Over a year into the COVID-19 crisis, Canada is cautiously working toward pre-pandemic employment levels. Still, Statistics Canada says there were 296,000 fewer people employed in March 2021 compared with February 2020, and 247,000 more people working less than half of their usual hours. Over 3.1 million Canadians were affected by job losses or reduced hours last March when pandemic restrictions first began, and while there has been steady progress in the past year, the job market remains volatile and many Canadians are left strapped for cash and depending heavily on savings, emergency funds, and the credit available to them. As a result, Canadian households are dealing with record levels of household debt, owing more than $2 trillion in the third quarter of 2020, according to a recent Equifax report.
Many Canadians were forced to find creative ways to earn income, leading to a shift in priorities and a renewed focus on forging new paths to achieving their goals. Mortgage brokers have an opportunity to help borrowers achieve their goals by offering expert advice and solutions to the financing barriers plaguing a growing number of Canadians, like low cash flow . While banks and traditional A-lenders will find it difficult to help in these situations, private lenders are poised to arm brokers with creative, customized solutions that can provide relief for cash flow challenged clients.
Take advantage of equity
Canada’s home resale price surged 31.6% year-over-year in March, according to the Canadian Real Estate Association (CREA). With property values rising, mortgage brokers may be able to help clients free up some cash by refinancing. When evaluating this option, it’s important that brokers advise clients of potential fees, including penalties for breaking a current mortgage. A second mortgage is a compelling alternative to refinancing a first mortgage in situations where steep prepayment penalties make breaking a first mortgage cost-prohibitive.
Whether the best option is to refinance an existing or to take on a second mortgage, both of these financing options offer homeowners an opportunity to consolidate high-interest household debt, which could provide further cash flow relief.
Roll closing costs into the mortgage
While closing costs tend to vary, mortgage brokers should recommend that clients set aside 1.5% to 4% of their loan amount for these upfront expenses. Therefore, for a $300,000 mortgage loan, homebuyers should set aside between $4,500 and $12,000 on top of their downpayment. If a borrower is experiencing cash flow challenges, brokers can suggest building these costs into the mortgage proceeds. While this would mean paying interest on closing costs over the life of the mortgage and a slightly higher monthly mortgage payment, it could save a borrower from shelling out a large lump sum at closing. Private lenders may also offer premium pricing, where borrowers can choose an increased interest rate in exchange for reduced closing costs.
Learn more in our recent blog Don’t let additional fees be your client’s downfall.
Prepaid mortgages
Another option for borrowers who are cash-strapped due to reduced income or temporary job loss, is a prepaid mortgage. This option provides borrowers with much-needed funds without making any demands on their monthly cash flow. It involves advancing the total value of payments over the term of the mortgage up front in mortgage proceeds on the funding date. While this option would mean paying higher interest costs over the mortgage term, it could free up cash for other necessities – and could be the only option for borrowers with lost or reduced income.
Prepaid mortgages, generally used during refinancing, are best suited for the self-employed borrower who has seen their business struggle through the pandemic, or a borrower temporarily out of work.
Interest-only mortgages
Similar to a pre-paid mortgage, an interest-only mortgage can provide relief to cash-strapped borrowers. It works much like a regular mortgage, except payments cover only the interest that has accrued – there is no repayment of principal over the term of the mortgage. While monthly payments are lower, borrowers are not building equity in their property through principal repayment as they would with a traditional mortgage. This option is best suited to borrowers who find themselves with temporary cash flow challenges, such as those who have been temporarily laid off, but expect to have an ability to catch up on principal payments in the future.
By design, a private mortgage is short-term in nature – a temporary solution intended as a “bridge” back to a conventional borrowing option. No matter the specific situation, CMI offers creative solutions for borrowers who find themselves in difficult circumstances. Equipped with expertise about these solutions, brokers can provide much-needed – and often life-changing – options to clients to see them through hard times.
It’s more important than ever that brokers take the time to build a strong relationship with their preferred private lending partner. As borrowers get more creative, and their situations get increasingly complicated, mortgage professionals must also step up and be ready to think outside the box.
Talk to us today to find out why CMI is the partner of choice for our growing mortgage broker community.