If you are looking for a home valued over $2 million, you are in a market with skyrocketing demand. Home prices continue to stay on the rise, and high-end homes make a terrific investment, particularly in BC and Ontario. The properties are gorgeous and offer seclusion and quiet in the middle of some of the busiest cities in the world. The eye-popping views and the lush neighborhoods bring in both borrowers with high net worth and investors. When it comes to financing high-end properties, though, the process is not always as simple as it seems. When your bank puts up roadblocks or your broker is unable to assist, we have access to equity driven lender partners that look at the big picture and high value in equity to grant an approval and do not pick apart all the other details. It’s understood that more time may be required to move income and assets around to fit the bank mold and obtain prime rates. The solutions we provide are meant to allow you to secure temporary financing until you can transition to prime financing.
According to a report from Sotheby’s International Realty Canada, the luxury housing market in Canada will continue to thrive as the world emerges from the COVID-19 pandemic. In its report, Sotheby’s said, “The compounding effects of dramatic changes in the housing preferences of affluent Canadians, new demands across multiple generations of homeowners and buyers, significant cash accumulation, easy access to borrowing, and pent-up local and international demand, are rippling across the market.” In the Greater Toronto Area, sales of homes worth $4 million or more shot up by 157% year over year during January and February of 2021. Single-family homes worth $4 million or more shot up in sales by 203% over that same time frame. For investors, this side of the market is the ideal time to jump in.
If you are financing your purchase, there are some things that you need to know in the luxury home mortgage market. If the property value is more than $1.25 million, some challenges arise in the financing process in addition to the borrower’s experience in securing financing for mortgages more in the median range. The most significant challenge is the sliding scale.
What is the sliding scale? It refers to your down payment. Conventional lenders generally want a 20% down payment – unless the home’s value is at the higher end of the market. With a luxury home mortgage, different lenders start to ask for more of a down payment after a particular dollar value. In some cases, this amount is $1.25 million, but in other cases, this amount can be as low as $500,000 or $750,000. For any amount over the trigger amount, many conventional lenders want 40 to 50 percent of the excess amount included in the down payment.
Let’s say that the lender’s trigger amount for the sliding scale is $1.25 million, and you are buying a home for $2 million. Your down payment could be as high as $625,000. For the first $1.25 million, 20% would be $250,000. For the remaining $750,000, though, 50% would be $375,000. Adding those two numbers together means a $625,000 down payment. This factor is often a surprise for first-time high-end buyers. The reason for this sliding scale has to do with the increased risk to the lenders. In Canada, home purchases in excess of $1 million cannot be insured in case of default, which puts the risk back on the lender.
Another factor to consider when applying for a mortgage is the potential for an extended closing process, because management may want to review the documentation for approval. This can add a couple of weeks to over a month to the process.
If you have a strong relationship with your bank, and particularly if your corporate account is “active” and “healthy,” that is the first place to begin. Banks often offer exceptions and programs for lenders at this price point. However, if you are still working toward that point with a bank, Amansad Financial has a network of equity based private mortgage lenders that make their decisions about luxury home financing based on overall net worth and equity, with minimal income requirements. Also, the stress test and affordability requirements that banks utilize in the underwriting decision process are generally not a large part of the private lending process. Working with this sort of lender will allow you to make the investment now and work toward restructuring the financing so that you can transition to a conventional mortgage within a year or so.
Private lenders can provide borrowers who do not yet have the connection with a bank with the financing to start benefiting from their investment in high-end real estate. Some important information about working with private lenders at this price point includes the following:
- Private lenders prefer to work in major cities and other marketable areas, such as Southern Ontario, Southern British Columbia / Okanagan. Other major cities in other provinces like Edmonton & Calgary in Alberta, and Saskatoon & Regina in Saskatchewan are also considered.
- The maximum loan amount available generally falls between 65 and 75 percent of the property’s value – without a sliding scale; however additional real estate security may be required depending on the application details.
- Private equity lenders are more likely to work with purchase, refinancing and equity take out situations.
- First and second mortgages are both generally available.
- Private lenders generally be paid off in full after 3 or 6 months with no lender prepayment fee.
- Decisions are made based on equity.
- Private lenders do not have a minimum credit score for approval, although credit history is a consideration for approval.
- Applications do not involve GDS / TDS requirements, and they do not involve stress tests.
- Private lending is available to residents and non-residents.
- Fully prepaid & Interest Only mortgages are available.
- Non-recourse loans are available on a case-by-case basis (read more below)
- Inter-alia (Blanket) mortgages are available (read more below).
A non-recourse mortgage restricts the borrower’s exposure with a mortgage to the security that goes up as collateral. This differs from a recourse mortgage, which allows the lender to go after the borrower’s other assets if the seizure of the security does not cover the balance due on the mortgage. This increases the lender’s risk, because a drop in property value could mean that selling the foreclosed property does not make the lender whole for the loan.
An inter alia mortgage involves multiple properties or items of security attached to a loan. This happens when the lender does not believe that the offered security provides enough value for a property. In cases where a borrower cannot qualify for financing with a conventional lender, this can provide the private lender with enough security for the elevated level of risk.
Reach out to one of our luxury home mortgage specialists to learn more about how we can help you move into the high-end property investment market, so that you can strike while the iron is hot!