It’s an important concept, but often misunderstood in the private lending world: the exit strategy, or having a plan in place to move from private space to a lender A.
Having a viable exit strategy – a way to identify the path back to the banks after securing a private mortgage – is an invaluable advantage for homebuyers who find themselves in the private space, according to the chief. Canadian Mortgages Inc. (CMI) sales operations team. Cynthia Clark (photo).
Indeed, it’s an idea that brokers and their clients should always keep in mind: what a long-term transaction will look like instead of just considering what might be the best solution today.
These exit strategies, she told Canadian Mortgage Professional, generally take two forms in the private lending arena. The first is to use a private mortgage to gradually help repair a borrower’s credit, allowing them to position themselves with a bank in the not-so-distant future.
In this case, CMI can set up a private mortgage to help borrowers clean up their secured and unsecured debts, so that over a period of time – say six months – their credit rating can improve enough to reach ” more stringent minimum beacon score for banks. Criteria.
The second exit strategy, explained Clark, is to sell a property. For clients who may have financial problems, a short-term mortgage can be put in place to help eliminate past due debts and / or judgments – or even provide the ability to renovate or improve the property – so that ‘it can be sold afterwards.
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“We can put a second private mortgage behind a traditional first mortgage – maybe to get money from the borrower for renovations, to consolidate some debt, or to help them in some other way,” he said. she said, “A lot of people are using our second mortgage to top up their first bank mortgage.”
One of the great advantages of private lending for facilitating these types of exit strategies, Clark said, is the flexibility it can offer.
“It is very important to keep in mind that private loan options are extremely flexible in terms of the length of the term,” she said. “Say, for example, a client has a longer-term first mortgage with a traditional bank and they only need to withdraw equity for a shorter, second mortgage. This is where we come in and help a borrower.
Another use of this second mortgage, she said, could be to allow borrowers to help their children increase the down payment required to buy their first home.
Clark pointed out that the short-term solution offered by a private mortgage works in tandem with any longer-term mortgage a client may have. This added flexibility also means that lenders like CMI can offer anything from a short term bridge of a few days to a longer contract of up to 24 months.
It can also offer less hassle with documentation and having to meet strict bank regulations, she said, while often being a quicker solution to put in place.
Not only that: sometimes private lenders can offer a cheaper option compared to traditional mortgages.
“Usually with private loans, the shorter the term of the mortgage, the lower the rate and the lower the fees. It’s somewhat different from banks, which tend to have higher rates with shorter, open terms, ”she said.
“If you go to a bank and ask for a six-month open, that rate will be much higher than their fixed five-year rate. With us you can apply for this short term open mortgage rate and it in some cases could be cheaper and less complicated than what the banks would offer.
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This is an important point to note, Clark said, with private mortgages sometimes having a reputation for being more expensive than traditional products. In fact, the rates and charges for private solutions are based on a number of different factors, she said, one being the overall risk of the case.
Another is the customer’s ability to pay, which is a requirement for private mortgages despite the lack of established guidelines on gross debt service (GDS) and total debt service (TDS). Even though the client does not have this ability, 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. – demonstrate again how flexible private lending solutions can be.
The case for working with a private lender
With the different options that private lenders can facilitate for exit strategies, Clark said it’s critical for brokers to become familiar with the space and its various benefits, especially in light of the growth of the industry over the course of time. recent 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 underscore the need for increased flexibility in the mortgage market and its lending guidelines.
“Although banks are regulated by the government, private lenders do not have these same strict regulations, and in many cases they may be a better option due to the added flexibility, especially for clients who do not fit. not in the category of traditional lenders. “