Is your alternative mortgage costing you? Do you need a clear and simple exit strategy? This article gives you a great option.
It’s clear that it has become increasingly difficult to get approved for a mortgage in Canada. This is due in part to the impact that COVID-19 has had on the lending space. Many Canadians have had their income and cash flow reduced. Thus, lenders are being more risk-averse, cutting back on refinancing loans, and demanding closer scrutiny of your finances.
As you know, there are many reasons you might be denied a traditional mortgage. Here are some of the main reasons
- Inability to meet the maximum debt-service ratios
- Have a low credit score because of too many late payments.
- Employment type
- Commission or tips-based income
- COVID-19 had an impact on your ability to meet financial obligations or essential needs (28.9% of Canadians reporting this)
- Are retired and have no income despite holding significant assets.
Alternative Mortgage Lenders
Many Canadians in this situation are therefore turning to alternative mortgage lenders, These lenders are provincially regulated and therefore not required to implement the stress test. However, while traditional mortgage lenders offer rates of around 3%, alternative lenders tend to offer rates closer to 7.99-13%. This massive difference in interest payments is over the short and long term. Alternative mortgage lenders also require you to renew every 1 to 3 years, and with renewals come fees and requalification. Many Canadians already have cashflow issues, so the question is, how will they be able to afford these interest payments and renewal fees without having to sell their assets? Some private lenders work in the capitalization of the first year of payments. This unfortunately is a short-term fix and escalates equity erosion.
Canadians often resist or forget about the Reverse Mortgage option. A reverse mortgage is a lifetime loan with no renewal fees and no requalification. The best parts are that the loan can’t be called and there are no required payments whatsoever. This gives Canadians more monthly cash flow to live out their retirement.
An Alternative Mortgage Exit Strategy
If you are currently in a high-interest alternative mortgage, consider the CHIP Reverse Mortgage. It allows you to release equity from your home by borrowing up to 55% of its value. Importantly, a reverse mortgage has considerably lower interest rates than an alternative mortgage.
You can use the additional funds from a reverse mortgage to pay the required penalty to abandon your alternative mortgage. This makes financial sense in the long run as you’ll now be free of such a high-interest loan. What’s more, alternative loans usually have monthly payments while reverse mortgages don’t. You will only pay what you owe once you sell your home or pass away. Therefore, you’ll benefit from increased monthly cash flow to enjoy the retirement they’ve always planned.
Second Mortgage Exit Strategy
This solution is also an option when the alternative mortgage in question is your client’s second mortgage. A second mortgage normally has higher rates and fees than a primary mortgage because the second mortgage has priority on the collateral if the borrower defaults. With a second mortgage, the borrower has to keep up with two sets of repayments. Therefore, their monthly payments are considerably higher, meaning a higher risk of foreclosure. Because it’s impossible to default on a reverse mortgage, this risk is taken out of the picture when using this as an exit strategy.
If your clients are looking for a mortgage exit strategy, they won’t have one with an alternative mortgage. With a CHIP reverse mortgage, they won’t need one, since it is a lifetime deferral mortgage for Canadians 55+. Contact me today for more information.