The rules around mortgage lending may be tighter, but it’s also spurring creativity.
MERIX Financial has been offering the Interest-Only mortgage for the last couple of months, and given the marketplace need it’s fulfilling, reception has been resoundingly positive.
“The Interest-Only Flex is all about providing clients lower monthly payments that allow them to free up cash flow for other purposes,” said Merix's Executive Vice President of Broker Experience Jill Paish. “We felt there was a real need for that type of mortgage for a variety of reasons. With the tightening rules and the way real estate prices are going, a lot of times clients can’t afford the monthly carrying costs, and the monthly costs are higher than they’d like to live in a desired marketplace.”
MERIX has noticed that people with high debt levels are gravitating to their Interest-Only mortgage product. The extra cash flow savings with lower mortgage payments is helping them service higher-interest debt. It’s also helping them grow their money.
“We’re finding it’s being used by people who want to invest,” said Paish. “They’re taking a lower interest rate on their mortgage and using cash flow from that investment for a savings nest. We’re also finding that it’s popular with people who have various lifestyles, like cyclical income or a lot of overtime, and just want to make lower payments. When they have more money, they’ll pay a lump sum towards their mortgage.”
Jacques du Preez, the principal broker and owner of Mortgage Allies, was the first broker to apply for MERIX’s Interest-Only mortgage product and he says its applications have a wide set of parameters. In particular, it’s ideal for real estate investors.
“It’s the most innovative product that has come through the mortgage market for the last seven years,” he said. “Because of the new rental laws, you can’t just increase the rent on tenants, but at the same time you want to make sure your costs are stable. What turns a lot of people off is having a line of credit on a rental property because as time goes on, payments go up, so cash flow gets pressurized.”
What du Preez loves about the flexibility is that borrowers pay variable rates on a five-year fixed term with limited penalties. The client for whom he secured the 4.3% Interest-Only mortgage is a real estate investor.
“They have a low payment, and that is fixed for five years,” he said. “If at any time they want to lock that in, they can lock it into a P&I [Principal and interest]. Variables are not good for rentals because it can impact the cash flow over time as the prime increases, but here the cash flow is sure for the next five years.”
He added that it’s also suitable for couples who are planning on having children over the next couple of years and need to strengthen their financial security.
The loan-to-value goes as high as 80% and there’s no refinancing cap, meaning the usual $200,000 limit isn’t applicable.
“We’re pleased with the amount of applications we’ve received,” said Paish. “The average mortgage size at MERIX, generally, is $320,000, but this one is averaging closer to $700,000, so we’re finding that brokers are definitely using it for people with larger mortgage payments.”