Interest Reserve Mortgages in Alberta

Cheap gasoline might seem like a boon to the economic fortunes of many regions throughout the world, but in Alberta it means hard times. The dip in crude oil prices has sent Alberta into a recession; between January and August, for example, unemployment rose from 4.5% to 6.0%, for a 33% increase. Companies in oil and gas services, as well as the peripherally related industries such as Construction, professional services and manufacturing, have had to cut the number of their employees. To put a concrete number on the issue, there were 29,290 Employment Insurance (EI) recipients in Alberta, but there were 52,700 in July 2015. That same time period saw the number of unemployed people increase from 110,700 to 147,800.

The drop in crude oil prices also has an impact on the province’s trade balance. Through the end of October 2015, crude oil accounted for 57% of the province’s total merchandise exports, and natural gas and gas liquids accounted for 10%, totalling 67% for the industry. This is about a 10% drop in the proportion from 2014, when they accounted for 74% of the province’s total merchandise exports. This does not mean that companies sent less oil and gas out of the province; instead, crude oil volumes actually rose by 13% in 2015 thanks to a surge in production from oil sands. Gas volumes increased by 4%. It is the sharp drop in prices that led to that drop in proportion. Between 2014’s first eight months and the same time frame in 2015, oil export prices dropped by 35%, and gas prices fell by 39%.

The current recession has not harmed the Albertan consumer as much as the Great Recession of 2008-09 did, at least not in terms of consumer bankruptcies. However, the Index of Consumer Confidence, a metric tracked by the Conference Board of Canada, fell by 56% between September 2014 and October 2015, similar in scale to the fall in consumer confidence that took place when the Great Recession was in full effect. For example, retail sales have fallen by 2.6% in the first eight months of 2015 in comparison with the first eight months of 2014. The primary reason for this is the drop in the price of gasoline and in the number of new automobiles being sold. Many Albertans currently face considerable insecurity in their employment, which is why so far fewer cars are being sold. Albertans have purchased 10.6% fewer new cars in 2015 so far than they did in 2014; the rest of Canada has seen a 4.7% increase.

The housing market in Alberta has seen a similar setback, with 23.7% fewer MLS housing resales in September 2015 than in September 2014. MLS volumes and sales prices have both dropped in Alberta in 2015. New housing starts began to decline in April 2015 and dropped by 4.2% between January and October 2015 in comparison with the same time period in 2014. Multi-family starts (rental condos and apartments) have gone up by 11.4% in 2015 but single-family homes have dropped by 22.9% during that same time. The upshot is that consumers in Alberta are becoming increasingly worried about the effect that this recession will have on their finances. The end result is that consumer confidence and spending on durable goods (new cars or homes) are in decline.

So how can an interest reserve account help you?

An interest reserve savings account is designed to help the holder pay the cost of interest that has accrued from long-term debt obligations. The most common use of these accounts is as part of a major construction process. The size and scope of the debt in place are a commonly used metric to determine how much the account should hold. One way to figure this is out is to multiply the total value of a loan by the estimated project completion time by the interest rate by the percentage of the project time frame when the loan will actually be outstanding.

If you find that liquidity is dwindling, and you hold a significant amount of equity in a property, you can use an interest reserve savings account to prompt a lender to provide you with the financing that you need. Some private lenders may not take the interest reserve savings account into consideration, but others will. As the borrower, you get access to the additional funding that you need and only have to put a partial payment down because the mortgage included that reserve to boost your cash flow. You have to be more disciplined with your finances over the short term, though, because you get less in hand now, and a private mortgage involving an interest reserve savings account will generally come with a higher interest rate than you get with a standard private mortgage.

Let’s take a look at two scenarios. Let’s say there’s a gross private mortgage for 12 months for $200,000. A standard private mortgage would take away 5% for closing costs and fees ($10,000) giving $190,000 in net funds. If this is an interest-only private mortgage, the borrower pays in $2000 per month (compounding the interest monthly) assuming the rate is 12%.

With an interest reserve private mortgage for $200,000, those same closing costs and fees would come out, and $24,000 would go into that reserve account, leaving the borrower with $166,000 in net funds. The lender gets the peace of mind that the payments are sitting in the bank. It also keeps the borrower from having to worry about having to remember to write that check each month to the lender. Instead, he can focus on restoring his credit and his finances.

Amansad Financial has connections with private lenders who are willing to extend interest reserve mortgages — as well as with lenders who provide blanket security mortgage loans and traditional loans. We also can connect our clients with non-private reverse mortgages for borrowers who are over the age of 55 who need liquidity without the hassle of making monthly payments on a loan and without interference with pensions or benefit payments. Give one of our lending specialists a call today!

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