It’s a solution many A clients struggling to come up with a down payment may have overlooked. It’s also one with the potential to expand broker revenue streams, said a DLC leasing specialist, pointing to the sale-leaseback transaction.
“It’s a win-win-win situation for the client, the broker and the leasing specialist,” said Larry Dufty, a leasing pro/agent with Dominion Lending Centres Alliance in Cobourg, Ont. “The broker helps the client use equity in their property – usually a consumer vehicle – to develop a down payment. The broker gets a referral fee for that and also gets the commission on the actual mortgage, which they’ll handle entirely.”
That kind of successful outcome depends on the traditional sale-leaseback agreement, more common to commercial deals, but increasingly an option for A clients looking to cover closing costs or to meet down-payment requirements, given tougher qualifying rules. They may also be looking to avoid those rules altogether by going with a conventional mortgage.
Under the terms of those lease agreements, Dufty matches the client with a lender willing to buy his or her asset, what is most often a car. The client then agrees to lease back the vehicle and, ultimately, to buy it back for an established amount at the end of the term. The referring DLC broker collects a commission from that deal but also the full commission on the mortgage. Proceeds from the asset’s sale are usually applied to the down payment.
It’s a little more complicated than that, said Dufty, entirely focused on stewarding deals for DLC leasing division. He’s one of several “pros” scattered across the broker network and accepting referrals from its expansive family of mortgage professionals. While there’s no requirement for the client to own the vehicle outright, the “factor of seven” rule applies. “The sum of the age of the vehicle and the term of the lease cannot exceed seven,” Dufty told MortgageBrokerNews.ca. “That figure is generally ‘10’ for commercial vehicles.
Also a consideration, he said, is that the sale-leaseback amount is dictated by the balance owing to the primary lien holder, who would be paid out first. As well, the property must not currently be under lease.
While DLC brokers can arrange the sale-leaseback themselves, it’s usually more expedient to refer it on. In doing so they’re protecting a mortgage deal that might otherwise have failed to win lender support without the added cash injection of the sale leaseback, he said. It also protects the broker-client relationship in the event the lease deal is unsuccessful.
“I would not recommend a mortgage agent unfamiliar with leasing cut their teeth on a vehicle lease,” said Dufty, “It can be more involved than a commercial equipment lease deal and frustrating for the uninitiated."
Still, in many cases, the transaction can be viewed as an alternative to the cash-back mortgage, demand for which is expected to grow in Alberta.
That’s not necessarily a good thing, charge some brokers.
“I do think (optimism about Alberta’s economy) will encourage young buyers to look to get into the market as it continues to rebound and that will lead to growth in demand for cash-back mortgages from those workers who don’t have the down payments, but have good jobs and income and don’t want to wait,” Gord McCallum, principal broker and owner of First Foundation Residential Mortgages, told MortgageBrokerNews.ca. “If the client absolutely isn’t prepared to wait to save a down payment, there are still better, cheaper options brokers need to be offering them, other than a cash-back.”
The sale-leaseback may or may not fall in that category. It all depends on the particulars of each deal, said Dufty, suggesting it’s an option brokers nonetheless may want to bring to the attention of their clients.