A cautionary tale about private lender mortgages

Borrower beware

The easy fix isn’t always the right fix.

I wondered how long it would take to see the fallout, as clients who were paying really low interest rates have their mortgages come up for renewal.

We have all experienced a steep increase in the cost of living. Even though interest rates are now are sitting where most clients who qualified with the “stress test” when they originally got their mortgages, for many people, life happened in the meantime.

What do I mean by that? Often, clients have to push right to the top of what they qualify for just to get into the housing market. As we go through the mortgage approval process, we talk about keeping big consumer purchases (financing a car or furniture as examples) to a minimum because additional loan payments reduce borrowing power.

Once clients are into a home, life does indeed happen. The older car dies and a new car is necessary. Little ones come along and that can affect family income and add a daycare bill to the bottom line. Property taxes increase. Grocery prices skyrocket. You know the list. Balances start creeping up on credit cards or lines of credit.

There are lots of different mortgage products to help with consolidation of debt. Lately, the challenge has been that even if clients have significant equity in their homes, with the increased interest rates they may not qualify with traditional lenders.

Alternative lenders and private lenders come into play as options in those cases.

I’ll leave the alternative lenders to another day because I have a cautionary tale about private lenders but not all private lenders are created equal.

I have several I work with when my clients need a solution in the private world. There is a time and a place where a private mortgage is the ideal fit. As long as you have an exit strategy (a plan as to how it will be paid out in a relatively short time frame ie: one year) this can be a great option for clients.

Then there is the private lender that hurts my heart. Heavy, catchy marketing bombards us from multiple venues. Its jingle is running through my head as I write this. For it, the bottom line is if you have adequate equity in your home you are approved.

That fixes the immediate problem. However, more times than I like to think about, it can creates far bigger problems for people.

Despite the fact you have equity in your home, you still have to make the payments on those private mortgages. Interest rates are usually around the 14% mark, so payments are high and you are not making any headway with paying down the mortgage. If there is no significant increase in your income, you struggle and find yourself in a financial bind again. They set up another mortgage with an even higher rate.

When you sign on for a private mortgage your are responsible for covering your legal fees, the lender’s legal fees and there is also a lender fee that is included. Even a small private mortgage can end up costing almost $10,000 to put in place.

If you couldn’t cover expenses with your first mortgage (at reasonable rates), guess what happens when you start adding in more and bigger payments on top of your normal expenses? For most people the only out at that point is selling their home.

That is a very hard conversation for me to have with clients, especially when they’ve been in their home for many years.

If you are finding there is more month than money, sitting down and reviewing your expenses is the first step to take. Are there any areas where you can cut back? Do you have any options for increasing your income?

If the answer is no, talking to a mortgage professional sooner rather than later may help identify some options before you end up in a never-ending cycle of sleepless nights and missed payments.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

Now is a good time to look at your finances

New year, new mortgage

Dealing with bridge financing when selling your home and buying a new one

Mortgage timing

When clients are selling one home to buy another, realtors try their best to line up the sale date of the current home with the purchase date of the new home.

When clients want a few days, or even a few months, ahead of the sale of their current home to move from one home to another, they can look into bridge financing.

Depending on the lender you are working with, bridge financing can be very easy to arrange, or it may be the lender you are working with does not offer bridge financing so you need to arrange private bridge financing.

Before you agree to any dates with your realtor, it is important that you look into your options.

If you are working with a traditional bank or one of the monoline lenders, bridge financing is fairly simple to organize. Generally there is an administrative fee of approximately $250 and daily interest on the funds you borrow to bridge your down payment.

This year, I’ve had a couple of situations where bridge financing was not an option, so clients had to time their moves strategically.

When might bridge financing not be the right option?

• When your lender doesn’t offer bridge financing.

• When the cost of bridge financing through your current lender seems excessive.

• When the current home is located on First Nations land. (Most lenders will not offer bridge loans because of the terms of the lease agreements.)

• When the cost of arranging private bridge financing far exceeds the benefit of having a few days to move.

So, if you need a few days to empty your current home, what do you do? Over the years, several of my clients have used companies like Securite or Big Steel Box. They have a shipping container brought to their home a few days ahead of their sale date. The company will pick the container up once the home is emptied and store it for a few days, then bring it to the new home for possession day.

There is a bit of coordination required with this strategy and maybe a night or two in a hotel or staying with friends or family.

I did a cost benefit analysis with clients last week comparing using the shipping container versus arranging private bridge financing. In their case, they will save approximately $4,500 (using a container), even factoring in the hotel stay and eating out for a few days. For a few days of inconvenience I’d rather see those funds in their pockets.

I also helped clients arrange bridge financing through the monoline lender they are working with. In their case, it was the $250 fee and the interest for the week that will be about $650. In their case, the $1,000 investment will give them time to clean both homes and move their things over the course of a week rather than panic packing a moving truck the night before and exhausting themselves with the logistics.

When you are planning a move and considering have the sale and completion dates on different days, make sure you check with your mortgage professional before you sign off on a date change to your contract.

Thank you for your feedback and support throughout the year. Wishing you and your family warmth and happiness as we head into the new year!

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

Getting ahead of yourself when buying a home

Last minute mortgages

Do your homework. Be prepared. Make good decisions. Don’t gamble on an outcome and maybe, most importantly, don’t rush. These are lessons that can be applied to almost every aspect of our lives.

Last week. I jumped in to help another mortgage broker. A client of his wrote an offer on a new home priced at $1 million. The client’s current home was owned free and clear (no mortgage outstanding) but was worth slightly less than that.

The broker had a mortgage arranged to cover the difference between the purchase price and the anticipated sale proceeds of the current home. The client removed all of the subjects on his purchase before his current home was sold – basically rolling the dice and assuming it would sell.

I bet you know where this is going. There was a plot twist though.

As it turned out, the other broker was unexpectedly away dealing, with a health emergency. The client’s original home had not yet sold and he had to complete the purchase on his new home by the end of the following week. We scrambled to line up private financing to cover the shortfall needed to complete the purchase of the new home.

The broker had urged the client not to remove subjects on the purchase until the other home was sold. I have seen the email. The client decided to move forward regardless. He was fortunate he still qualified for the new mortgage, even with the current home not sold.

The client would, however, cover some unanticipated expenses. Between fees for the private loan and additional legal fees the client will be paying more than $10,000 at closing on top of the expected closing costs for the purchase. As well, the monthly payment on the private loan will be approximately $4,500 per month, so we are all hoping an offer comes in soon.

The thing about houses is more are built all the time, maybe not everyday but certainly new homes come onto the market regularly. It’s hard if you are emotionally attached to the idea of a shiny new home, but I lean to the conservative side and encourage my clients to look at the long-term outcome, should all the pieces not fall into place.

As we move into what we expect to be a busy spring market, I encourage you to make thoughtful decisions and not put your financial well-being at risk by jumping into something you shouldn’t.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.