The Changing Face of the Mortgage Industry
Since the 2008 real estate and mortgage market fallout, there have been desperate attempts on the part of the banks to keep interest rates low and tighten up the lending regulations in Canada. The Canadian Mortgage and Housing Corporation (CMHC) has changed their lending guidelines over the last several years to the point where the “A”/prime lenders such as banks and trust companies are turning down a lot of borrowers that could have qualified for a mortgage just a few years ago.
The emergence of ‘Alternative’ and Private Lending is filling the void left by the government-sanctioned regulatory bodies, and come in the form of Mortgage Investment Companies (MICs) and individuals (private lenders), who have flexibility to help people that don’t fit into traditional lending criteria. Typical scenarios that would fall into this are individuals who are self-employed and have unverifiable income, individuals with bad credit, etc.
Alternative lenders make their decision based on an assessment of the borrower’s security and equity, rather than on credit or income. In private investing, the property value and location is the main factor which drives approvals, and will commonly be willing to loan 85% LTV of the property’s worth (Loan-to-Value ratio).
Private Mortgage Deal of the Week
Brent and Brad are brothers and they want to buy an investment property in Scarborough for $500,000. They are both contractors that have been in business for over 6 years, and have saved up 15% for the down payment. Brent and Brad haven’t done their taxes in a couple years, and their tax returns state that they make only $40,000/yr each when they really make upwards of $70,000/yr each. Brent and Brad go to their bank branch and get turned down based on the fact that they are self employed with unverifiable income, and are only willing to offer them 65% of the purchase price as a loan.
Purchase Price: $500,000
Mortgage Loan from Bank: $325,000 @ 4% interest
Amount of Down Payment: $75,000
Amount they still need: $100,000 @ 9.99% interest
Brent and Brad are still $100,000 short on their down payment! This is where a private lender comes into play. Brent and Brad can get a 2nd mortgage with a private lender for this amount, bringing them from 65% LTV to 85% LTV! Now they can close on the house, and by next year they will be able to refinance the whole mortgage amount at a lower rate after they put in some upgrades to boost the property value.
Private lending has been stigmatized as being ‘risky’ or undesirable in some way, but it is best thought as of a temporary means to an end. A mortgage professional that is a specialist in private lending and alternative real estate financing knows to always have an exit strategy!