Canada’s home prices could complicate private mortgage renewals: broker
Some homeowners in Canada are finding themselves in a tough position as they approach the time to renew their mortgage.
The renewal period can be a stressful situation at the best of times. But now, in some cases, private mortgage lenders are choosing not to stick with existing borrowers. This comes down to dropping home prices, explains Reza Sabour, a senior mortgage advisor with TMG The Mortgage Group.
“The private lenders typically don’t like to renew private mortgages maybe more than once. So, once they see a client is falling in that renewal loop, they’ll actually usually try their best to convince that client to qualify at a bank,” he told CityNews.
“And those clients, if they’re still unable to qualify, they would have a difficult time moving it elsewhere.”
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While urban centres like Toronto and Vancouver haven’t seen significant price drops, he notes some other communities have seen a more prominent slide.
“This definitely comes up in situations where we see a sharp decline in property prices. It’s going to happen in parts of Canada that may be more susceptible to lower property values than some of the major cities,” Sabour explained.
“Certainly, across Canada in some of the smaller communities, this could definitely be a thing and we do see these things tend to happen when rates go up quite dramatically.”
Sabour notes one of the main reasons for this is the fact that private lenders require their clients “have a relatively large equity stake in the purchase,” unlike with a bank, where you can typically buy with five per cent or 10 per cent down.
“With a private lender, you usually have to have at least 25 per cent down,” he said.
Why are people going private?
Sabour says there are various reasons a person may seek out a private mortgage loan over a federal one or one through a bank.
“The private lending category, which they are completely bypassing, essentially, any kind of a federal requirement for a stress test, and their decision making is really happening by a group of investors who are, essentially, pooling together their own risk tolerance and they’re pooling together their own money. Based on that, they’re pricing each individual deal as it lands on their desk based on that risk assessment,” he explained.
Someone may seek out a private lender if they haven’t been able to go through the other channels successfully, Sabour notes. In some cases, he adds, clients go the private route for second mortgages.
“You may have a first mortgage with a bank, the bank is in first position. You’ve capped out the amount you can borrow. This happens a lot with builders or small-time builders who are maybe building a single-family house or something and they run out of money,” Sabour said.
“There could be a lot of reasons why someone would go to private. It is noteworthy, though, even a private lender does require a client to have good credit.”
That, he says, could mean a lender asks for a credit report, for example, to show investors there is a path to getting repaid.
‘Have an exit strategy’
In situations like the one we are in now, when prices are dropping in some communities across the country, Sabour says investors will look at what’s happening and decide “whether or not it’s going to make sense for them to proceed at the same loan-to-value.”
“Obviously, the loan-to-value has changed, meaning that the value of the home is worth less than what they originally lent on,” Sabour said. “So that loan-to-value, if it grows beyond that 75 per cent range, that’s when a private lender might decide not to renew. And those clients … if they’re still unable to qualify, they would have a difficult time moving it elsewhere.”
He also notes it’s important to understand how a private lender first qualifies a client.
“Most private lenders … are mixed mortgage investment corporations. They tend to be quite conservative because they have a pool of investors — might be four or five people, on that board, might be 10 people — and everyone has to be satisfied with that risk of that specific client that’s landed on their desk in order to proceed,” Sabour told CityNews. “Every single one of those investors always asks one main question and that is, what is the exit strategy for this client?”
Private mortgages are typically one or two-year loans, he adds, unlike with a bank.
“Every private lender will ask that client, ‘What is your exit strategy? Because we don’t want to have these funds out for more than a year. We want to have them back so we can invest them in other files.’ So, because it’s a quick type of turnaround, some of that onus is also on that client to make sure they have an exit strategy,” Sabour said.
If you find yourself in a situation where a private lender won’t let you renew, Sabour suggests you may have to go to a family member or someone close to you to co-sign on a renewal to get you out of a private lending situation.
However, he acknowledges not everybody has that option.