Self employed, high-risk homeowners increasingly scrambling to get mortgages
By: Susan Pigg Business Reporter, Published on Thu Jun 19 2014
Private lenders have been moving aggressively to fill a growing void in the wake of Canada’s tighter mortgage lending rules, offering loans to desperate homeowners that, with fees, can range from 12 to more than 30 per cent interest rates, leaving some people at risk of losing their properties.
Mortgage brokers say they are seeing more people — especially self employed or those who bought preconstruction condos or houses before Ottawa further tightened lending guidelines — now scrambling to get mortgages or approvals to refinance their properties.
So many are now being turned down by the A lenders — banks offering 2.99 per cent mortgages — that B lenders such as trust companies, with rates of 4 to 5.5 per cent, have seen a significant spike in business.
So have private lenders — a largely unregulated sector of the mortgage market where money pooled from investors is used to offer one-year, interest-only loans to desperate borrowers traditionally considered high risk.
Veteran mortgage broker Jason Friesen calls the growth of such alternative lenders “a sign of the times.”
“We’re going to see more and more of this. It’s very much a byproduct of people who, for so long, used their houses as a bank machine and now it’s catching up to them. You’re finding a lot of desperate people doing desperate things.”
Friesen has seen a virtual doubling of people who no longer qualify for mortgages from banks.
“Where it used to be one out of ten, it’s now two in ten, and substantially higher for self-employed. They are being hugely impacted by this.”
The costs of having to turn to alternative lenders can be staggering.
A $500,000 mortgage at 2.99 per cent over 25 years costs about $2,360 a month. At the 5.5 per cent charged by B lenders, that rises to $3,000 per month.
But that mortgage payment skyrockets to $6,200 per month — and that’s interest only — from private lenders charging, say, 15 per cent. On top of that is frightening fine print and fees, often overlooked by desperate borrowers, from lawyer to lending and late payment charges that can add tens of thousands in costs.
The pool of borrowers with no choice but to take the private route appears to be growing, as are the email marketing campaigns by private lenders offering to do “difficult deals” or “what the bank does not.”
Brokers can get hefty fees for connecting private lenders with borrowers needing 85 or 90 per cent financing, in excess of the 80 per cent loan to value of the home limits that Ottawa has now imposed on the big banks.
Broker Steve Garaganis calls private lending “a minuscule” segment of the mortgage market. He urges clients to rent, rather than further burden themselves with high-interest loans in what can end up being a futile effort to hang onto their homes.
But he sees more self employed, who used to qualify with the banks, now forced to alternative lenders because “Ottawa has gone way overboard” in tightening the lending rules.
Broker Rod Smith specializes in arranging private mortgages, but only with money from wealthy, savvy investors who are vetted to make sure they can afford the risks. Most are looking for alternatives to the stock market and like the fact the loan is backed by a hard asset, real estate.
Private lending “is a growth sector right now, but that’s because of the contraction of the institutional (bank) sector,” says Smith.
In fact, it’s resulted in a “higher grade of borrower” turning to private lending, especially self employed, he says.
Brokers believe the worse may be yet to come as highly-leveraged homeowners, or self-employed persons lacking adequate proof of income, try to renew mortgages in the next couple of year and find themselves turned away by the banks for the first time.
One Mississauga woman discovered the hard way the high costs of private mortgages after being turned down by both A and B lenders for a second mortgage on her $325,000 townhome. She was looking to consolidate debt after a bout of joblessness.
She was eventually able to borrow $20,000 at 16 per cent. But the woman says fees, for everything from documents to late payments, have been crippling and she’s at risk of losing her home.
“Their fees were so disgusting that I just couldn’t get ahead. I’ve just not been able to re-establish my credit (rating),” said the woman, who spoke on condition her name not be used.
It’s not only desperate borrowers who are at risk.
Toronto realtor Brian Persaud has been trying to sell a condo for a woman who is now $77,000 in debt after she says a broker convinced her there was big money to be made if she used her Home Equity Line of Credit to help needy borrowers.
Her first $35,000 loan went well. The one-year, interest-only loan was repaid on time and the broker paid her a hefty return on her investment, including $1,700 in fees.
Today, however, she’s out $77,000 after a second loan of $50,000, also against her HELOC. Only later, she says, did she discover the money was being used as a second mortgage on a condo.
The owners defaulted and she was left on the hook for the mortgage, as well as mounting maintenance and other fees.
The single mother acknowledges now that she should have hired a lawyer to look at the deal first. She’s fearful of having her name used, in case her bank discovers how she’s been using her HELOC.
“I thought, ‘This is going to make me some extra money. But the broker didn’t do his math. Right now there is nothing (no value in the highly leveraged) condo to cover my money.
“I would never go into this kind of situation again. It’s killing me.”