It isn’t just prime clients who are frustrated by mortgage lending rules, as alternative lenders increasingly clamp down on their own underwriting – much to the benefit of private players.
“On the alternative lenders it’s very much harder to qualify; they are so regulated now with the B-20 and the B-21 guidelines they can’t do anything they used to be able to do,” Greg Domville of Plan B Mortgage Services told MortgageBrokerNews.ca. “Hence, that’s why the private sector is blowing up because you used to be able to get an alternative lender to do 75 per cent (LTV) and now they’re only doing 65, so you need a lot more help with these private lenders to top up mortgages to get the mortgage you need.”
As a result, alternative lenders are partnering up with privates to bundle mortgage products.
“If a client needs 80 per cent, an alternative lender will do 70 per cent and their private lending partner will top it up to 80 per cent,” he said. “It’s a risk sharing thing and yield thing.”
According to Domville, private lenders charge fees for the entire amount of the mortgage even if they lend 10 per cent, and clients who aren’t properly prepared will face higher fees at the end of the term.
“When the mortgage is up for renewal, now all of a sudden the two lenders are renewing independently, so now your five per cent second mortgage rate goes up to 12 per cent,” Domville said. “That’s the risk brokers have to be careful of.”
Which means exit strategies for transitioning clients into lower rate mortgages at the end of the mortgage term have become more important than ever.
“Brokers have to be way more cognizant of thinking ahead and not just closing the deal now; thinking what is going to happen in a year when it’s time for renewal – what’s the payment shock going to be, what are the renewal fees going to be,” Domville said. “People who aren’t thinking that way are going to be in big trouble and clients become a risk to foreclose.”
And not just exit strategies, but contingency plans as well, according to one player.
“Some of these lenders that offer blended mortgages keep the rate down but they charge huge fees at renewal,” Grant Powell of Verico
VIVID Mortgage told MortgageBrokerNews.ca. “You have to have an exit strategy and a plan in place in case the client doesn’t qualify for a more conventional mortgage and end-of-term and is forced to renew.”
Still, Domville doesn’t foresee an increase in foreclosures, despite the growing number of these blended deals. Especially if brokers properly advise the client before – and during – the mortgage process.
“Brokers need to slow down, think ahead, and not just think about the band aid – think about the solution,” he said.