MERIX Financial’s interest-only mortgage, introduced a year ago, is taking the broker channel by storm because of how neatly it fits into borrowers’ financial lives.
“Most people don’t like variable rates because there’s an inherent risk of it going up at any time, and it’s usually prime-plus-half,” said Jacques du Preez, the principal broker and owner of Mortgage Allies. “In this case you have interest that’s below prime, and you can have it at a fixed rate, which is great for somebody who wants stability. There’s no other such thing on the market right now."
Among du Preez’s clients is an RBC senior investment banker making $450,000 annually who was shocked to find out the broker channel has access to a product like this.
“If you do a mortgage for $1 million, you put 20% down, 15% goes to principal and interest, and then they can lock that interest-only portion into a normal mortgage,“ said du Preez, adding he counts among his clients a couple looking to upgrade their house with stable and self-employed incomes.
“They can lock that interest-only portion into a normal mortgage at any time when they’re ready to do that. These clients are getting 3.29% on the mortgage portion and 3.69% on the interest-only portion. It’s phenomenal.”
The mortgage is especially suitable for an investment property, he added. If a landlord takes a variable rate mortgage, they risk a rate hike eating into their profits.
“The danger with a rental property mortgage is if you put it on a variable rate and rates go up, you erode cash flow,” he said. “Here, you have a large portion of interest-only at a fixed rate and you know that, for the next five years of the property’s life, it has a much greater chance of cash flowing because you have stable payments.”
Rachelle Gregory, senior vice president of originations at MERIX Financial, noted that the industry doesn’t do itself any favours by simplifying things, but when she talks to people about the interest-only mortgage, she talks about the flexibility it will afford them.
“The way we qualify income is through a 12-month period, but the average executive or person in lower level management earns 20-30% of their income as a bonus or through commission,” she said. “The reality is that they’re only earning it in January or February when the bonus arrives, so we came out with this product that allows more flexibility in their mortgage payment. They may have a mortgage that’s 80% the value of their home but we may do 50-60% percent of that value in interest-only. When they get the rest of the salary through a bonus later, they can put it on the mortgage so it’s still being paid down, but they’re not strapped for money when they want to take that family vacation in the summer.”
Gregory noted that the interest-only mortgage has become a differentiating factor for MERIX because brokers strive to keep their clients from falling deeper into debt—a problem not uncommon in Canada, she added.
“Brokers are finding that this is a great product for them to consistently be involved in their clients’ financial solutions. Instead of saying, ‘Here’s your five-year fixed mortgage, talk to you in five years or 90 days before maturity,’ they can talk to their clients once a year and track the progress paying down the mortgage. They may find their clients will have extra funds saved in a year or two for a down payment on a rental, or that they can do some renovations. It’s helping brokers remain engaged with their customer throughout the life of their mortgage.”