As business in the B channel has soared this year, exit strategies for clients need recalibrating.
“Now that the dust has settled on the new rules, strategy and structure are more important than ever with mortgage brokering and lending. It’s about structure and strategy, and not just the interest rate,” said Frances Hinojosa, a managing partner with Tribe Financial. “
It used to be that borrowers in the B channel spent around a year or two there while they improved their financial standing in preparation for a shift to an A lender. However, that path is rockier than it used to be, and Hinojosa says planning a few years beyond the norm is a requirement for many borrowers.
“As brokers, we have to coach our clients on why taking a longer term in the B space makes more sense because then they can work strategically with their accountant to balance off their reportable income so that they can eventually hit the A space, but they need at least two years of reportable income to hit that threshold,” said Hinojosa.
“The spread between a one-, or two-, or three-year rate in the B space isn’t that big,” she continued. “But where the difference comes into play is the renewals: If I put a client into a one-year term in the B space to get a 0.25% difference in the interest rate, when they come up for renewal in a year you run the risk of putting them in the position of having to pay a lender fee again. If I calculate the cost of that fee and my APR works out to be more by switching them than taking the 0.25% higher interest rate, obviously I’ll take the 0.25% higher interest rate because it will save the client more in the long run.”
Before this year, 98% of Broker One Financial’s Rakhee Dhingra’s funding was comprised of AAA business. This year, however, about 50% of her clients’ funding is from B lenders.
“That means tapping resources for secure private financing at affordable rates with conservative fees, as well, hence strengthening our relationships with our B lenders,” said the broker. “I’ve built a really strong reputation with our A lenders we build a proper business case for every application that comes through our door to ensure that we position it for exception financing when we need it. We get the exception to our ratios quite often to secure financing where it may not meet traditional ratios.”