Amidst the currently rising interest rates, securing a favourable mortgage rate is increasingly important, but also increasingly difficult. As of October 2023, one in five Canadian homes financed by major banks faced negative amortization, extending their mortgages significantly due to soaring rates.1
Although it’s common to shop around for rates when purchasing, most people are busy, and only research the big bank rates, consistently renew with the same provider for convenience, and don’t watch for improving rates to refinance at a better one. These oversights will have financial repercussions, but a skilled mortgage broker offers a solution, saving time and money.
Beyond the Bank: The Advantages of Working with a Mortgage Broker
A mortgage broker serves as a middleman between borrowers and lenders, assisting individuals in obtaining mortgage loans tailored to their specific needs and financial situations. Unlike lending agents who work for the institutions they represent, brokers work directly for borrowers, offering them access to a wide range of mortgage products and competitive interest rates from multiple lenders. This broader selection provides borrowers with more options and flexibility in choosing a loan that suits their requirements.
Moreover, mortgage brokers collaborate closely with borrowers to understand their financial circumstances and preferences. Leveraging their relationships with lenders, brokers negotiate favourable terms and rates on behalf of their clients. This personalized approach is particularly helpful to individuals who may not meet the strict criteria of traditional lenders, as brokers can often find alternative solutions or lenders willing to accommodate their unique circumstances.
While traditional lenders offer a limited selection of loan options based on predetermined criteria, mortgage brokers provide personalized guidance and access to a broader spectrum of financial solutions, making it easier for borrowers to qualify for suitable loans and secure better rates.
Minimizing the Challenges of High Interest
In a high-interest rate environment, the ability to explore various lenders and mortgage products becomes increasingly important. Mortgage brokers’ access to an extensive network of lenders, including banks, private lenders, and credit unions, allows them to shop around on your behalf, comparing rates and terms to identify the most favourable options. When rates are higher, every percentage counts, but it is difficult to scour all of the options available to find that better rate.
Excluding other costs, a modest $400,000 house, with a 20% downpayment, over 20 years at 5.0% will have an actual cost of $506,846.01 including interest. At 5.1%, with just a 0.1% increase, it increases to $511,098.19, for a difference of $4,252.18. In markets of uncertain, fluctuating, and high interest rates, a mortgage broker can often find you significantly lower rates compared to the ones that banks offer.
Elevated interest rates, falling real estate values, and government stress tests may lead to a looming mortgage crisis for Canadians.2 Many could face higher payments and qualification challenges when renewing mortgages. Refinancing through traditional banks may become difficult, exacerbating the situation. According to Ringo So, Mortgage Agent and Managing Partner of 360Lending, “There are going to be thousands of Canadians going into their banks in the next few months to look for a solution to keep their payments affordable or to seek approval for refinancing… many of them will be turned away, but there are mortgage brokers who can offer advice and solutions to these very real problems.”
Ringo So also notes that “The major banks have no solutions for tens of thousands of Canadians whose mortgage payments are going to skyrocket or need to refinance. This is a critical time for homeowners to understand their finances in detail, and learn how the mortgage industry works outside of the Big 5 banks.” If you’re self-employed, have trouble securing financing due to stricter requirements, or otherwise looking to minimize the impacts of high interest, a broker can assist in finding loans tailored to your situation.
Personalized Guidance and Advice
Each borrower’s financial situation is unique, and there is no one-size-fits-all approach to securing a mortgage. Mortgage brokers provide personalized guidance, taking the time to understand their client’s financial goals, preferences, and constraints and offering tailored advice.
Extended Ratio Loans
When individuals find themselves unable to secure suitable mortgage options through traditional banks, mortgage brokers step in to offer tailored solutions. One such avenue is through extended ratio loans, which go beyond conventional debt-to-income considerations. These loans take into account a borrower’s entire financial profile, including their credit history and employment stability, to ensure a comprehensive assessment of their repayment capacity.
Unlike the stringent criteria imposed by major banks, alternative lenders, often referred to as B lenders, adopt a more flexible approach. The Gross Debt Service (GDS) and Total Debt Service (TDS) ratios play pivotal roles in determining the allocation of income towards debt payments. Major banks adhere strictly to prescribed limits, capping these GDS/TDS ratios at 39/44, so no more than 44% of pre-tax household income can be allocated to mortgage, taxes, heating, and debt payments. B lenders are willing to accommodate a broader spectrum of financial circumstances, and may permit higher ratios up to 50/50, with rare exceptions to include ratios as high as 60/60. These extended ratio loans enable borrowers who have higher debt levels, but who also demonstrate responsible financial management and a clear ability to meet repayment obligations, to receive the financing they need.
Access to Preferred Rates
When it comes to securing a mortgage, Ringo So notes, “Brokers have access to preferred rates, which are usually significantly better than lenders’ posted rates.” Posted rates are the standard mortgage rates advertised by banks or lending institutions, often higher than what could be negotiated. On the other hand, mortgage brokers have the advantage of accessing a wider variety of lenders, including those that do not deal directly with the public. This network allows brokers to negotiate rates that are more competitive than the posted rates, potentially saving borrowers thousands over the term of their mortgage. By leveraging the expertise and connections of a broker, individuals can unlock access to exclusive deals and rates that are not available to the general public, aligning their mortgage more closely with their financial goals.
Loans for Self-Employed People
Those who are self-employed often have challenges fitting traditional income requirements in the process of mortgage refinancing. Major banks use only reported or taxable income to qualify, which is disadvantageous to self-employed individuals because of tax-deductible write-offs. As these write-offs lower taxable income, this lowers a self-employed person’s borrowing capacity with a bank.
However, specialized loan programs exist, enabling alternative documentation such as bank statements, contracts, invoices, or tax returns to be used. These loans allow self-employed individuals with irregular income to prove income using these documents, instead of T4s and employer documents which the banks favour. Mortgage brokers can guide borrowers through these options to secure suitable financing solutions.
Investor-Friendly Programs
It is not just homeowners that can benefit from a broker; they can help investors find programs that cater specifically to real estate investors. This includes specialized loan products such as portfolio loans, fix-and-flip financing, or rental property loans. While banks and traditional lenders may have limited investment-friendly options, rates may not be competitive, and you may not have the complete guidance you need to make optimal choices. Brokers offering these services are likely to have a deeper understanding of the unique needs and challenges faced by investors to provide expert advice throughout the loan process.
Equity-Based Lending
Equity-based lending involves using the equity in an existing property as collateral for a loan. This can be useful for borrowers who have substantial equity but may not meet traditional income requirements. Brokers can connect borrowers with lenders offering equity-based lending solutions and assist with structuring the loan to meet their needs.
Certain investors may find themselves excluded from traditional avenues, such as those outside the Greater Toronto Area (GTA) and major urban centers, as B lenders typically don’t extend their reach to lend in these areas. However, other alternative or equity-based lenders can bridge this gap.
Additionally, individuals who may not meet the requirements set by traditional A/B lenders, often because of a decrease in income, can benefit from a home equity loan. This loan can settle various debts such as credit card balances, auto loans, and student loans, amongst others. For many in this situation, a home equity loan can lead to potential reductions of up to 50% in monthly interest payments. Furthermore, by promptly clearing their debts, they are also able to rebuild their credit score within 60 to 90 days.
Collaborating With a Broker
A skilled mortgage broker offers advice, guidance, and access to alternative lending options, such as finding willing lenders or alternative solutions, including loans based on alternative documentation or non-traditional income verification methods, as well as extended ratio or equity-based loans. Brokers understand non-standard lending guidelines and can direct clients to suitable options.
Effective cooperation with a broker, honesty in disclosing financial standings, and providing comprehensive financial documentation enable personalized loan plans, increasing the likelihood of success in mortgage approvals and favourable terms.
Navigating the complexities of the mortgage market requires expertise, diligence, and strategic planning. Using a reliable mortgage broker agency like 360Lending, borrowers have the advantage of a skilled team with expertise and access to a wide range of competitive lenders and products, to help you combat rising interest rates.
