STRESSFUL TIMES REQUIRE EXPERT SOLUTIONS

2023 is a year of opportunity for mortgage brokers, whose toolbox of customized financing options can’t be matched by mainstream lenders

BY LISA GORDON

ince the Bank of Canada began hiking interest rates in March of 2022, mortgage broker Denise Laframboise has noticed a growing trend: bank clients are reaching out to her more often because they aren’t getting customized financial advice.

“This is the type of market that creates a need for experts,” said Laframboise, who operates LaframboiseMortgage.ca – Mortgage Architects in Whitby, Ont.

“If you’re dealing with someone (at the bank) who has never owned a home or doesn’t know their stuff, that’s not going to fly now. It’s a stressful time for people, and they really need good advice.”

Throughout 2022, the Bank of Canada steadily raised the overnight lending rate from 0.25 per cent in January to 4.25 per cent in December. In January 2023 the rate was raised to 4.5 per cent.

Laframboise, who has been in the mortgage industry since 2016, said she is passionate about helping clients pay less interest while building net worth through strategic real estate investing.

“Right now, homeowners may be facing the perfect storm,” she told Canadian Mortgage Broker. “The Christmas bills are coming in. If you’re part-time, you may have been off work for the holidays. And now, they’re talking about another rate increase.”

Some variable rate mortgage holders have already received trigger rate notices from their banks. This means that the prime rate has risen to a point where their static monthly payments are barely covering the interest owed – without paying down any principal. At that point, the bank may increase their payments.

In this kind of financial climate, Laframboise takes a holistic approach with her clients. With inflation driving up the prices of groceries, gas and other commodities, it’s not just about variable rate mortgage payments.

“Strategic restructuring is best for clients with higher debt and higher expenses outside the mortgage,” she said. “What about cash flow? I do think in this market, the days are gone when you can give a five-year fixed to everybody with no strategic assessment.”

This is the chance for mortgage brokers to shine, believes Laframboise.

“They will have the ability to give advice that will change people’s lives. Bad advice will really hurt people right now.”

She described one client’s situation, where switching to a five-year fixed rate was not the best option.

“The clients had a variable rate mortgage and asked us about locking in. They had just over $90,000 of debt outside their mortgage. Instead of saying here is the lock-in option for their mortgage – which would save them only about $100 per month while tying them in for five more years – we are doing a refinance instead. We are extending their amortization and paying out all their higher-interest debts, saving them about $1,463 per month. They are now in a two-year fixed, so if rates come down a bit, they will have the chance to take advantage of it. We’ve improved their monthly cash flow and paid off the debt that was beginning to tank their credit rating. If this client had gone directly to the bank, they wouldn’t be presented with any other option (than a five-year fixed). But locking in isn’t always the best answer.”

Mortgage brokers can offer their clients so many options, which becomes even more critical in this financial climate.

Financing Options

“It’s extremely important to work with someone who has your best interests in mind,” said Laframboise, who works with 58 lenders. “We have investors flipping into interest-only lines of credit (LOCs) to remain cash flow positive, or stretching out amortizations even longer by going to B lenders. Are other debts costing you more? Can we refinance a car payment into an LOC?

“This is the opportunity to eat the bank’s lunch. Truly, there is so much we have access to that they can’t.”

For homeowners who are facing bigger payments on their variable rate mortgage or LOC, Laframboise has some advice: “Don’t call up the bank and ask them if you can lock in. Instead, tell them, ‘These increased payments and the higher cost of living are hurting us. How many different options can you give me to solve this?’

“If they asked me that question, I’d find out how their mortgage is set up and what other debts they have. Then, we’d run the numbers and show them what payments would look like with other options. Does a refinance make more sense? What if you break your current mortgage and roll in your car payment, what does that look like? Some clients are going to want the lowest rate possible. Some will want the best cash flow. Some want to pay off their debts as soon as possible. Some want to buy a vacation property. For some, locking in may be the best course, but it’s not for everyone.”

Denise Laframboise

Heading into 2023, Laframboise said she’s focused on providing solid advice to her clients.

“Now, more than ever, is a great time for brokers to embrace that they will answer anyone’s questions for free. Half the battle is starting those conversations, and business will come from it.”

Structuring Solutions

Compassion is the guiding force at Canada Mortgage and Financial Group (CMFG) in Mississauga, Ont., where Ameera Ameerullah is CEO/ broker/lender.

A mortgage industry veteran since 2001, she agrees with Laframboise that it’s a stressful time for homeowners. Mortgage brokers can help by identifying financial paths clients may not have considered.

“We’ve seen many clients access unsecured debts to cover renovation costs or consolidate existing loans; or clients who have been misinformed about the credit consequences of a consumer proposal, which can take up to four years to be paid out,” said Ameerullah. “In some cases, clients have gone into a proposal for just $20,000, not realizing the impact it would have on their credit and borrowing ability.”

She advised borrowers to consolidate debts with mortgage financing, which significantly lowers their monthly carrying cost versus the interest on unsecured debt.

“In many cases, we have paid out proposals from an equity takeout, which puts the client on a path toward improving and/or re-establishing their credit.

Overall, lower monthly cash outflow reduces financial stress.”

Ameerullah added that juggling a variety of debts and paying higher interest on unsecured loans can make it difficult to get ahead financially.

Ameera Ameerullah

“Credit cards and personal loans carry higher interest rates, and the regulatory focus should be on that instead of increased stress tests for mortgage financing, which reduces the opportunity for home ownership,” she said. “Even private mortgage rates today, with interest-only payments, are far lower than unsecured debts.”

She does not believe the current pace of interest rate hikes can continue, simply because it is unsustainable.

“Rate increases do not create demand. If rate hikes continue in this manner for 2023, then it could lead clients into default proceedings, or possibly obtaining even higher unsecured debts, leading to mortgage fraud and power of sale. This is where professional guidance from mortgage brokers is so essential; clients must reach out to their mortgage professionals who can provide better alternative solutions.”

Until now, Ameerullah has seen clients doing their best to keep up with payments; but sadly, many have used up their savings and now have a high utilization of unsecured debt. In the meantime, wages have not increased, even as the cost of consumer goods has skyrocketed in recent months.

“This will cause families to go into financial depression,” she said.

Ameerullah, who specializes in structuring complex transactions in the alternative lending space as well as risk management on mortgage investments, advised homeowners to do their best to “ride it out” and avoid locking into a fixed-term mortgage. She believes interest rates will level off once the target inflation rate is met, and predicts a more stable market by the third or fourth quarter of this year.

“Clients thinking to go into a fixed rate mortgage term could be stuck because the exit penalty is higher to break a fixed rate versus a variable,” she said. “Those who switch to a fixed rate today will end up paying a higher rate, and may feel financial pressure given the carrying costs over the term. When rates subside, a variable rate mortgage would be the most favourable. Even as it is today, a variable rate is still lower than the five-year fixed.”

As the year unfolds, Ameerullah said mortgage brokers who are involved in pre-construction financing and alternative/private lending will likely find more opportunities. Her company is offering several client incentives, including rate discounts, no broker’s fee on residential and institutional transactions, and quick same-day turnarounds. To show clients appreciation in 2023, CMFG will also be providing a financial incentive of up to $500 to put towards property taxes, appraisal or legal fees.

“We are always keeping a close eye on what’s happening in the real estate market and with mortgage regulatory changes so that we can better inform our clients,” she concluded. “Our clients know that we are not money-focused; we do what’s right even if it means losing a transaction.”

As Canadians wait to see if there will be further interest rate hikes this year, mortgage brokers can still find success by doing what they do best: problem-solving.

Locking into a five-year fixed rate mortgage is not necessarily the best option for every household. Luckily, brokers have the tools – and the connections – to find solutions that will help to keep the roof over homeowners’ heads.