—The Mortgage Report: Oct. 15—
- Canada has had interest-only home financing for decades, the most popular type being the HELOC. But it’s hard to find a mainstream lender selling an interest-only mortgage. That’s partly what makes Meridian Credit Union’s new Hybrid mortgage interesting.
- The Meridian Hybrid is a traditional mortgage and interest-only (I/O) loan in one. It lets someone with a 20%+ down payment pay interest only on up to 60% of a home’s value and principal and interest on another 20%. The I/O portion is limited to 75% of the total financing.
- The point of the Hybrid is to lower your monthly payments and make it easier to qualify. Unlike banks that “stress test” you—i.e., make you prove you can afford payments at a 4.79%+ interest rate—Meridian allows you to qualify simply by proving you can afford the minimum required payment, which is mainly interest-only. That nets you a much bigger loan amount on the same size income.
- Its interest-only rate doesn’t do Meridian any favours, however. It’s currently 3.83% (variable) and 3.92% (5-year fixed). That reflects the fact that there is a “certain amount of risk associated with this product,” says Carolyn Devic, Director, Share of Wallet & Retention at Meridian.
- While 3.83%+ won’t excite many people, some will pay it to buy now instead of later. The difference in maximum loan amount with Meridian’s Hybrid is considerable. Someone making $100,000 with 40% down and no other debt, for example, could qualify for over 50% more home (for a roughly similar monthly payment)—compared to a borrower who used a bank and was stress tested.
- Whether that’s prudent or not, you can decide. Compared to the lowest uninsured rate in the market, someone getting a $400,000 interest-only Hybrid might pay roughly $40,000 more interest over five years. That’s the price of getting into the housing market quicker — versus having to wait and save a bigger down payment, settle for a cheaper property or add more income.
- Devic calls the Hybrid “a short-term solution to help you get over that hump—where your salary is catching up to your life.” She says the credit union then encourages borrowers to move “to more of a standard principal and interest payment.”
- The target customer is someone who’s got excellent credit, high earning power and a temporarily high debt load, Devic says. That might be someone fresh out of medical, law, dentistry or engineering school, a newly graduated programmer, an apprentice about to become a full-time tradesperson, or anyone expecting a significant jump in salary.
- The Hybrid is available from branches and mobile mortgage specialists only, not via brokers. It’s available on purchases (no refinances) and is sold in Ontario only (all regions of the province). Maximum loan amounts are determined “case-by-case,” but Meridian does lend on home values over $1 million.
Funding a New Business With No Proof of Income
- Unemployed homeowners with significant equity and risk tolerance can still borrow to start a new business (if appropriate). That story…
- “The reality is that some of today’s big city borrowers will never pay off their mortgage.”—Financial Planner, Jason Heath (FP)