Exit Strategies Essential for Equity-Based Mortgages
I recently came across a small classified ad under the Mortgages section of a local newspaper, advertising difficult 1st, 2nd and 3rd mortgages. The company promises funding in less than a week, using equity in your home to get you approved. The punch line? Mortgages are cheaper than your credit card.
While all of this may be true – and can be arranged by myself as well – these types of private mortgages need to be treated carefully. They are very expensive, must only be used as a means to an end, and they must be accompanied by an exit strategy that preserves the equity in your home. There are a lot of irresponsible mortgage companies out there, preying on people who have large amounts of debt and are desperate to stop the bleeding.
Responsible mortgage brokering is essential when it comes to private mortgages. Exit strategies can include a plan to consolidate the private mortgage into a new first mortgage when credit is repaired and income is stable. Another exit strategy could be to sell the property at your own pace, while the private mortgage is arranged so that other mortgage payments aren’t missed and the home doesn’t go into foreclosure before it sells. There are many cases where equity-based private mortgages make sense. They can also be used to prevent bankruptcy or damaging consumer proposals. Private mortgage solutions can be a saving grace, but they must be arranged responsibly.
Interest rates for most private mortgages are in the low double-digits (10-12%) and then there are lender fees, broker fees and legal fees. All-in, the effective interest rate (APR) usually ends up being in the low-teens (14-16%). However, in Ontario, the criminal interest rate threshold for the APR is 35%!! This means that fees and rates combined can be as high as 34.9% and it isn’t viewed as criminal. Just because it’s legal, doesn’t make it right. I have seen scenarios where predatory brokers have charged exorbitant fees resulting in home loss. It is heartbreaking to see vulnerable people being preyed upon.
If you are struggling with bill payments or feeling like you need a lifeline, please be sure to work with someone who cares about your bigger picture, not just a quick easy fix. Your home’s equity is likely the largest asset you will ever have and it needs to be respected. I’m really passionate about doing the right thing for my clients and I’m always here and happy to help.