Private second mortgages can help brokers sidestep harsher tests

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Brokers are now considering the viability of secondary loans with private lenders in response to new federal mortgage rules that took effect last week, which mandated tighter tests to determine a borrower’s capability to service debt at the Bank of Canada’s 5-year posted rate of 4.64 percent.
 
These private secondary mortgages will allow brokers to bypass the “stress test” requirements, Reuters reported. Circumventing the stricter tests means that aspiring buyers will have to take out uninsured mortgages, which require 20 per cent down payment—and in turn might force consumers to go for unregulated private loans to secure the funds needed.
 
“[The stress test] pushes Canadians into private second mortgages, and it's just costing more and more money for these people," Toronto agent Mark Cashin said.
 
Cashin predicted a significantly increased number of private secondary mortgages in the near future, despite these charging anywhere between 7 to 10 per cent interest.
 
“It's not a good option but maybe it's the only option we've got,” Toronto private mortgage fund operator Ron Alphonso said. “It's a way to get around the new rules.”
 
The regulatory changes might have inadvertently opened the door for alternative lenders to occupy an increasingly larger portion of the mortgage market, observers cautioned.
 
“[Consumers] are going to turn to these unconventional lenders and pay higher prices and it's not just going to be a higher price for one year, it could be a higher price for three, four, five years,” Credit Counselling Society chief executive Scott Hannah said.
 
“They want to get into the market, in some cases at any cost, and the cost is going to be a very high mortgage payment.”


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  • Dave on 2016-10-24 9:17:19 AM

    Someone should tell Cashin its more like 12-14% lol ...and dont forget the fees making it 18%

  • Ross Taylor on 2016-10-24 9:31:49 AM

    "Cost is going to be a very high mortgage payment"

    Why is that? I think the overall monthly payment could go down. Remember, this strategy will not fly for 5% down, and doubtful it is wise for even 10% down.

    Let's consider a $700,000 purchase where the buyer has $105,000 savings = 15% DP

    She wants to borrow $35,000 via a private second mortgage. We will make the mortgage $40,000 to cover most of the one-time costs.


    Let's say the second mortgage is at 12%, not 7 to 10%. The 2nd's monthly payment will be $400.

    The first mortgage of $560,000 will cost $2,206 (bank mtge at 2.49%, 30 yr am)

    Total monthly payment = $2,606

    BUT, if they could qualify for a 15% DP mortgage at the same 2.49%, the monthly payment is higher at $2,710 (25 yr am)

    I think we should cease pi**ing on alternative and private lender rates and fees and do a better job of understanding and explaining them to grateful clients

  • LanceH on 2016-10-24 9:31:55 AM

    They're theory is that if no one can afford the homes, sellers will have to reduce their prices to sell, effectively lowering prices across the board. Well, the one market that isn't likely to work, is the GTA, the one they were targeting, because demand is just that high. You'll go from 12 bidders to 4 bidders, but still a bidding war.

    What a mess. With ppl unable to get into the market they'll stay renting. But they've made it more difficult and expensive for investors to buy rental ppty's, squeezing that market from each end. So what do you think that'll do to rents in the GTA?

    Everything Lefty's do backfires, everything!!

    7-10%? A 2nd to 85 or 90 or even 95% is going to be 15%.

  • Marie on 2016-10-24 9:54:32 AM

    Just a cautionary note... Make sure to read your mortgage conditions. Obtaining secondary financing without the prior knowledge and consent of the lender may be a breach of contract and the loan can be called. Secondary financing obviously impacts the TDS ratios so not sure how this can "bypass" the stress test.

  • Rod Smith on 2016-10-24 10:16:17 AM

    This expansion of the secondary subordinate market is overstated. Lenders still require confirmation of the source of borrowers downpayment and as such any borrowed capital has to be factored into servicing guidelines and as such the circumvention of the new guidelines is not necessarily achievable. Secondly the institutional market has to view this activity as accceptable which maybe a challenge particularly when addressing inventory insurance securitizing debt that is only conventional as a result of borrowed subordinate debt. Additionally many sophisticated investors are loathe to take a small secondary debt position behind a large prior charge at a high loan to value notwithstanding return. As brokers knowledgable in private placements know, the erosion of equity is marked when default occurs and there is no financial sense in maintaining a large mortgage ahead of you when the equity margins are so thin at the outset. Those that believe that this ballooning of secondary debt will be the solution to circumvention of the new guidelines are assuming that this will be accepted by the institutional market which maybe wishful thinking. Lastly, if this suggested increase in secondary lending were to be acceptable to the market, you still have to convince the consumer that paying double digit rates is okay when they are accustomed to pricing never before seen in history. Good luck with that. Historically the secondary market has provided an intermediary position that brokers viewed as fluid and the intent was always to move the newly created secondary debt into a new first position in a relatively short timeline. Refinancing rules have changed that scenario signicantly. New rules that should have been dubbed " A Tale of Two Cities"!

  • Mortgage Guy Geoff on 2016-10-24 10:34:15 AM

    Exactly what I was thinking Rod. If the borrower doesn't qualify using the new stress test rules how are they going to qualify with the additional payment factored into the equation? Unless of course that additional payment is not being disclosed, but we all know what that's called... (hint just in case: begins with FR and rhymes with odd.)

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