Having a plan in place to move from the private space to an A lender is an invaluable asset, the company says
It’s an important, but frequently misunderstood concept in the world of private lending: the exit strategy, or having a plan in place to move from the private space back to an A lender.
Having a viable exit strategy – a way of identifying the route back to the banks after securing a private mortgage – is an invaluable advantage for homebuyers who find themselves in the private space, according to Canadian Mortgages Inc. (CMI) team lead, sales operations Cynthia Clark (pictured).
Indeed, it’s an idea that she said brokers and their clients should always bear in mind: what a deal is going to look like over the long-term instead of simply considering what the best solution might appear to be today.
These exit strategies, she told Canadian Mortgage Professional, usually take two forms in private lending. The first is using a private mortgage to gradually help repair a borrower’s credit, allowing them to position themselves with a bank in the not-too-distant future.
In that instance, CMI can put a private mortgage in place to help borrowers clean up outstanding secured and unsecured debt so that over a certain period – say six months – their credit rating can improve sufficiently to meet the banks’ stricter “minimum beacon score” criteria.
The second exit strategy, Clark explained, is selling a property. For clients who may have financial issues, a short-term mortgage can be put in place to help remove outstanding debt and/or judgments – or even provide the capabilities to renovate or upgrade the property – so that it can be sold after that.
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“We can put a private second mortgage behind a traditional first mortgage – maybe to get the borrower some money for renovations, to consolidate some debt or to help in other ways,” she said. “Many people use our second mortgage to complement their first bank mortgage.”
One of private lending’s big advantages in facilitating those types of exit strategies, Clark said, is the flexibility it can offer.
“It’s very important to keep in mind that private lending options are extremely flexible with regards to term length,” she said. “Let’s say, for example, that a client has a longer-term first mortgage at a traditional bank, and they just need to pull some equity out for a shorter-term second mortgage. That’s where we would come in and help a borrower.”
Another use for that second mortgage, she said, might be to allow borrowers to help their children raise the down payment required to purchase their first home.
Clark emphasized that the short-term solution offered by a private mortgage works in tandem with any longer-term mortgages a client may have. This added flexibility also means lenders like CMI can offer anything from a short-term bridge lasting a few days to a longer deal of up to 24 months.
It can also offer fewer hassles with documentation and having to meet banks’ strict regulations, she said, as well as often being a quicker solution to put in place.
Not only that: private lenders can sometimes offer a less expensive option relative to traditional mortgages.
“Usually with private lending, the shorter the term of the mortgage, the lower the rate and fees will be. This is somewhat different than the banks, whose rates are usually higher with shorter and open terms,” she said.
“If you go to a bank and ask for a six-month open, that rate will be a lot higher than their five-year fixed. With us, you can ask for that short-term open mortgage rate and that, in some cases, could be less expensive and less complicated than what the banks would offer.”
That’s an important point to note, Clark said, with private mortgages sometimes having a reputation of being more expensive than traditional products. In fact, rates and fees for private solutions are based on a number of different factors, she said – one being the overall risk of the file.
Another is the client’s ability to pay, which is a requirement for private mortgages despite the lack of set Gross Debt Service (GDS) and Total Debt Service (TDS) guidelines. Even if the client doesn’t have this capability, Clark said that CMI’s prepaid options – deducting all payments for the term of the mortgage from the advance rather than requiring the client to make a monthly payment – again demonstrate how flexible private lending solutions can be.
The case for working with a private lender
With the various options that private lenders can facilitate for exit strategies, Clark said that it’s essential for brokers to familiarize themselves with the space and its various benefits, particularly in light of the sector’s growth over the past few years and future growth projections.
“I think it’s really important for mortgage brokers to have a thorough understanding of private lending,” she said. “What COVID-19 has done is emphasize the need for added flexibility in the mortgage market and its lending guidelines.
“While the banks are regulated by the government, private lenders don’t have those same strict regulations, and in many cases can be a better option due to the added flexibility– especially for clients that do not fit into the traditional lender box.”