Borrowers often focus on getting the best interest rates in the market. While the rate is an important feature of any mortgage, it is only the beginning—other costs, terms, and conditions can overshadow the advantage of a lower interest rate, imploring brokers to look more closely at all the borrowing terms and conditions.
Open Versus Closed Mortgage
When looking at the terms, you need to think about whether an open or closed mortgage is appropriate. Will the borrower need to get out quickly? If so, at what cost? Sometimes, an attractive rate on a closed mortgage can cost more on the exit due to prepayment penalties, higher discharge fees, etc. It may be more worthwhile for the borrower to go with a higher open rate if they believe they have the potential to pay down a lump sum or refinance during the term of the mortgage. Consider the following scenario where the open rate ends up costing the borrower less during an early payout.
Added Costs, Terms, and Hidden Fees
Additional costs to consider when looking at the overall cost of borrowing include administration fees, set-up fees, holding fees, discharge fees (often upwards of $500), and legal fees. In some cases, these add-ons can bring the total cost of borrowing to over 20% of the loan value. Making matters worse, the fees are not always obvious at the time the loan is negotiated.
The lesser-known fees often appear during the discharge process and if left unclear can be quite shocking. A good lender will have a transparent and formal discharge process and fees (with fewer fees on discharge). A borrower should always have a clear idea of what it will cost to payout their mortgage by reviewing the commitment and its related schedules for fees associated to discharge (prepayment bonuses, discharge, and administration fees) to avoid any surprises upon receipt of the discharge statement. Remember to consider these as part of your overall cost of borrowing.
Finally, if a borrower can’t actualize on their exit strategy and refinance with an institutional lender, will the private lender offer renewal terms? If so, under what circumstances will they be willing to renew? Renewal terms, fees, and rates vary significantly (a 0.5% fee is considerably less than a 2.0% fee). Consider the circumstances where the interest rate might change upon renewal and how this could affect the ability of the borrower to renew. It should also be clear if the lender will keep the broker involved during the renewal process.
Making good on lending promises
There is a bigger picture beyond the quantitative side of the equation that a reputable lender brings to the table. You need to choose a lender that offers a consistent and comfortable experience for all parties involved. Can the lender deliver on what is promised? Will they provide the funds in the full amount, on-time, at the quoted interest rate, and without any hidden fees, or undisclosed conditions? These are things that money can’t buy.
Key factors beyond the rate
Here are five important factors a mortgage broker should consider before advising a client to enter into a borrowing commitment:
- Investigate all terms and conditions (including fees) beyond the interest rate. Some may be hidden in the details and schedules to the commitment. Or at the end of the term during the discharge.
- Beware of the bait and switch—make sure the deal is not at risk of evolving as you move toward closing. It’s ok to ask the lender what their closing rate is on the rates they advertise.
- Where a mortgage is funded on draws for situations like construction, or other project-based loans, compare closely the cost of refinancing the entire loan as a first mortgage over adding a second mortgage. When possible, you’re often better to leave the first mortgage in place and add a second.
- Make transparency of the lending terms the top priority. Look for ease of underwriting and a quick turnaround.
- Consider the reputation of the mortgage lender in delivering on their commitments. Are they licensed with professional designations? Any lender that you present to the borrower as an option is a reflection of your service and reputation and will be remembered as part of the experience with you as the broker.
Take time to ensure that you’re clear on the lender’s offering before presenting it to your client in order to set the borrower’s expectation, avoiding frustration and disappointment.
Peace of mind with no surprises
It’s not always easy to measure the qualitative parts of a mortgage loan against the quantitative ones. There’s a lot to be said for peace of mind—the fewer surprises your clients have to contend with, the happier they’ll be and the less likely it is that you’ll be called to deal with unexpected crises.
All successful mortgage brokers focus on what’s best for their client—and it’s a maxim that serves not only their borrowers but the interests of brokers themselves. Recurring business or new referrals come from happy clients, who tend to be those who got the loan and service they expected.
Article by Gary Spivak, CFO at Hillmount Capital. Gary can be reached at email@example.com