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Mortgage products, interest rates and inflation Q&A with Gagan Lalli of CMLS Financial
Gagan Lalli, Vice President of Real-Estate Finance at CMLS Financial, discusses the institutional and consumer mortgage lending environment.
Mortgage products, interest rates and inflation Q&A with Gagan Lalli of CMLS Financial
Ten on the 10th
Now in its third year, Citified's Ten on the 10th is a monthly question-and-answer segment connecting our readers with the insight and knowledge of Victoria's top real-estate and business professionals.
Following a summer break, Ten on the 10th is back, with October's and our third anniversary segment featuring Gagan Lalli, Vice President of Real-Estate Finance at CMLS Financial. Click here to view a list of all Ten on the 10th Q&As.
Asking the questions is Ross Marshall, Senior Vice President of the Victoria offices of commercial real-estate brokerage CBRE. As a leader in facilitating large-scale commercial real-estate transactions throughout the Capital Region – which include apartment complexes, industrial retail and office properties, and land/development opportunities – Ross and his team are at the forefront of market-leading real-estate transactions on Vancouver Island.
Would you like to be featured as part of a future Ten on the 10th Q&A? We'd love to hear from you.
Could you tell us a little bit about yourself? 
I am originally from Victoria (Gordon Head area), graduating from the BCom program at UVic and moved to Vancouver shortly thereafter. I still have family and friends in Victoria, in addition to business clients, so I am there quite often. I have been with CMLS Financial for over 10 years and although I assist clients across the country, most of them are in Greater Vancouver and Greater Victoria.
Tell us about CMLS Financial as not everybody is aware of your firm.  
CMLS has been around since 1974 and is an institutionally backed firm that currently has $29 billion of assets under administration, or AUA. Although we are traditionally known as a mortgage lender (both conventional and Canada Mortgage and Housing Corporation [CMHC]-insured loans), we do a lot more. We consider ourselves real-estate financiers, connecting capital with opportunities. 
While we continue to lend, there are some really exciting initiatives at CMLS that have been put into overdrive, notably our advisory business. We are more often working for users of financial capital in sourcing debt and/or equity. We enjoy working with a fiduciary duty to the borrower, negotiating on their behalf and helping them execute in their goals with an existing property or new development. My team has been involved in almost $700 million worth of deals this year, and the firm is on target for a $6+ billion year, one of our best years yet.
Why should somebody approach CMLS versus their regular bank or credit union?
When we are acting as a lender, we represent a variety of funds that are not otherwise available. While a bank or credit union may have a certain type of deal it is looking for, we have over 30 funds we represent, many of which are seeking different types of loans or risk profiles, so you could consider CMLS’s lending arm as a market within itself.  
We also have the capacity to act as advisors, as described above, where we are working on the borrower’s behalf.  Given our 45-year history of lending on a variety of deal types, we have the institutional background and experience that we use to our client’s advantage. While loan amount and interest rate are always important, sometimes a well-structured deal with flexibility is just as important. We also understand that there are people behind every opportunity, and it’s not a one-size-fits-all approach. This is going to be a major part of CMLS’s growth and what I personally see being a large part of my offering to clients. 
What are your thoughts on the Victoria marketplace?
I am a huge fan of Victoria, and although I may be biased, it is clear that Victoria has grown in investor interest due to its strong fundamentals. I have witnessed the organic growth of local players and a major influx of others from across the country looking to do business in Victoria.  It is great seeing this activity in my hometown and being able to help clients achieve success. 
You mentioned CMHC. Is that an option that everybody should look to when financing a rental apartment building?
That really depends on the client’s plan with the property and their long-term intent. There are certain fees/premiums that come along with a CMHC loan and we need to make sure the client’s plan and timeline is long enough to pay those back, in addition to the structure of the loan working for their business plan.  
For example, if a client is looking to build or buy an apartment building and hold it long term, then yes, CMHC is definitely a path to explore, especially given the preferential interest rate.  However, if a borrower is looking to buy a property, renovate it and sell it within a few years, I would not suggest the CMHC path as it doesn’t align well with that style of business plan.  
What is happening with the lending marketplace and with interest rates right now?
The lending marketplace is the most competitive I've ever seen. Lenders have a large amount of money to invest and there are only so many properties they can do that on. Supply of capital far outweighs demand. When acting as a client’s advisor, we have had situations where potential lenders are in a bidding war, trying to sharpen their pencil to win the deal.  It is great being able to work for the client and help source and negotiate the best deal for them.  
As for interest rates for term loans, most lenders price a mortgage as a spread over the Government of Canada bond rates. Although the bond rates have risen, the spread that lenders charge over the bond has continued to compress to offset much of those increases over the past year or two. For example, a few years ago a deal could be priced at 2% above the bond rate, but now that is down to approximately 1.40% over the bond rate, and we have seen even lower in certain circumstances. Though there has been a slight increase in bonds in the last month, overall interest rates are still at extremely low levels.
Where do you think interest rates are going?
The Government of Canada five-year bond yield has increased over the last 12-months, about 0.75% which is a big swing, although they did hit an all-time low due to COVID.  We actively and regularly review and study economic forecasts, and I agree with the consensus, rates will continue to rise over the next 12-months as the Bank of Canada eases their bond buying program. Although I don’t work in the consumer side of the mortgage business, I do watch it for personal reasons and the big banks just increased rates 0.20-0.30% this past week. This is evidence that rates are increasing.
Another trend to note of the last year or two is what term length clients are looking for. Last year and earlier this year a lot of our clients were looking to take 10-year terms given how low the interest rates were, sometimes being lower than 2.50%. With the rising rates and a steeper yield curve, we have seen some clients shift back to the 5-year term requests to maximize their loan. 
Is this the time for mortgage holders, consumer or otherwise, to blend their mortgage rates or refinance, if they are within 12 or 24 months of their mortgage renewal, given the interest rate environment? Would you advise locking in mortgages beyond a five-year term if the option is available?
I would say yes, it is something to explore on both a refinancing and going beyond a five-year term. Of course, this is dependent on the client’s circumstance and plan going forward. Most lenders can offer terms from one-year to 10-years, and the sweet spot may be somewhere such as the seven-year mark.  Borrowers should definitely look at their leasing profile (other than apartments) to determine what the best mortgage term would be. There may be a large rent increase planned in say three-years, and that may be the opportune time to refinance.   
We continue to hear about inflation. How is that impacting the real-estate market?
We are seeing inflation have some impacts in the marketplace. For example, on the construction side, most of our development clients are seeing their budget increase quarter after quarter as they get ready to break ground.  Even while under construction some costs continue to escalate as you can only lock in certain trades so far in advance.  Therefore, it is so important to lock in whatever trades you can, create a buffer for those you can’t, and have cash on the sidelines to handle any unforeseen increases.
Another large cost escalation we have seen is property insurance on completed apartments.  Although that may not be directly tied to inflation, we have seen some clients have that cost rise by 50%.  As you can imagine, with minor (if any) rent escalations, increasing property taxes, and increasing insurance costs, apartment owners really need to stay on top of things to grow net income. 
And of course, as inflation increases, so will interest rates.  In theory, however, rents should also increase to offset that. 
What type of deal is the most common on your desk right now? 
New rental apartment developments. We are seeing projects that were originally slated for condominiums become rental developments, in addition to the strong market fundamentals driving clients to build rental apartments for long term cash flow. I believe a big part of this is due to attractive financing on apartments. This is the asset that lenders are willing to stretch the most on given how safe it is. Also, the CMHC programs have been a catalyst for new rental developments and construction. We get enquiries every week from developers who ask us to help assess which financing path would be the best for them, be it conventional, CMHC, or a hybrid version of both. 
What is the best part about your job?
That is an easy one! It’s the personal interaction with people. Although working at the desk is a major part of the job, getting out and meeting with clients for a coffee, lunch or even a beer is the best part of the job. In my view, it is about building relationships for the long run and not just working on a particular transaction. We want to be a trusted advisor for all of our clients, and that takes time to build. C

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 Article resources

  • Would you like to be featured as part of a future Ten on the 10th Q&A? We'd love to hear from you
  • View CBRE Victoria's website here
  • View CMLS Financial's website here
  • 2018
    • October, 2018: Reed Kipp of Devon Properties talks about Victoria's rental housing industry
    • November, 2018: Business Development Bank of Canada's Chris Boissevain talks about interest rates
    • December, 2018: Aryze Development's Luke Mari and Ryan Goodman talk about real-estate development
  • 2019
    • February, 2019: Phung Horwood's My Phung talks about real-estate appraisals
    • March, 2019: Luke Mills of Megson Fitzpatrick Insurance talks about the insurance industry
    • April, 2019: Greg Damant of Cascadia Architects talks about architecture in Victoria
    • May, 2019: Real-estate development with Robert Fung of The Salient Group
    • June, 2019: Rental housing industry Q&A with David Hutniak of LandlordBC
    • July 2019: Harris Green redevelopment Q&A with Mark Chemij of Starlight Investments
    • August 2019: Land remediation Q&A with Harm Gross of NEXT Environmental
    • September 2019: Business banking Q&A with Raj Wirk of Coast Capital Savings
    • October, 2019: Real-estate development Q&A with Mike Miller of Abstract Developments
    • November, 2019: Real-estate development Q&A with Byron Chard of Chard Development
    • December, 2019: Interest rate and commercial mortgage brokerage Q&A with Dave Ganong of Canada ICI Capital
  • 2020
    • January, 2020: Real-estate development costs Q&A with Doug Foord of Invictus Commercial Investment Corp.
    • February, 2020: Private lending and the mortgage industry Q&A with Len Shorkey of Shorkey Mortgage Corp.
    • March, 2020: Strata insurance premiums Q&A with Luke Mills of Megson FitzPatrick Insurance
    • April, 2020: Rental housing and COVID-19 Q&A with David Hutniak of LandlordBC
    • June, 2020: COVID-19's impact on Victoria's real-estate Q&A with Jordan Milne of GMC Projects
    • July, 2020: Multi-unit residential and commercial building fire safety services Q&A with Tim Lindsay of the Vancouver Island Fire Protection Association
    • August, 2020: Royal Beach Q&A with Georgia Desjardins of Seacliff Properties, developer of the 134-acre Colwood project
    • September, 2020: Victoria real-estate development Q&A with Sam Ganong of Curate Developments
    • October, 2020: Real-estate development Q&A with developer Dan Cox of Cox Developments
    • November, 2020: CRD affordable housing and CRD parks services Q&A with Stephen Henderson of the CRD
    • December, 2020: Real-estate values, wine and housing market Q&A with Johnathon Sipos of Cielo Properties
  • 2021
    • January, 2021: Mass timber construction, the Mayfair District and junior hockey Q&A with Edward Geric of Mike Geric Construction
    • February, 2021: Excavating industry, sewage treatment pipe and COVID economy Q&A with Trevor Mann of Don Mann Excavating
    • March, 2021: Victoria industrial sector investment opportunities Q&A with Brent Sawchyn of PC Urban Properties
    • April, 2021: Northern Junk, Capital Iron lands and Victoria real-estate development Q&A with Jon Stovell of Reliance Properties
    • May, 2021: Victoria housing delivery and affordability Q&A with Adam Cooper of Abstract Developments
    • June, 2021: Institutional investment in Victoria's rental housing market Q&A with Alex Messina of Nicola Wealth
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