One lender says he's seen payout statements that are "eye-watering"
A private mortgage priced at 5.99% with a 2% fee can balloon into a 14% loan if a broker misses an auto-renewal clause in the commitment, private lenders warned on September 24, the second day of MortgageFest Canada in Toronto.
Jason Geall, chief executive and principal broker at Peerage Mortgage Capital Inc. in Toronto, laid out the scenario during a Day Two panel on private and mortgage investment corporation (MIC) lending.
"What I've seen and hear a lot – it's unfortunate – is that some lenders have auto-renewal fees that can be really scary. You could have a really cheap upfront rate and fee, which sounds fantastic," Geall said.
"But then if they don't renew and it auto-renews, the rate goes up by 3.5%, there's a 4% auto-renewal fee, and all of a sudden your 5.99% and 2% is now 14%, and they're locked in. It's closed for 6 months or for a year, and they're handcuffed."
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Why private mortgage costs don't stop at the rate
Nick Christopoulos, chief executive of Hosper Mortgage, said brokers routinely compare private lenders on the wrong numbers.
"A lot of brokers think it's just about interest rate and placement fee. And when you actually compare lenders, there's a big disparity in the schedule of fees – the fees that they charge for administration, for discharge, for enforcement actions," he said.
"On an annualized basis, these fees can be upwards of 3, 4, 5%."
Hosper has previously warned brokers about backend penalties and hidden fees in private deals.
Sebastien Kuperhause, vice-president of sales at Sequence Capital, said the exit deserves equal scrutiny.
"Understand it's not just the cost on the way in, it's the cost on the way out. What is the true cost to your client? Because what is it at renewal when you have to renew? And then what are the discharge fees? I've seen some payout statements and it was eye-watering – just absolutely eye-watering what they're being charged to get out."
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What regulators expect brokers to document
Moderator Donna Thornton, a board member of the Canadian Mortgage Brokers Association – Ontario (CMBA-ON), said clients who get trapped are what bring the Financial Services Regulatory Authority of Ontario (FSRA) calling.
"We get phone calls from our friends at FSRA saying, 'Please show us why this was suitable, how you came to that,'" she said.
"From the regulator's perspective, it's not just enough to have your client sign the suitability and the exit strategy form. You need to take notes."
FSRA's suitability guidance says brokerage documentation should, at minimum, record the product recommendation and the reasoning for how it meets the client's needs and circumstances. In July, the regulator refused to renew an Ontario broker's licence over unsuitable private mortgages arranged for elderly clients.
Renewal offers no safety net either, said Joe Flor, vice-president of national sales and broker relations at CMI Canadian Mortgages Inc.
"When it comes to renewal in the private space, it's never a guarantee. It's a privilege," he said.
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