender.
Finance your new construction purchase While higher interest rates cooled the housing market significantly by the end of 2022, the overheated market is barely in the rear-view mirror. During that frenzied time, new construction was a lucrative investment for many. However, realtors are reporting serious concern from many homebuyers who purchased pre-construction homes at the peak of the real estate frenzy. A group of Ontario homebuyers told the CBC that they can no longer qualify for the mortgages they need for pre-construction homes they purchased at the start of 2022, due to elevated borrowing costs and lower home values. Those that do qualify are being offered a much lower mortgage amount, and with the significant climb in mortgage rates since contracts were inked, monthly payments are potentially unaffordable.
Private lenders may be able to come up with a solution to help. For instance, if a traditional lender is offering your client a reduced mortgage amount, based on a lower appraisal value, CMI can offer potential solutions to make up the difference, such as using equity from another property as security.
When it comes to your AAA clients, it’s still helpful to think outside the box, especially in today’s uncertain economic environment. There are several potential advantages to selecting a private mortgage lender, even for borrowers with excellent credit scores. These include faster approvals and funding, flexible underwriting, custom loan terms, a willingness to finance non-traditional properties, as well as less documentation requirements. In addition, CMI doesn’t just benefit your client, we also benefit our broker partners. CMI prioritizes a collaborative relationship with you to structure the optimal deal for your client. Even before you submit a deal to us, you can reach out for advice, to discuss scenarios, and get help with structuring a deal. Give us a call to discuss your borrower’s unique situation today.