The mortgage financing industry is constantly changing, and recent trends have significantly impacted both borrowers and industry professionals. These trends have both positive and negative implications, and it is important to understand them to stay ahead in the industry. In this article, we’ll discuss the noteworthy shifts in mortgage financing and how they can reshape the way you do business.
Trend 1: Mortgages for Cash Flow
The mortgage financing world has shifted towards focusing on cash flow management, rather than just interest rates. Instead of borrowers solely considering their total mortgage amount, they are now emphasizing what the mortgage will cost them per month or pay cycle.
This shift is especially relevant as interest rates have fluctuated, leading to increased payments for those with Variable Rate Mortgages (VRMs). Depending on their budgeting strategies, some may find it challenging to absorb these increased payments. At The Mortgage Centre, we prioritize helping borrowers create a budget for homeownership, which has helped prevent payment issues for many of our clients.
Cash flow considerations apply to primary residences and rental properties alike, and the Manulife One is a mortgage product gaining popularity due to its unique equity and debt management features. With the Manulife One, a bank account is connected to an operating secured line of credit (SLOC), with funds flowing in and payments made from the SLOC. This system’s daily interest calculations often result in lower overall interest payments, and individuals with balances in their bank accounts can apply them towards their Manulife One, saving even more money.
A similar concept applies to rental properties – rental income can be redirected into the operating line of credit to optimize cash flow. We also offer tailored programs for self-employed individuals, allowing for extended debt ratios if they have an excellent credit history. This program enables them to leverage their home equity for business investments, which can be a more affordable option than approaching the Business Development Bank of Canada (BDC).
Trend 2: Mortgages for your Upcoming Renewal
Now, let’s talk about mortgage renewals – a trend affecting over 65% of the current mortgages, with renewal dates approaching within the next two years. In Canada, it’s common to opt for 5-year mortgage terms, which differs significantly from the longer terms prevalent in the USA.
When it comes to mortgage renewals, borrowers usually have two options: stay with their current lender or search for better rates elsewhere. However, the interest rate is no longer the sole consideration; borrowers now prioritize cash flow management.
In the mortgage renewal industry, professionals often use tactics such as collateral transfers. Many banks place a collateral charge on properties exceeding the mortgage amount to avoid secondary financing. While banks promote the convenience of not requiring a lawyer for future refinancing, borrowers can use this system to transfer their mortgage to a different financial institution with better rates and re-amortize the mortgage to adjust for higher rates and payments.
Another trend worth noting is the increase in insurable mortgages, particularly for properties valued at $1 million or less with a 25-year amortization or less. These mortgages are “back-end insured,” resulting in lower rates, as they carry default insurance. Combining collateral transfers with insurable mortgages enables borrowers to merge their mortgage and Home Equity Line of Credit (HELOC) into one loan. This isn’t considered a refinance and often offers better rates, allowing borrowers to adjust the amortization to suit their budgets without undergoing a full refinance process.
Trend 3: Private mortgages
The final trend we’ll explore is private financing, where borrowers are matched with lenders outside the traditional banking system. These borrowers often have good credit but face challenges like self-employment, low taxable income on their personal tax returns, or unusual properties that are hard to finance. They may also require more substantial down payments than they have readily available. Private lending often involves business-minded individuals with around $500,000 to invest. Those without sufficient capital can invest in a Mortgage Investment Corporation (MIC).
Why has private financing gained traction? It offers borrowers an alternative way to qualify for mortgages, particularly when faced with stress test rates and employment fluctuations. It’s an inexpensive means to access funds, using their homes as collateral.
On the lender side, individuals who have grown dissatisfied with traditional investments like stocks, bonds, and mutual funds are increasingly turning to private lending. As a brokerage, our role is critical in vetting borrowers based on the 5 C’s of credit, presenting lender-recommended options, preparing documents, and helping transactions, acting as a hub between borrowers, lenders, and lawyers.
Adapting to the Changing Mortgage Market
The mortgage financing industry is undergoing many changes driven by various trends. From prioritizing cash flow over interest rates to creative solutions like Manulife One and insurable mortgages, borrowers and industry professionals alike must adapt to these changes to navigate the mortgage market successfully. As we move forward, it’s crucial to remain agile and informed to make the most of these trends in mortgage financing.
Contact us today to learn how we can assist you in finding the right mortgage financing solutions to suit your needs.