Why is this relevant?
Well, with all the carnage that is going on in the states, the Canadian economy is looking like a better bet for investing in commercial mortgages, at least in certain areas of the country.
So there are commercial property funding sources that are spending more time trying to get into the Canadian market.
In the past, even though Canadian business owners would consider U.S. based funded mortgages on commercial property, the close rate tended to be rather low as in the end, if they could receive a competitive offer that was close to a U.S. offering, in Canadian dollars, then the Canadian deal would be taken for fear of the currency risk driving up the cost of financing over time.
But is that as much of an issue anymore?
Sure, the dollar will continue to go up and down, but when you’re talking about a mortgage term, its usually for a three to five year period of time. With all the trauma going on in the global financial markets, its hard to forsee a significantly lower Canadian dollar any time soon.
Outside of currency, there is also the issue of availability.
There are certain segments of the commercial property market that Canadian lenders don’t have much interest in from time to time, mostly driven my the economic conditions of a sector, and partly driven by the balance of any given lender’s mortgage portfolio.
These days, a commercial deal that is just below the approval line of a Canadian lender, can be very attractive to a U.S. currency funded lender that is looking to upgrade its deal flow and diversify into the Canadian economy.
If a U.S. dollar backed commercial mortgage at a decent rate is the best option, or maybe the only option available, then its going to be given some serious considerations, despite the currency risk.
There is certainly a lot of U.S. dollar funds that would like to invest in Canada these days and that’s also not likely to change in the near term as economic reports from down south continue to worsen.
So if you’re in the market for a commercial mortgage in Canada, you may want to consider American commercial mortgage options for the reasons provided above.
For the most part, a home construction loan is either acquired by an individual that his paying a builder for a turn key finished product where the property owner does not play an active role in the management of the construction project, or property owner is orchestrating a self build construction project whereby the owner will serve as the general contractor and coordinate the sub trades and all other elements of the build.
In either case, a home construction loan can be obtained by the property owner, but in the case of self build construction, the lender may want to see more evidence of the owner’s experience and ability to successfully manage a home construction project.
A home construction loan can be obtained from both bank and private mortgage lenders. There are benefits to both types of lenders that can cause you to select one over the other, even if you qualify for both.
For the most part, a bank or institutional lender will only provide a home construction loan as a first mortgage against the property where construction is taking place, requiring the builder or property owner to have 100% paid in ownership of the land in question. With a private mortgage lender, a home construction loan can be placed in a second mortgage position, provided that there is sufficient equity in the property and project to protect the private lender’s risk.
Regardless of the source of a home construction loan, there are typically three draws set out to advance the construction financing. The first draw is usually advanced once the building is closed in with roof, windows, and doors in place.
The second draw will normally take place once the dry wall stage is complete which will also encompass the completion of the wiring, plumbing, and heating systems being installed as well.
The third draw will be advanced at or near completion of the remaining work.
For larger homes, the building process can take a lot longer to complete, so there can be additional draws added to the project schedule to better manage the timing required to pay for materials and trades.
Before you start applying for a home construction loan, you should first put together a solid budget for the project as well as a timeline for completion that outlines when all the work elements will be completed. You should also have a set of professionally prepared plans and drawings completed to provide greater support for your construction financing request.
If you are planning a home construction project, or are in the middle of one and require a home construction loan, I suggest that you give me a call so I can quickly assess your requirements and provide home construction loan options for your consideration.
Every once in awhile we need to provide a construction bridge loan to a builder, developer, or property owner that is mid way through a construction project and requires additional funds to complete the work.
All of the construction bridge loans we place are through private mortgage lenders due primarily to the speed in which they can react to a bridge financing request.
In these situations, the money is required right away so that the project doesn’t stall out and other costs start being incurred. So being able to get something in place quickly is paramount to the the owner of the construction project.
One of the reasons that construction bridge financing can be placed rather quickly in most situations is due to these requests typically come near the end of the project when most of the building or construction risk has been removed from the lending equation. Also, the amounts required tend to be considerably smaller than the increased value of the property from building, providing ample securing to a construction lender, even if they need to be in second or even third position behind the primary sources of financing for the property and project.
The most common scenarios where a construction bridge loan is required is as follows:
Budget Over run: This is probably the one we see the most often where certain stages of the construction project have cost overruns due to inaccurate budgeting or unforeseen and unplanned events that created more costs for the project. The result is that the project ends up costing more than expected and requires additional funds to complete.
Change In Scope: While similar to the first scenario, a change in scope in not about the budget for the project being overrun by higher costs. This is a result of the builder, developer, or property owner making a conscious decision during the project to make a change to some aspect of the build which results in more costs for the project. This can be things like a bigger kitchen, finished basement, more landscaping, and so on.
Primary Construction Loan Shortfall: This is the least common of the three, but it does happen more often than one might think. Under this scenario, the primary construction lender that is in place is not providing draw advances when the builder or developer expects them to be made. And in some cases, the draws can also be cut back by the lender if in their view there is more of the project remaining to be completed than what the builder or developer is declaring. In any case, there is not enough money being advanced when required and the result is a need for incremental capital to offset the short fall.
While there are lots of private mortgage lenders in the market place, only a small handful will do these types of construction mortgages and do them quickly enough to meet the needs of the construction project.
The best way to get access to construction bridge loan financing is to work through a construction mortgage broker who has direct relationships with these types of lenders and has a track record for placing construction bridge mortgages.
Economists are concerned that even though things are going well for Canadians compared to people in other parts of the world, that we risk backing ourselves into a corner with higher debt levels that leave our economy vulnerable when interest rates eventually go up.
So while it only makes sense to take advantage of lower interest rates when it makes sense, it is also possible to have the best of both worlds, that being lower cost of capital and lower debt.
Assuming that paying down debt is important to consumers, then it makes sense to be budgeting your cash flow to apply more to debt reduction when cash is being freed up by lower interest rates.
The challenge for most debt reduction is that it needs to be structured in order to occur.
For instance, if someone has a mortgage or a car loan, they will have an amortized payment can identifies how much money they need to spend every month on debt service.
As debt holders, we get conditioned to having this amount available and direct the remaining cash flow to other expenditures.
With a little bit of focus on personal cash flow, its usually very possible to come up with some amount of incremental money during the year that can be applied to the outstanding mortgage balance above and beyond the payment amount.
Over time, even small amounts can eat into the balance owing and significantly reduce both interest costs and total debt load.
And because many of the residential and commercial mortgage programs today are filled with different payment options to retire your debt sooner without prepayment penalties, it truly is a period in our history when you can have the best of both worlds.
The challenge is coming up with a financial plan that you can implement to pay down your mortgage sooner, and then making sure that any mortgage you enter into has the payment features built in to accommodate your plan.
Low levels of interest can allow you to afford the things you need today. A proper debt retirement plan will make sure you are in good financial shape into the future, regardless of where interest rates moves.
A little bit of planning and for thought can go a long way and save you a considerable amount of money along with reducing financial risk.
For instance if you’re talking about bare land in a rural area that is completely undeveloped in any way shape or form, the financing amount that could be available may be as low as 40% to 50% of the as is market value of the property.
Contrast that to a fully developed lot in the middle of a built out urban area where the loan to value you can secure can get as high as 75% of the fair market value.
Both banks and private lenders will consider bare land loans, but in keeping with all bank or institutional lending, you would have to meet all the typical lending requirements such as credit rating and cash flow to service the debt.
Most bare land mortgages are provided by private lenders who clearly understand the value of the land and its resale market and are not afraid of having to sell the land off in order to recoup their investment if required.
From a lender’s point of view, they would rather finance a piece of property that is being acquired versus providing financing for bare land real estate that you already loan.
This is because a market value transaction has occurred whereby someone is buying and someone else is selling at a negotiated price versus having to rely on a market value appraisal where there may not be a lot of strong comparable sales to establish value from.
The more the land has been improved and/or the closer it is to further development, the more likely it will be to locate and secure a lending source.
Because the majority of these types of transactions are provided by private mortgage lenders, it makes sense to be working through a mortgage broker with experience in bare land financing as the private lenders that do these types of deals can be sometimes hard to locate with broker assistance.
But a mortgage broker can be just as helpful if you want to try go through a bank or institutional lender as those that are prepared to do these types of deals can also be hard to find.
If you’re in need of a bare land loan for acquisition or development, I suggest that you give me a call so I can quickly assess your requirements and provide available land financing solutions for your immediate consideration.
When it comes to residential mortgage options, getting quotes from multiple lenders is an acceptable industry practice, largely because the application assessment process if very straight forward for “A” credit type applications.
Some lenders will even accept multiple applications for the same borrower, submitted by different brokers.
But when it comes to commercial property financing, the unwritten rules of engagement are different.
For instance, if a commercial lender receives more than one application for financing from a borrower or business entity that owns a commercial property, they typically will assume that there are several other lenders being given the same information.
Because of the amount of work that can go into a commercial mortgage application assessment, many of these lenders will not consider the deal further if they feel that its being spread all around the market.
This is even more true with private lenders.
With private mortgage financing on commercial property, there are considerably less lenders available compared to private money for residential property.
And because most mortgage brokers don’t have direct relationships with private lenders, they send these requests into their network, many times working through other brokers, trying to find someone to help their client.
If more than one broker gets involved, there is a good chance that one private lender could end up getting several different applications for the same deal from the broker network.
When this happens, there is a good chance that the private lender will just decline the request and move on to the next opportunity as its pretty obvious that the deal is being broadly shopped around and they don’t want to waste their time.
The solution to this is for the borrower or client to control their own deal.
What this means is that if you want to work with multiple brokers and/or go to lenders directly, you need to make sure that you are aware of each lender that is being contacted and that the mortgage brokers you are using are not only disclosing where they are taking the deal, but are also made aware of where they shouldn’t be presenting the deal.
When the commercial property requirement is with a bank or institutional lender, this type of control is very doable.
But with private mortgage lending, its much more difficult due to the fact that private lenders that finance commercial properties are more rare and mortgage brokers are more apt to be protecting their sources and will not likely be prepared to divulge who they are going to take the deal to.
The only way around this is to provide short term exclusivity to one broker at a time.
Private lenders tend to show their interest in a deal pretty quickly and if a broker can’t get a term sheet for you in three to five business days, its likely that he or she does not have a direct lending source and is scouring the market for one.
If in a week or so the broker you are working with comes up with nothing, then its time to move on to the next one.
By taking this approach, if the second broker ends up taking to the same lender as the first broker, no harm is done because the lender did not express any interest in the deal the first time around.
The key here is for the borrower or applicant to manage their deal so that they don’t loose out on a private mortgage opportunity on a commercial property due to excessive shopping.
In order to continue to survive the down turn, asset rich companies end up turning to asset based lenders, many times at higher costs, to inject capital into the business through debt financing facilities that these types of lenders provide.
And when a business is in some form of financial distress, the cheapest form of asset based lending is going to come from commercial property financing, assuming the business has real estate assets that it can offer as security.
If you have a business that is looking to leverage commercial property to inject capital into the business, then here are a few things to consider.
First, time is typically your enemy when it comes to commercial mortgage financing. The process can take longer than you think, especially if you are trying to get funding through a bank or institutional lender when you’re financials are not that strong.
Second, the cost of a commercial property loan may be higher than what you have been used to pay over the years, especially if the most likely source of financing is likely going to be coming from a private mortgage lender.
Third, for any type of financing facility or loan you may consider accepting, make sure you allow enough time for the business to get back on its feet before the commercial loan needs to get repaid.
For instance, in the case of a private mortgage, most lending terms are for one year.
If you’re highly confident that your cash flow will get back on track in the coming months and have strong enough financials to go back to a bank or institutional lender to refinance, then you should be considering a two or three year commercial mortgage term if they are available, even at slightly higher rates as the cost of having to refinance a private mortgage with another private mortgage a year from now will be significant.
Also, there is no guarantee that in a year’s time that private money will even be available for your particular requirements, at the time the old mortgage needs to be paid out.
A private mortgage is going to have some placement costs you are going to have to absorb, so better to only have to incur them once and make sure that any short term commercial mortgage your take on will bridge you to a period when you can return to low cost forms of money.
Finally, if you do end up generating additional capital through a private commercial mortgage, make sure that you allow yourself plenty of time to arrange the payout of this mortgage in the future. As I mentioned earlier, commercial mortgages can be slow to arrange and the last thing you want is to get to the end of your private mortgage term and be in a funding delay with a bank or institutional mortgage application, potentially generating more penalties and/or fees in the process.
Short term commercial property financing in many ways is about biting the bullet and paying what you need to get financing in place, but to also minimize the cost as much as possible and being realistic about how much time you are really going to need the money and how much time its going to take to pay it back.
With the fixed mortgage rates at near record lows, and the prospects for further decreases based on where the 5 year bond yield is sitting right now, everyone with an above market fixed interest rate on their existing mortgage is trying to figure out how take advantage of these record setting rates for fixed interest terms.
The big problem for most fixed rate mortgage holders is that if they were to leave their lender for a lower fixed or variable rate somewhere else, they would have to pay a prepayment penalty based on three months interest on the principal amount being repaid, or interest differential, whichever is the higher.
So if you have years left on your fixed interest rate term, the prepayment penalty could be significant and prohibit you from mortgage refinancing at all.
One solution that will be available to some fixed interest rate holders (this will depend on your mortgage lender) is to blend your existing mortgage term with a new mortgage term at the lower rates.
For example, if you have two years left on your existing fixed term mortgage where the annual posted rate is 4.5% and you are prepared to sign up a new two year term with your mortgage lender where the rate is 3.5%, the new blended rate between the two mortgages will be close to 4.0%, depending on the exact day you refinance and if there are any other lender costs that get added into the equation.
Through this blending process, you are basically paying the prepayment penalty over time, but there is no up front outlay of funds, no mortgage discharge for an old mortgage, and registration for a new one.
The end result is that you have been able to reduce your fixed interest rate.
You’re still going to be at a rate higher than the existing market rates, but at the new blended rates you can either drop you payment amount as you will be paying less total interest, or leave the payment the same and pay down the principal faster.
Once again, this will not be available through all mortgage lenders, but for those that do offer this type of mortgage rate blending opportunity, it can be something to consider, especially if fixed rates continue on a downward path.
What I’m referring to is how the supply side of the commercial property financing market is constantly changing as lenders work to maintaining a balanced portfolio of commercial mortgage investments.
At certain times, there can be considerable supply and competition for a particular deal, while at other times it can be hard to find any lenders that are going to be interested in providing funding.
This relates primarily to the geography where the commercial real estate is located, the industry that generates the revenues to service debt as well as provide a resale market for the asset, and the lending and funding criteria of any specific commercial mortgage lender.
And because most commercial lenders will consider a wide spectrum of properties, there can be constant adjustments as to what can be funded, how it will be assessed, and the amount of financing a commercial mortgage lender will extend.
Let’s take the example of a hotel.
For any commercial property lender that will finance a going concern hotel, they will have predefined rules as to how much of their portfolio they are prepared to place into this sector.
If last month they place a business mortgage that filled up their available lending allocation for this property type, then next month a similar looking deal could come through the same lender’s door and not get funded.
Taking it one step further, a commercial lender may have quite a bit of hotel commercial mortgages in their portfolio and are willing to consider additional investments, provided that they are of a lower risk value to the lender than what they already have in place. To accomplish this, the lender may have more stringent requirements for future deals such as major flags only, national reservation systems, and so on.
For the business owner or property owner, there is no way to really know when the lending sign is out and when its not when it comes to commercial property financing.
Potential borrowers have a certain capital need at a certain time.
So when commercial property financing is required, the exercise is to quickly locate those lenders, at that particular time, that are going to be seriously interested in funding your requirements.
In many cases, this cannot be a popularity contest, loyalty exercise, or response to branding. Its about knocking on the doors of those lenders that are currently in a position to service your needs.
As a result of this ebb and flow of market supply from a funding point of view, this also means that there are better deals available at different points in time.
The more in tuned you are with the market, the easier it will be to align yourself with a lender that can meet your requirements.
This can also mean delaying a project until there is a positive adjustment in the supply side.
The good news is that the commercial mortgage market is vast in terms of lenders.
The challenge is to efficiently navigate the landscape to develop commercial mortgage options that are going to be acceptable to you.
The borrower profile where these two segments of the market are the most competitive is when there is both good cash flow and good equity, but weak, poor, or bad credit.
A bad credit mortgage from either of these sources can see the quoted interest rate being very competitive.
Where they tend to vary is when you get into the terms and conditions of the mortgage, specifically the length of the mortgage and the terms related to early prepayment.
With the sub prime institutional mortgage lenders, the programs offered are typically for three years or longer with very little if any opportunity to prepayment without incurring significant penalties.
If you know its going to be several years until you are going to be able to qualify with an “A” mortgage lender, and you’re unlikely to be doing any form of prepayment during the next two to three years, then a sub prime mortgage offering for multiple years may be a very good fit.
On the flip side, private mortgage lenders only offer one year mortgage terms for the most part, which are typically interest only payments compared to the fully amortized programs that many sub prime lenders provide.
With a bad credit mortgage from a private lender, the monthly debt service or mortgage payment is going to lower if you are comparing interest only to a principal and interest payment combination, and there is likely going to be less restrictive repayment penalties.
But even if the prepayment penalties were similar between the two, at then end of a one year mortgage term, the private mortgage is essentially open for full repayment without penalty.
So if you think you can get your credit back in shape in a year or so, you might want to consider a private mortgage term of one or two years, and negotiate a prepayment penalty that is acceptable to you.
While not all private lenders are the same when it comes to prepayment penalties, there are some that stick with a three month interest penalty on amount prepaid, and others that have no prepayment penalty after a certain number of months have passed in the mortgage term.
The key thing to remember in the short term is that interest rate is likely not going to be the deciding factor as both sub prime lenders and private mortgage lenders can be very competitive for bad credit deals where equity and cash flow are strong.
If you’d like assistance sorting through your bad credit financing options, I suggest that you give me a call so we can go over your situation together and discuss the different alternatives available to you.
As a mortgage broker, part of what me and my colleges battle on a day to day basis is the information and misinformation about the services we offer and the cost benefit assessment of others with respect to what we have to offer to our clients.
The landscape has become more and more competitive over the last couple years and as a result there are more people taking the opportunity to voice their opinions regarding using a mortgage broker.
And while there is certainly nothing wrong with providing your opinion, especially in this age of social media that is based largely on discussion and opinion, there is a problem with putting out information, opinion, or rebuttal that does not speak from fact or available statistics and data.
I came across a piece in Canadian Mortgage Trends that did a very good job of correcting some mistakes discovered from another publication, specifically addressing four of what they refer to as mortgage misconceptions.
Here is a link to the article … http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2011/09/a-few-misconceptions.html
As the article mentions, there are a lot of things you can likely do for yourself, but choose not to due to time restrictions and the potential cost of a sometimes steep learning curve. Outside of getting help with a mortgage, there is investment advise, writing your own will, and completing your taxes to name a few.
In my biased opinion, mortgage brokers are like every other type of services professional.
We have a service to provide that delivers value to our customers. And similar to every other type of service provider and practitioner we should be held to a proper standard of customer care and held accountable for the quality of our work.
The mortgage business is not getting any less complex and with all the changes that regularly take place in the market, a professional and knowledgeable guide can truly save you time and money.
If you have any comments on the subject or have questions regarding mortgage broker services, please leave a comment or give me a call and I’ll be sure to get back to you right away.
In almost all cases, private mortgage interest rates are going to be higher than anything provided by a bank or institutional lender, and most of the time the rate is considerably higher.
For instance, where a conventional bank mortgage rate for one year may be at or around 3%, a private mortgage rate for one year can range from 7% to 11%, depending on the lender’s assessment of risk and competitive interest in the deal.
The reality is, however, that private mortgages are priced where they are priced for a reason.
The interest rate reflects the risk to the lender.
If there was all sorts of opportunity for a bank or institutional lender to place these primarily equity based mortgages at lower rates, they would in a minute.
But for those individuals and entities that fall outside of the lending requirements of a bank or institutional lender’s “A and B” lending programs, it can be a considerable fall to private money.
So yes, private money does come at a higher cost.
But it also serves a very vital role in the mortgage financing market place, providing short term credit for those with some sort of cash flow and/or credit distress, as well as providing bridge loans for transactions or capital requirements that do not afford enough time for conventional bank financing, even if the borrower would otherwise qualify for it.
There can also be a considerable range in private money pricing with the best rate available coming within two to three percentage points of conventional rates.
And the longer a borrower in some form of financial distress waits to get financing in place, the more likely they are going to fall into the higher end of the rate range.
When considering private mortgage financing, the focus should be less on the interest rate and more about the costs you are going to be facing if you don’t get mortgage financing in place.
In situations of mortgage default or foreclosure, losing your home or your home equity is likely a significantly higher cost than any private mortgage.
In situations of bad credit and debt consolidation, private mortgage rates are a bargain compared to the credit card balances you might be trying to get rid of.
And if you’re trying to save a real estate deal or generate capital for either a revenue generating or cost saving action, the cost of interest on a private mortgage may very well pale in comparison to the lost profits or incurred costs from not having funding in place by a certain date and time.
Once you have exhausted all your bank or conventional lending options, a private mortgage is likely your next best choice.
The cost is relative to the alternative.
Many times private mortgage interest rates can turn out to be a bargain compared to the alternative.