As mortgage professionals, we are sometimes asked to solve problems slightly outside the scope of our mandate. Naturally, we must take care not to position ourselves as tax experts, accountants or lawyers.
But there are a few instances in which we can comfortably offer additional information, when the mortgage component is not quite enough to get the job done.
Here we explore how you can offer a total mortgage solution incorporating extremely low-cost unsecured personal credit in times where your clients need even more than the base mortgage on offer.
Let’s look at three different situations:
1. Purchase plus improvements: clients need capital to pay for home renovations before the new mortgage is funded. This is typically $40,000, but can be higher.
2. When a refinance is cost prohibitive: when homeowners need to tap into their home equity, but either it’s too expensive to break the current mortgage or they just don’t qualify.
3. Flexible down payments: when an otherwise strong applicant needs to borrow money to complete their down payment. These are rare, but they do come up now and then.
The common thread across these three scenarios here is your clients need to borrow unsecured money as cheaply as possible. There are several companies in the mortgage broker space offering personal loan products, but these often have high interest rates and set-up fees, to boot. Surely there is a better way.
Where should your mortgage clients source this money?
Some have additional savings or can tap into friends and family. But others are in a pickle, as they are pretty much tapped out after completing their purchase. And they would rather not involve other people.
An unsecured personal line of credit (PLC) is a pretty good solution. But the interest rate is likely between 6 and 7%, even today.
For those with excellent credit, it’s quite possible their credit cards are the key.
You know those offers from your credit card company offering six months, or even one year, at a very low interest rate? Some people already have one or two of those in hand. You sometimes pay a one-time admin fee, and then you are good to go.
Credit card issuers often send out special low interest-rate offers to their best clients—those who pay off their balances in big healthy chunks, who have a perfect repayment history (never late, often early), and who, in effect, use their credit card as a “debit card with benefits.”
If your client doesn’t have any such offers, there are in fact several quality card issuers, including a few chartered banks) offering cards which provide an introductory low balance transfer rate for six to ten months.
Low-interest promotional offers by credit card issuers can offer an attractive alternative to an unsecured personal line of credit, but borrowers have to be careful and disciplined if they use this strategy to lower interest costs. There are a few basic guidelines your client needs to be aware of. Otherwise, they might end up paying interest at the regular rate!
1) Start with a card that has zero balance owing, and never use the same credit card for purchases and cash advances. The low interest rate only applies to cash advances, not to purchases. If they only pay the minimum amount during the low-interest period and end up using the card for purchases, they will have to pay the card in full, otherwise their purchases will not be considered as paid.
Interest on outstanding balances for purchases will be at the regular rate. And, since the payment is now being split between cash advances and purchases, it’s likely to trigger the high rate on the cash advances as well, since you can never pay the amount owing without paying off the card in full.
2) Watch dates carefully. When the promotional rate ends, the outstanding balance needs to be transferred to another low-cost form of financing or the borrower should have the cash available to pay off the loan. Otherwise, the interest rate will flip to the normal rate.
3) If possible, do not use the entire available credit limit. Those who do would have a very high utilization ratio, and that could drag down their credit score. Best practice is to leave some room for interest charges and fees, and just generally avoid the perception that one is choking on a credit balance.
4) Only apply for what you need. Advise your clients not to get carried away and over borrow. It’s not a good look, and remember, these are best used for short-term borrowing needs, not as an ongoing life strategy.
5) Watch for administration fees. Some cards with very low interest may have an upfront administration fee of 1 to 3% of the balance borrowed. Ensure your client factors this into their calculations of how much they are actually paying.
Balance Transfer Strategies in Action
As mentioned previously, there are several popular balance transfer strategies that can be used in conjunction with credit cards. We’ve detailed a few below.
Purchase Plus Improvements
If you have ever worked on a Purchase Plus Improvements mortgage, you know the lender does not advance the extra funds until the appraiser confirms the work is completed.
Meanwhile, the work needs to get done, and the tradespeople expect to be paid. It’s often the case that your buyers have very little extra capital after they muster up their down payment and closing costs.
Most Purchase Plus Improvements mortgages cap the increase at $40,000, but there can be situations requiring far more than that. Applicants can likely source all the credit they need from just one or two high limit cards.
When a Refinance is Cost Prohibitive
We all know the usual reasons why our clients want to refinance and extract equity. Debt reduction, home improvements, post-secondary education, wedding costs, etc. But maybe the current mortgage is mid-term, and the cost to break it is simply too high. Or maybe our clients don’t pass the mortgage stress test.
Managed properly, a borrower with excellent income and employment could stretch this into years of low-cost borrowing, switching from one offer to another, until such time as the mortgage refinance is a viable option or the unsecured debt can be repaid in some other way.
Flexible Down Payment Mortgages
Not for the faint of heart and NOT something the folks at CMHC would recommend, but occasionally we come across borrowers who seem tailor-made for a Flex-Down mortgage.
The borrowers who succeed with this approach are typically two high-income earners, perhaps not that long out of university and not having had enough time to save the full down payment. But they check off all the other boxes with great income and employment, awesome credit and they are upwardly mobile.
Perhaps you thought of balance transfer offers as not much more than inbox clutter, but look at the potential utility they have.
Sharing your knowledge of products and services outside of the regular mortgage beat makes you more attractive to your prospective clients. It fosters loyalty and goodwill, as you become much more than just an order taker.