Essential for brokers to bring a note of caution to the conversation, says mortgage pro
Suitability, and a borrower’s ability to handle the mortgage they’re placed into, have always been of huge importance in the private and alternative lending spaces – and those considerations are as crucial as ever for mortgage professionals in the current volatile environment, according to a leading broker.
Daniel Vyner (pictured top), of the Toronto-based DV Capital, told Canadian Mortgage Professional that the need for a “conservative” approach by borrowers and brokers alike was essential in today’s climate, one characterized by rising interest rates and surging mortgage servicing costs.
Difficult circumstances for many borrowers show little sign of easing, with a further Bank of Canada hike expected in September and no indication that rates are set to drop soon.
“Suitability is critical in all cycles of a market, but especially this real estate market,” Vyner said. “Borrowers need to be very conservative. They should not be gambling on the concept of home values increasing and rates decreasing in a short period of time.
“They should be assessing their financial health based on current rates, and they need to be very honest with themselves if they can sustain this current interest rate environment. Brokers should be very explicit in their disclosures of material risks, and they must exercise due care to consumers who may not be in ideal positions.”
Bank of Canada's policy rate may stay high as sticky core inflation measures persist, indicating challenges in restoring price stability.https://t.co/VuXDsXAtWk#mortgagenews #mortgageindustry #ratehike #interestrates
— Canadian Mortgage Professional Magazine (@CMPmagazine) July 26, 2023
What do brokers need to keep top of mind about the private lending space?
The prevalence of private and alternative lending options has only grown in recent times, with higher interest rates pushing many Canadians away from conventional borrowing.
In its latest residential mortgage industry report, Canada Mortgage and Housing Corporation (CMHC) said non-bank lending witnessed a significant surge throughout last year. Mortgage activity in that space accelerated until the third quarter and matched the pace of mortgage growth in the banking sector.
Still, while private options can prove an effective short-term solution for borrowers, Vyner said brokers have a duty to ensure their clients are fully aware of the differences between private and more traditional mortgage types.
“They must exercise due care to homeowners that are not in ideal situations,” he said. “It’s their duty to make explicit disclosures of material risks pertaining to the attributes of short-term private mortgages: fees, the possibility that a private mortgage lender may not offer a renewal, the cost of renewing the mortgage, the likelihood of the homeowner being able to replace or to convert the mortgage a traditional [one].
“Consumers are depending on brokers to provide them with insights and disclosure – you need to be crystal-clear with the consumer. Some may be very confused, [and] some are still of the impression that rates are going to go back down and their home value is going to rise.”
Why a conservative approach is essential in the current private lending climate
Brokers must add to the discussion that home price increases may not necessarily happen and instil a note of caution, Vyner said, rather than “cheerlead” or encourage the borrower into the mortgage without keeping them apprised of what it entails.
“We’re not in the forecasting business,” he added. “We’re in the business of providing crystal-clear, explicit disclosure of potential options that coincide with the consumers’ circumstances.”
The “conservative” part of that approach, Vyner said, means emphasizing to borrowers that interest rates could – and likely will – remain elevated for at least the foreseeable future, with no guarantee either that home values will continue ticking upwards.
In that environment, creating a gameplan based on the current high-rate landscape, rather than on a belief that property values will rise, should be a key recommendation brokers make to their clients, he said.
“That’s how you need to navigate this market whether you’re a bank, whether you’re a lender, or whether you’re a borrower or private borrower,” he said. “We’ve got to be conservative – we need to be honest.
“Borrowers need to really look in the mirror and assess their finances and their financial health. Brokers, as always, need to be very explicit with their disclosures.”
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