As a hedge against a “very probable” correction in B.C. home prices, a leading broker is actively moving to trailer fees, a way of protecting income at renewal for high-ratio clients, who may ultimately find themselves under water.
“Last year I did zero trailer fees and am now using them for 80 percent of my high-ratio deals,” Greg Martel, owner of Dominion Lending Centres Harbour View Mortgages, told MortgageBrokerNews.ca. “I would strongly advise other brokers in overinflated markets – not only B.C., but Alberta and Saskatchewan – to do the same thing because when prices drop, they won’t be able to move those clients at renewal.”
Martel’s move to batten down the hatches comes amid growing speculation that Vancouver, Victoria and other markets grappling with double-digit price gains will, in fact, suffer a price correction. The high-volume broker, who funded $89 million in deals last year, is predicting that storm of sorts will come within the next five years.
“I don’t think it will be a huge drop, but at least a 10 per cent correction sometime within the next five years,” said Martel, ranked 13th on this year's CMP Top 50.
The decline would be more than enough to force most recent high-ratio borrowers “upside down” on their home value-to-mortgage ratio. It means they would have no equity in the home, effectively stymieing attempts to transfer them to a new lender at renewal, said Martel.
This summer, he assiduously began placing clients with lenders offering trailer fees if, in fact, the mortgage terms met client objectives on rate and other key variables. It’s an about-face from the broker’s established preference for the traditional upfront compensation model, but protects renewal income when clients don’t have the equity needed to switch lenders.
Other brokers have likely taken the same precautionary steps to protect their future revenue in markets where house prices far exceed household incomes. Vancouver is on the top of that list, with a median home price 9.5 times that of the median household income, according to the latest RBC affordability index.
Purchasing the average detached bungalow will claim 92.5 per cent of the average Vancouver family’s income, compared to the 37.1 per cent of the average Calgary family’s earnings.
Still, brokers even in that key Alberta market may be tempted to take a closer look at Martel’s strategy, with prices largely considered to be overinflated despite 2008’s devastating correction.
“I think that's prudent,” he told MortgageBrokerNews.ca.