Equity Lending -does it still exist?
Short Answer; Yes, but in a very limited fashion at Prime rates.
Long Answer; read on…
It seems that each week I take at least one mortgage application from clients whose criteria goes something like this;
- Stellar credit
- a relationship with the same bank for as long as 45 years, and never a missed payment – Ever.
- no credit card debt or unsecured line of credit debt
- no car payments
- significant equity in their home, possibly even clear title.
- Significant equity in additional rental properties (in one clients case more than $5 million worth of equity)
- very low documented income specifically from employment activities
- possibly strong dividend income, possibly strong rental property income
- limited liquid assets (i.e. not much in the way of cash or liquid securities)
- looking to access as little as 25% or as much a 65% of the value of their property (often to assist children or grandchildren with a property purchase of their own)
One might think that with a banking history of 40 years, impeccable credit, $100,000 per year of rental income, and a free and clear property, that applying for a line of credit secured by the property would be a simple matter.
Indeed it was up until last year.
Significant changes to the lending capabilities of the chartered banks were introduced in the fall of 2012 by the OFSI at the behest of the Honourable Jim Flaherty.
Essentially ‘Equity lending’ programs have been all but eliminated from the chartered banks.
The bottom line is that the mortgage amount, or secured line of credit limit, that one can now be approved for through a chartered bank is dictated almost completely by documented income.
The definition of documented income does not include;
- income from rental properties
- dividend income from securities
- dividend income from your own Corporation (one possible exception being a three-year history of dividends paid)
- payment of shareholders loans
- pension income
- gifts from family
The definition of documented income does include;
- Management salaries drawn from your own Corporation
- A regular pay check from a place of employment
With the chartered banks having been legislated out of lending to clients without documented income there was a massive inflow of such applications to the Credit Unions which are regulated at the Provincial level and thus were not subject to the Federal guideline changes.
The Credit Unions carefully watch the balance of lending products being utilized by their members, and due to the somewhat sudden and large influx of equity lending applications were quick to implement policy changes of their own. Most limited the maximum mortgage amount to $500,000, some eliminated their own equity lending programs, others saw the opportunity to charge a rate premium and in some cases a lending fee for such applications.
This brings us to the heart of this post and something makes me feel truly good about my job this week.
An application was submitted by a professional individual whose practice is rapidly expanding. This individual wanted a $500,000 line of credit in place to help manage their business growth.
With stellar credit, minimal consumer debt, no car payments, two investment properties with very strong positive cash flow, and a $2.5 million home with a clear title, one might think this individual would have very little trouble with their application.
The key wrinkle was, as is the case with many growing businesses, that the majority of revenues have been retained within the Corporation, with the clients personal income limited to just enough to cover the basics of life…barely.
This client had completely paid off their home two years earlier, closing down a $1.2 million line of credit that they otherwise would’ve had in place with a zero balance. The mistake this person made was not paying off their home, it was closing a credit facility which could easily have sat with a zero balance costing them nothing at all. However closing it out was an emotional decision (as many in life are) to achieve a goal of truly feeling that their home was free and clear. Admirable and respectable, yet unfortunate timing considering the lending guideline changes (which most Canadians are somewhat unaware of).
By the time the client came into my orbit they had been to two banks, a credit union and had worked with another independent mortgage broker.
At this point the best offer the client had was a fully advanced mortgage at 5.25% with a 2% application fee. Although this might sound like something originating from a private lender, it was actually an offer from a local credit union.
Although I was unable to qualify the client for a line of credit product, within a week we were able to nail down a mortgage advance at 3% with no fee whatsoever via another local Credit Union.
The net savings to this client was $10,000 upfront with the elimination of application fees, and an additional $11,197.68 interest savings per year.
$65,000 over the next 5 years in their pocket rather than the lenders.
Not bad considering the client does not have to pay me a penny for finding them this solution.
The bottom line for you, the documented income challenged applicant; (I apply this daily)
Leave no stone unturned prior to signing a mortgage commitment with a higher than market rate and application fees.
Thank you.
AMP – Accredited Mortgage Professional
PH# 604.351.1253
Fx# 1.877.797.8692
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