Do you know why most mortgages are closed to repayment without penalties? It’s because investors don’t want to go through all the hassle of underwriting an application, preparing documentation, getting conditions fulfilled and formalizing a loan only to have the borrower pay them back a couple of months later which forces them to find another borrower to lend to and repeat the process all over again. They just don’t want to do the work. That’s it.
You’ve heard me say it before – there’s no such thing as a cheap private mortgage so it ought to be every Broker’s goal to replace their client’s private mortgage with cheaper bank financing as soon as possible. The problem is that penalties get in the way. For whatever reason, Borrowers are always going to “feel” a penalty they have to pay today more than the interest they might save tomorrow by breaking their current deal. A fully open mortgage is the solve all, and here’s why.
Private mortgages should be like extended bridge loans. They should help the Borrower stem the tide from a time when they’re dealing with the consequences of having gone through a challenging financial time, to a time when things are better. No one applies for a 5-year term when they’re forced into the private market and no private lenders offer terms that long. Why? Because they’re bloody expensive, that’s why! From the Borrower’s perspective, if you think you’re going to need a private mortgage for 5 years, you’re better off selling now and liquidating your equity. From the perspective of an Investor, if someone asks for a 5-year private mortgage you have to question their financial sense.
The biggest misconception about private mortgage money is that its unaffordable. It’s not. In fact, it’s very affordable – as a SHORT-TERM fix. That’s the key. For one year or even two, private money can make all kinds of sense. A quick look at the numbers tells you everything you need to know.
Even at 12% per year, you can borrow $100,000 from your home, pay all the interest from the loan proceeds, and still have $88,000 left over to use to fix your circumstances so that you can replace that money with cheaper bank financing. Looking strictly at the dollars here, $12,000 is a (relatively) small price to pay to gets things going in the right financial direction without having to sell the home. And the faster you can make that move, the less you pay for private money – unless you have to pay a penalty to break the mortgage.
Now, sometimes its easy to see ahead of time that its going to take at least a year to rehabilitate your client’s circumstances, and when that’s the case it makes sense to put them into a closed term for a year and have them commit to the year of interest payments and accept a penalty if somehow things miraculously improve sooner (a positive problem!). But when you think there’s a legitimate chance that you can refinance your client in less time an open private mortgage is without a doubt the answer – if you can find one.
Switch’s primary lender is Magnetic Capital Group who’s a licensed mortgage administrator that manages private mortgage portfolios for hundreds of individual and corporate investors from coast to coast. Most of Magnetic’s investors are average Canadians who are lending their RRSP, TFSA or CASH savings. Magnetic syndicates multiple lenders together to fund Switch’s loans and because they have so many investors with different appetites for security and return on investment, Switch has more flexibility in terms of how we can create products that actually serve the real needs of you and your clients.
We have closed mortgages and open ones. Here’s how they play off each other. Our closed mortgages are the cheapest mortgages we have. In exchange for a commitment from the borrower to pay interest every month for a year, they can get the cheapest rate available – as low as 6.00% on a 1st mortgage and as low as 8.00% on a second. But in the case where you think you can replace the private money with bank financing sooner, you can offer them our open product which charges them 75bps per month for a first mortgage and 1.00% per month for a second. The lender fee is the same whether the loan is open or closed (check out www.switchmortgages.ca/ratescore for pricing details including lender fees).
If your client takes the open product on a first mortgage at 75bps per month and ends up in the mortgage for the full 12-month term, then they pay 9.00% interest for the year. But if you’re able to refinance them at the 6-month mark, they’d only pay 4.50% in interest. That’s significant savings and our open product allows your client to payout every 30 days without penalty. Imagine all the ways you can use the open product to create choice, flexibility, and savings for your clients!
Most private lenders don’t offer open mortgages because like I said before, it’s a lot of extra work to write new loans, process exits for old ones, and manage Investor expectations every month. Switch is different. We’re set up to efficiently to manage all of that because we knew coming in that open mortgages would serve the needs of our broker partners and their clients better. Without them, we don’t have people to lend money to and without people to lend money to Magnetic’s Investors don’t have anything to invest in.
Running a business is about filling needs and in our business, we only succeed if we serve your needs and the needs of your clients better than everyone else, so we’re hell bent on it. Give us a try for your next private and experience the Switch difference yourself. You’ll be in great hands.
