What brokers should ask before placing the next loan
The years-long condo market correction in Toronto has seen appraisal challenges hit the headlines, with countless preconstruction buyers suddenly scrambling to make up the difference between the price they originally agreed to pay and the actual amount lenders value the property at.
That’s still a highly prominent problem for the condo sector – but there’s often a much longer story also at play, according to licensed insolvency trustee Paul Franchi, who told Canadian Mortgage Professional appraisal headaches aren’t necessarily where problems began for condo borrowers.
“Picture a father of three working two jobs, supporting rentals that need money every month, with another condo approaching closing,” he said. “There may also be a half-interest in a townhouse bought with a friend. These are not separate investments when the same paycheque is keeping all of them afloat.”
While the mortgage gets paid, groceries might go on a card, with the line of credit growing when another deposit is due. “A long record of on-time payments can sit beside a household that no longer lives within its income,” he said.
Property is increasingly part of the answer when a client arrives with hundreds of thousands of dollars in credit card debt, Franchi said – either because the investments created the shortfall, or because the household was already struggling financially and a big property gain was supposed to fill it.
When the mortgage isn't the real problem
Whatever the case, the appraisal gap may be the final financial problem but not necessarily the only one. Franchi said an important question for brokers whose clients have significant unsecured debt alongside their mortgage is what that unsecured borrowing has been paying for.
“Paying off the cards may help,” he said. “But if the rental shortfalls and household deficit remain, what stops the balances growing again? A rental running at a loss is not automatically an unsuitable investment. Some households can comfortably fund it.
“The problem is relying on steadily expanding credit while waiting for the property to rescue the budget. Private lending can address a temporary need where the repayment plan is credible. The rate alone does not decide suitability – but neither does getting an approval.”
Franchi offered the example of a one-year, interest-only second mortgage for $350,000 at a 10% rate with $44,500 in lender, broker, and legal charges deducted at advance – meaning the client receives $305,500. First-year fees and interest would total about 26% of the net cash received if they come to $79,500, he said, with the $350,000 principal still requiring repayment.
“That loan needs to accomplish something worth its cost,” Franchi said. “A hoped-for rebound is not the same as an executable exit. The broker’s question cannot stop at whether this condo closes. What funds the next 12 months across the household and every property? If the answer remains more borrowing, the conversation needs to widen beyond the next mortgage.”
The other costs of holding on
Another essential step is asking what the property was supposed to do for the household. Sometimes it might have been an investment funded from genuine surplus income; at other times, it might have been expected to produce the gain that would cover another property’s losses and finally put the family ahead. “That is a great deal to ask of one condo,” Franchi said.
“Once someone sees that gain as their way out, letting go is not just accepting an investment loss. It can feel like abandoning the solution to every other financial problem. That’s why the father takes another shift and why the family keeps finding money for a property that never seems to give any back.”
The cost of exiting a contract can also be serious, and Franchi said the contract, full debt picture and a comparison of the available choices are essential. For a consumer proposal meanwhile, insolvency professionals must weigh whether the offer is reasonable and fair to the debtor and creditors, and whether the debtor will be able to perform it.
“Lower unsecured payments may help, but they cannot be treated as permission to keep financing an unaffordable portfolio,” Franchi said. “Sometimes retaining the property works. Sometimes a sale, negotiated exit or bankruptcy needs consideration.
“The aim is a plan the household can carry without depending on a large, timely gain that nobody can promise. Closing the purchase and solving the client’s problem are not necessarily the same thing.”
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