5 things brokers should know when choosing an alt-lender for clients

CMP Featuring Jared Stanley March 29, 2023

5 things brokers should know when choosing an alt-lender for clients

This article was originally published on Canadian Mortgage Professional.

There’s never been more variety available for mortgage brokers when choosing an alternative or private lender – and whittling down that list can sometimes prove daunting.

In a recent blog post from Neighbourhood Holdings, the company’s senior director of originations, Jared Stanley (pictured top), took brokers through some of the top items to consider when carrying out due diligence on lenders – something that’s especially important, he noted, because “not all alternative and private lenders are created equal.”

One of the most obvious positive signs, according to Stanley, is a lender’s reputation among mortgage professionals. Membership of industry organizations often means a lender has agreed to abide by particular ethical guidelines and codes of conduct – at risk of forfeiting membership for failure to comply – and has access to the training and resources those bodies offer.

It’s also always a good idea, Stanley added, to read up on a lender’s online reviews and what their customers think about them.

“The best reviews come from borrowers because they are the end user of the financing,” he said. “If your clients are happy, you’re more likely to receive referrals.”

Interest rates are always a key factor in deciding which lender to go with – but are they the single most important component?

For Stanley, taking prepayment charges and related fees into account will also allow brokers to provide the most detailed possible advice for clients, especially since it’s relatively common for borrowers in the alternative and private spaces to pay off their debt ahead of schedule.

Advising clients on prepayment penalties isn’t just a case of understanding how they’re calculated – equally, the notice a borrower must provide a lender should be crystal-clear before proceeding.

“Don’t assume all notice periods work the same way,” Stanley emphasized. “For example, even some bank lenders require ten days’ notice to produce a payout statement. Failure by the borrower to provide enough notice may delay the borrower’s ability to pay off the mortgage because they can’t receive a payout statement.”

Fees for missed payments or defaults are equally important. Reviewing these charges and how they compare to those of other lenders is vital, Stanley said, as well as understanding the timeline for collections and the mortgage enforcement process.

“It is important that you can communicate with the borrower the potential consequences of defaulting on the loan to help them understand the importance of keeping their payments current,” he said.

With that in mind, a broker can ask lenders questions in advance, such as how much they charge for a missed payment, how willing they are to work with borrowers who have difficulties, how fast the lender will demand a mortgage if there is a default, and whether they can send a list of standard service charges.

Factors to keep in mind about renewals

One of the most significant parts of the mortgage process, meanwhile, is renewing. It’s important to know where lenders stand on rate increases over and above market increases, as well as associated fees and the likelihood of renewal.

The key questions to ask include how a lender prices deals at renewal, how much they charge, why they might not renew a loan, and who manages the renewals.

Brokers should find out well in advance if a lender has an automatic renewal or rollover policy included in the terms of their mortgage. That’s because the renewal policies of some lenders need the borrower to respond to the lender before the maturity date, and automatic renewals can cause higher borrowing costs.

“Renewal offers will typically include the date borrowers need to respond to lenders,” Stanley noted. “It is extremely important that they are aware of this date.”

Also worth noting: if the borrower does not wish to renew their loan with their current lender, they should be fully cognizant that they need to repay in full on or before the maturity date arrives, at risk of possible legal action otherwise. As explained in another blog post written by Stanley, it's also crucial to consider factors such as the interest rate, lender fees, and prepayment penalties to determine the mortgage terms and the overall cost of borrowing.

What should brokers know about where lenders’ funding comes from?

In the current crowded market of alternative and private lenders, being able to identify where those organizations source their funds from should be top of mind for brokers, according to Stanley.

While mortgage investment entities (MIEs) may have access to diversified funding sources, individual private lenders who lend out their own money directly usually rely on interest income, mortgage repayment and fees to guarantee liquidity, meaning their prices are often higher. Similarly, an individual private lender may not have the capacity to renew a borrower due to their own personal financial circumstances.

It’s also a good idea to determine whether the lender has ever had to cancel commitments due to a lack of funds, Stanley said, in addition to whether they’ve experienced a high volume of investors withdrawing investments from a fund.

“Understanding the answers to these questions enables you, as a broker, to better explain the associated risk of working with certain lenders to your client,” he said. “Regardless of the type of lender, if they want their money back at maturity, you and the borrower will need to find  a lender willing to refinance the loan, which could result in added costs, so it is important to understand the lender’s access to funding.”

What else do brokers need to know?

Another key way of assessing a lender’s reputation and suitability is by weighing up whether they practice good governance – for instance, whether they have an advisory committee to independently critique their policies and approaches.

That’s not to mention making sure lenders have a robust cybersecurity plan and a coherent strategy in place to mitigate against breaches.

Ultimately, making sure a lender ticks each of these boxes will help mortgage brokers maintain a good reputation in the industry and make sure they’re presenting the best possible solutions for their clients, Stanley concluded. Neighbourhood Holdings also provided a convenient checklist for brokers to use when deciding which lender to use – downloadable here.