Innovative mortgage products. Remember those?
With Ottawa’s onslaught of rule tightening, it’s been a while since we’ve seen a new product that was substantially unique. This is one of them.
Merix Financial, the broker channel’s seventh-largest lender by market share, is launching the Interest-Only Flex mortgage on Monday, June 25, 2018.
The IO Flex has one key purpose: to cut a borrower’s monthly carrying costs.
While the rates are higher than a conventional amortizing mortgage (as you’d expect given the higher risk), the payments are materially lower.
Take a $300,000 30-year-amortized mortgage, for example. A traditional adjustable-rate mortgage at prime – 0.75% has a payment of $1,214.
The IO Flex mortgage has a payment of just $918, almost $300 less each month. That’s based on a 5-year adjustable interest-only rate of prime + 0.25%, a rate that is one point higher, but a quarter point less than most HELOCs.
Of course, you pay a whack more interest on the mortgage itself, but interest cost is not necessarily determinant of net worth. That’s because the cash flow savings can be redirected to things like:
paying off higher interest debt
making other investments; or
letting folks with variable cash flow (e.g., self-employed or commissioned borrowers) make principal payments when they can, not when they have to.
The IO Flex is available up to 65% loan-to-value in interest-only form. You can then add another 15% LTV in the form of a regular amortizing mortgage, for 80% LTV total.
The rates at launch are as follows:
5-year Fixed Interest Only Rate: 4.25%
5-year ARM Interest Only Rate: Prime + 0.25%
5-year Fixed Amortizing Rate: 3.84%
5-year ARM Amortizing Rate: Prime – 0.70%
Merix says it’s the only prime lender in Canada with a fixed interest-only rate.
Here’s more of what you need to know:
Qualification rate: The greater of Bank of Canada posted or the contract rate + 2%
Qualifying amortization: 30 years (even on the interest-only mortgage)
Maximum loan amount: $2 million
Minimum loan amount: $200,000
Maximum GDS / TDS ratios: 39% / 44% (40% TDS for rentals)
Minimum credit score: 640 for purchases; 680 for rentals; 720 for refinances
Convertibility: The IO Flex can be converted to a fixed-rate amortizing mortgage at any time
Sliding scale: Varies by city (e.g., 80% of the first $2 million property value for single-family houses in the GTA and GVA, 50% thereafter; 80% of the first $1 million property value in Calgary, 50% thereafter)
Registration type: Collateral charge demand loan (meaning if you default, they can call it in right away)
I asked Merix CEO Boris Bozic about when Merix can demand repayment. “In the same theoretical circumstances that any HELOC can be called,” he said. “HELOCs can be called in on demand.” But barring non-repayment, “it would have to be something catastrophic.”
The product is “B-20 compliant” and funded by “rather large financial institutions,” Bozic adds, implying funding stability.
This project has been in development for over a year with Merix’s investors doing substantial analysis, Bozic says. Among other things, the company carefully evaluated the default behaviour of interest-only HELOCs. It confirmed the default ratios are “quite low” largely because the equity in the home is well established, he adds.
“These mortgages are B-20 compliant so they have to be satisfactory to regulators. So you wouldn’t see wild disparity between [default rates for] amortizing and IO loans.”
Where this product could get particular uplift is with rental investors, for four reasons:
The rate premium is only 5 bps for rental financing
It can be tax efficient for investors who write off all their interest (assuming no amortizing portion)
Merix allows the mortgage to be in a company name
The lower payment makes debt servicing easier when building rental property portfolios.
The Interest-Only Flex is available only through mortgage brokers.