Q&A on changing mortgage rates and the current lending environment with Peter Fast of Canada ICI Capital
Ten on the 10th
Published July 10, 2022
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.
Ten on the 10th's July, 2022 segment features Peter Fast, Vice President, Origination at Canada ICI Capital (Victoria) Corporation. Click here to view a list of former 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.
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Could you speak to whether this is a good time to consider a variable rate, rather than a locked-in rate for five years?
It could be. There are any number of studies over the years that will tell you that if you go with a variable rate mortgage, you generally come out ahead financially over the long term. There is an element of uncertainty about what your mortgage payment might be, as it will rise if interest rates rise, and not everyone is comfortable with that. That comfort with risk is a very personal decision. If you can live with more uncertainty, it might be the right move for you.
Where are we in terms of a historic rate environment? Are current rates still considered relatively low?
Oh, definitely. From the 1940s until 2008, the Prime Rate in Canada was never lower than 3.75%. It’s 3.70% today (although it’s expected to increase by 0.75% later this month). We have had over a dozen years of ultra-low interest rates, and people forget, or they never knew, that interest rates weren’t always this low. My kids, who are teenagers, have no idea. I tell them about my mother renewing her mortgage at 19% in the early 1980s, and they look at me like I’m speaking Klingon.
What do you sense is going to happen through the end of 2022 and into 2023 with respect to interest rates?
Well, my crystal ball is cracked, the same as everyone else, but I expect them to be higher. How much higher? There’s the magic question.
I recently asked a fellow mortgage broker, one of the smartest guys I know, what he says to clients about interest rates. He said, “I don’t make predictions. The smartest economists in the world have different opinions, so what hope do I have? I say don’t worry about what you can’t control. Make decisions based on what you personally are comfortable with, and what will make you sleep at night. Making people realize that there is not an objectively ‘right’ decision is sometimes comforting.” I thought that was a wise answer.
In times like these, should purchasers look to alternative lenders rather than the chartered banks for their mortgages? What advantages do independent or private lenders have that banks do not?
The “lending envelope” for institutional lenders is smaller today than it was a few months ago. It just is. For deals that pushed the edge of the envelope a few months ago, those deals don’t fit anymore. They’re riskier. So for borrowers who still want to go ahead with a deal, they may not be able to get institutional money. But they still may be able to do the deal with alternative lenders who are prepared to take additional risk in exchange for additional reward.
In our discussions with alternative lenders in recent weeks, they expect more volume. Some deals will still make sense with an alternative lender, and they’ll go ahead. And some deals won’t make sense, even with an alternative lender, and they won’t go ahead. And that’s o.k.
In terms of advantages over institutional lenders, alternative lenders are more willing to consider deals where the deal has some “hair” on it, they make faster decisions, and they’re usually easier to work with. That’s why they’re busy, and why they’ll stay busy in the years to come.
What are lenders doing differently today than what they would have done six months ago when underwriting a property purchase?
More conservative underwriting is the order of the day. It will be this way for a while. To start, some lenders are now “closed for business” if you’re not an existing customer. If they are open for business, they may do deals at a lower loan to value, or with a shorter amortization, or with tighter debt service coverage covenants, or with all three of those things. It doesn’t mean you can’t get deals done, but it does mean that deals at the edge of the envelope don’t work anymore.
For lenders that don’t retrench as much, they’ll have opportunities to win a lot of business. One of my most productive years as a commercial lender was in 2010, when many commercial lenders were sitting on the sidelines. The lender I was working for mostly stayed the course, and we picked up a lot of good business, as there was less competition than usual.
How can purchasers benefit by utilizing your services in a turbulent lending/rising interest rate environment?
The percentage of deals that involve mortgage brokers has been increasing in Canada over the years – I think it’s about 40-50% on the residential side now – because people see the value. A good mortgage broker will usually find you a better deal than what you can find yourself and will save you the hassle of negotiating with a bunch of lenders to get that deal.
I had one difficult deal last year that I ended up placing with the 17th lender I talked to, after the first 16 declined it. Does anyone want to negotiate with 17 lenders to get a deal done?
Financing is going to be more difficult to arrange than it has been recently. That’s where a good mortgage broker will really help.
What should owners expect when it comes time to renew their existing mortgage aside from a higher interest rate (loan to value discrepancy)?
It depends on whether we’re talking about residential mortgages or commercial mortgages.
For residential mortgages, for the most part, lenders qualify you when you get the mortgage, and as long as you repay it as agreed, they’ll offer you renewal terms. They don’t usually ask you to re-qualify, even if the payments are higher. So if you obtained the biggest mortgage you could a few years ago, and interest rates have increased, and your mortgage payment has increased, you can probably still renew your mortgage.
On the commercial mortgage side, it’s different. Some commercial lenders do annual reviews every year, or at a minimum, they do a full review at term maturity. In some scenarios, you may be asked to pay down the mortgage in order to renew. In other scenarios, the lender may require you to pay out the mortgage completely.
As an example, we have a very good client of ours that owns a commercial investment property here in Victoria. A few years ago, we maxed out the financing on the property. Their mortgage was $6,800,000, and their interest rate was 3.04%. Fast forward to today, and interest rates have risen. The lender was prepared to renew at an interest rate in the low 5% range. However, in order to renew the mortgage, the lender also required our client to pay down the mortgage by $800,000.
You can imagine that that wasn’t exactly what our client had in mind. The mortgage is now with another lender.
You worked as a commercial lender for financial institutions for over 20 years before becoming a commercial mortgage broker. Any regrets about making the move?
No. I like what I do, and it’s the same work – problem-solving. I’m just on the other side of the desk. My only regret is that I didn’t make the move sooner.
You work with Dave Ganong at Canada ICI Capital. How did that come to happen?
Dave would send me deals when I was a commercial lender, and we worked well together. He had good clients, he knew the deals well, and he made my job easier. When I made the move to be a commercial mortgage broker, it made sense to work with someone I had worked well with before.
In an interview (link) on Ten on the 10th, in 2019, Dave was asked about a rumour that he is competitive. Care to comment?
Oh, yes. Definitely yes. LOL. C
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