Navigating turbulent times

From the record-low interest rates in 2020 and 2021, we have now seen rates that are challenging all brokers and lenders. Purchase demand and home prices are starting to decline, and borrowers are really feeling pressure from inflation. Learn from the best in the industry on how to navigate these turbulent times and maximize the upcoming year.

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Fergal: Hello again and thanks for joining us on another edition of CMP TV. I'm Fergal McAlinden, news editor for Canadian Mortgage Professional. And today, we're taking a look to the year ahead with some of the best ways that mortgage professionals can meet the challenges of the current market and keep their business growing. It goes without saying that brokers and their clients are not presented with a much different borrowing environment than the one they faced 12 months ago. And we've gathered some of the leading members of Canada's mortgage industry today to talk us through navigating these turbulent times. On our panel today, I'm very pleased to welcome Daniel Joseph, director of broker relations at Canadian Mortgages Inc. Faheem Tejani, president of Oppono Lending. And Rachel Oliver, managing partner and broker relations at Clover Properties. Thanks to you all for joining us today. How are things with you? 

Daniel: Good. Thank you. 

Rachel: Thank you. 

Faheem: Yeah, Thanks Fergal. 

Fergal: So, Rachel, I'd like to start with you, if that's okay. I'm just wondering, amid those circumstances that I mentioned, what you're encouraging brokers to keep in mind for clients whose borrowing options may have narrowed a bit in recent times. 

Rachel: Yeah, the first reality check is that what's worked in the low interest rate environment isn't going to be sustainable going into this high interest rate environment and staying here. Brokers are saying that their conversion rates have gone from 70% down to 40%, which is a real challenge. So this is where you have to consider what has worked in the past and how is it going to evolve. Most brokers have been looking at a, B and private, but what one thing they haven't been considering is rent to own financing. And rent own financing has been around in Canada for over a decade, so expanding the periphery to include rental and financing as a solution would be probably the number one advice that I would offer and educating yourself on how it works. Ask a lot of smart questions so that you can then present these opportunities to your clients and solve more problems than any other brokers are solving. And ultimately, where that hero hat because you were able to do that. 

Fergal: Yeah, for sure. And that growth of the rent to own space, as you mentioned, has been really interesting over the past couple of years. Faheem, anything that you're encouraging brokers to keep top of mind in this changing climate? 

Faheem: Yeah, I would say the same thing in the sense that what used to work 12 months ago, it's different in this environment. You just have to be you have to be on top of your deals a lot earlier. So we're encouraging brokers to get started on the applications load earlier to be a lot more flexible. So for those workers that only looked at eight lenders or B lenders, you know, the private option is a very good option. It's temporary in nature. And the other benefit is it's not all doom and gloom when you look at it. Interest rates have gone up. But the flip side, too, is houses prices have come down. So in some ways, if you think about down payments, which in the past were a big deal where people just couldn't get the down payment, you got family and friends to help them get the down payment. They can now afford the down payment. It's now more the monthly payments they have to deal with. And again, being able to rent the property, rent out your basement as an option to get some more income coming in. So I think you've got to look flexible. You've got to come in earlier as well as open the types of lenders that you deal with. Not all private lenders are the same. So some look at only equity based lending, others might look at an income docs. 

Fergal: For sure. And one thing, Daniel, that we often hear about when it comes to the private space is suitability and making sure that a client is suitable for the product that they're going into. I know that that's a big priority for CMI. Could you talk to me a little bit about that and how important it is for brokers? 

Daniel: Sure. I mean, ensuring suitability is of utmost importance when recommending any financial product to a client. That's certainly true for brokers working to obtain financing on behalf of our clients. In fact, it's a duty under industry regulations for a mortgage broker to ensure product suitability. So it comes down to know your client, which means knowing, having a thorough understanding of your client, their unique needs and circumstances. It also means knowing, being knowledgeable at all possible and demonstrating all possible options, including private mortgages. So you're equipped to provide the best possible solutions. I mean, traditional lending is very black and white borrowers fit in the box or they don't. And terms in standard private lending, on the other hand, can be viewed as a spectrum. We have discretion to assess. Every borrower is unique situations to making a lending decision and to tailor needs the terms of the borrowing solution, including the rate. So the flexibility is exactly why the private lending space is experienced such strong growth. It's offering a lifeline to borrowers who would otherwise be without options. Flexibility also helps ensure the suitability of the solution for the borrower at the end is suitable. 

Fergal: Absolutely. Thanks, Daniel. For you, Rachel, what are you advising brokers to keep top of mind where suitability is concerned? 

Rachel: Yeah, it's really not a one size fits all situation right now. You know, when it comes to the alternative products, you know, a private mortgage might not always be the right solution because it is really a short term solution for a short term challenge. But some people have more of a longer term challenge, such as they need a little bit more time to pay down some debts, they need a little bit more time to rebound from some sort of a bankruptcy or consumer proposal, which is tarnishing their credit. And a six month or a 12 month private is not necessarily going to solve their problem. And if you do try to solve a long term problem with a short term solution, I think it's going to create more of a spiral in the wrong direction. So we want to look at what is the root cause of the challenge and is it going to be solvable in 6 to 12 months? And if it's not going to be solvable within a short term prime time time frame, then the rent own financing scenario could actually be an option here, because not. Rent to own also helps people who need a solution with just, you know, a 95% loan to value option. A lot of private options, of course, require a little bit more skin in the game. Rent to own financing is a little bit more forgiving. And it's ideal for people who need two or three or four years to become A or B mortgage ready. So don't try to solve a short term solution by creating a long term problem is really what I'm encouraging them to consider. 

Fergal: Faheem, so when it comes to education, how important do you think it is for brokers to educate themselves on a wider spectrum of lending options as the market changes? 

Faheem: Yeah, I think what we've heard from my other panelists is it depends on the situation for the borrower. So understanding both the A, B private space and other alternatives I think is very, very important. With higher interest rates, it is definitely going to be harder for people to qualify. But there also is the opportunity. So if you're a broker that understands all the different areas, all the different possibilities, you could differentiate yourself from the competition and provide a solution to that borrower that another broker can't do. And so I think understanding what different people can offer, finding out what really matters to your client in terms of what fits their needs, I think it's critical. And so I look at this as an opportunity where it's definitely more difficult because if you think about it, the purchase market is down, there's less purchases. The overall mortgage market has gone down, so there's less deals to work on. But that means that those brokers that are actually very good can actually do better in this market and attract new clients just because they can differentiate themselves in ways that in the past would have been very difficult to do so. 

Fergal: Yeah, absolutely. And, Daniel, maybe I'll come to you for this one. We always hear about how much the market has changed over the past 12 months, and obviously there's been a big shift, but it's easy to forget that the previous two years as well saw an enormous change in how the mortgage market worked. I'm just wondering if you could give a bit of an insight into how you feel it's changed over the past couple of years. 

Daniel: Yeah, well, lockdowns and restrictions are behind us. I mean, but the post-pandemic pandemic recovery has presented an entirely new set of challenges with rapidly rising interest rates and soaring inflation. I mean, these persistently challenging conditions have made it increasingly difficult for many borrowers to qualify for additional financing, So demand for private lending continue to soar, and it will do so more in 2023. I mean, the changing nature of work is one key driving factor. I mean, non-traditional jobs have been on the rise. Things like gig work have become practical and necessary employment opportunities, but there are still considered non-traditional income sources by banks and fall outside the B20 regulations. So that's the environment of rising rates, increasingly tight mortgage guidelines, the ever stricter, even stricter mortgage stress test being a prime example. And the result is a rapidly increasing number of borrowers unable to qualify with traditional lenders. So an explosion of demand for private lending solutions is apparent. So we see only an increase in 2023 until rates start to come down and values start to go back up. But the demand for private lending. 

Fergal: And Phil, just to pick up on what Daniel said, are there any trends in the lending space that you're expecting to play out in the next year or so? 

Rachel: Yeah, I think very much like what Daniel was saying. I think we're going to start to see an increase in unique income sources because people are getting more resourceful. People have, are having side hustles. So the type of income streams that people had before are going to start to evolve, which is of course going to be a little more challenging for people to qualify within the a lender space. So that will naturally push a lot more people to look at alternative options. And in that context, I think that there's going to be a lot more buyers that are leaning into solutions like rent to own financing. The Liberal government is already looking at funding builders across Canada who are going to offer a certain number of units for rent to own, and that's definitely a step in the right direction. But the real gap is whether or not CMHC is going to recognize people who have gone through solutions like Rent to Own. So it'll be interesting to see. But I hope that CMHC will keep pace with whatever the Liberal government is planning in terms of opening up rent to own for mass consumption. 

Fergal: Okay, great stuff. Well, plenty to look ahead to in 2023. I think that's a good place for us to leave things today. I want to thank you all for coming on and sharing your words of wisdom. Plenty of food for thought there for our viewers. So it's much appreciated. And I'm looking forward to speaking with you all again in the year ahead. 

Faheem: Thank you so much. 

Daniel: Thank you.  

Rachel: Thank you. 

Fergal: That just about does it for today's episode of CMP TV. Our thanks again to Clover Properties, Canadian Mortgages Inc. And Oppono Lending for joining us. Thanks to you for watching and we'll see you next time.