Brokers embrace an old friend

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Hello, old friend?

That new LTV cap on refis will inevitably increase the number of A clients seeking private second mortgages, says one broker specialist. It will also increase the need for broker vigilance.

“We’re talking about A clients who would have been able to go to the bank for a refinance up to 85 per cent under the old rules,” said Morgan Vaughan, with TMG The Mortgage Group in Toronto. “They can now only go to 80 per cent, and I think what we’ll see more of is that type of client turning to private lenders to fill the gap and get that extra 5 per cent out.”

Any move in that direction would mark the resurgence of the second mortgage – once the stock and trade of many mortgage brokers, but increasingly relegated to the past.

Jim Flaherty may have changed that trend in moving last month to lower the LTV cap on refis to 80 per cent from 85 per cent.

That rule change has the potential to divert a number of deals from the bank to the broker, still it falls to mortgage professionals to make sure the pros of a second mortgage outweigh the cons.

“Brokers have to assess whether the lender’s fees on the second mortgage aren’t so high that they minimize the value of drawing that extra 5 per cent equity out of the house,” Vaughan told “They also have to look at the potential costs associated with possibly having to renew the term of that second mortgage.”

There are other considerations for brokers looking to arrange those mortgages, including the higher interest rate. Still blended with the rate on the first mortgage – the prime rate mortgage – the financials often work out in the clients favour, said Vaughan.

  • Paul Meredith, CityCan Financial on 2012-08-17 3:25:34 AM

    I have seen a big increase in 'A' clientele coming to me for private 2nds up to 90% LTV, and I expect to see more and more. Before this, it was just 'B' clientele.

  • Paolo Di Petta | on 2012-08-17 4:50:37 AM

    I'm not sure about anyone else, but 2nd mortgages are (and always have been) a big part of my business. Competing with the "big 5" and their multi-million dollar ad budgets never seemed like a good strategy to me.

    That being said, a lot of people don't understand the private market very well (probably due to the myths and misrepresentation that are continually perpetuated). I've seen some advertising outrageous 90% LTV deals - either they're misleading their borrowers and lenders, or their lender is taking an unnecessarily high risk.

    Prudent lenders see the writing on the wall and are clamping down. The banks are doing it, and everyon is following closely behind. Gone are the days with rapid capital appreciation, where an 85% LTV 2nd will become a 75-80% LTV mortgage a few years later - in fact, I expect it will be just the opposite in coming years.

    Additionally, the time is coming where reality is going to set in. Borrowers won't be able to keep purchasing out of their means, and in response, home prices will have to normalize. I would be willing to argue that low rates, low down payments and long amortizations have played a big part in inflating the market over the past decade.

    What does that say for our market for 2nd's? (and 3rd's to some degree) - That specific market might be hot for the next little while, but if a broker/agent lacks experience, they're liable to get burned. It's a niche all it's own and requires much more experience, critical analysis, and a rather specialized set of skills when compared to a standard A-client bank deal.

    We're facing a rocky road ahead and there's definitely going to cause a bit of a shakeout - for brokers/agents, borrowers and lenders alike. If you love the industry, strap in for the ride - otherwise this is the last call.

  • Ron Butler on 2012-08-18 3:13:23 AM

    Thank you Paolo. A voice of sanity.

    Home Trust, who are very smart guys about this stuff; quietly moved refinance maximums from 80% to 75% in Ontario. We are trying to get all of our own investors out of everything over 80% in our office and our new target LTV is 70% for private mortgages.

    As Paolo said: fasten your seat belts, there is turbulence ahead.

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