How can brokers best advise their clients on term types?

This article was produced in partnership with Neighbourhood Holdings

Jared Stanley, senior director of originations at Neighbourhood Holdings, gave his view on the advice mortgage brokers and agents should be providing to their clients on term types in the alternative space – and why a one-size-fits-all approach simply won’t work

A growing number of borrowers are migrating away from traditional options towards private and alternative lending solutions – but as agents and brokers, what are some of the key factors to keep in mind when advising clients on the most suitable term type in those spaces?

That can be a daunting and often overwhelming challenge – and to avoid so-called “analysis paralysis,” it’s essential to have as complete an understanding of a borrower’s problem or end goal to determine the most appropriate option, according to Neighbourhood Holdings’ senior director of originations.

Jared Stanley (pictured top) said in a recent blog post that he focuses on two main questions when presented with a deal by a broker or agent: firstly, how long does their client need the mortgage for? And secondly – is that a realistic and achievable timeframe?

Those considerations are essential, he said, because they help him understand the broker’s overall strategy and provide relevant advice on which option is likely the best value for their client based on that timeline.

What should brokers keep top of mind about each term type?

Borrowers in the alternative space are typically presented with three options for term types – closed, open, and partially open, each with their own advantages and drawbacks.

Closed-term borrowers, meanwhile, usually enjoy the lowest interest rate but also face a prepayment penalty totalling three months’ interest to pay off the loan early. By contrast, partially open terms allow borrowers to pay their loan off early with no penalty, while open terms also have no prepayment penalty but usually include some form of lender fee.

Clients who prioritize a low rate and are content committing to a full year with a lender may find closed-term products are their best option, Stanley said, with those borrowers usually unwilling or unable to pay out their mortgage early.

“For example, borrowers with lower credit scores may find it more challenging to graduate to an A or B lender, and may therefore need to commit to a closed term product so they have more time to improve their credit,” he said.

Meanwhile, clients who prefer having the option to pay out their mortgage quickly without fear of penalties will probably gravitate towards open-term solutions – particularly as the rate plus fee will probably end up higher than the full closed-term costs.

“We have seen the open term utilized by brokers whose clients wish to sell their existing property and need equity in their existing home to bridge the purchase of a new home,” Stanley explained. “Another use case is where a borrower needs alternative financing to close on a presale and intends to sell it immediately after.”

For clients seeking a more flexible solution – for instance, those who may need to pay out the loan midterm but also need more time to do so – the partially open term may be the ideal solution.

That might include borrowers who wish to purchase a new property before selling their existing home, Stanley said, with the partially open term offering the ability to make improvements to their current place with the goal of selling it for more.

Understanding the uniqueness of each borrower is a key consideration

Of course, more important than any consideration is understanding that potential costs and savings for borrowers will depend on the lender, interest rate, prepayment penalties and fees – and that a blanket one-size-fits-all calculation can’t be applied to every borrower equally.

“The interest rates, lender fees, prepayment penalties, and other costs can vary depending on the lender and the specific mortgage product, so it’s important to do your research and due diligence before recommending a lender to a client,” Stanley said.

“Additionally, by understanding the borrower’s funding needs and goals and analyzing how long they will need funds, you can assist them in selecting the most suitable alternative mortgage term.”

Click here to read more of Neighbourhood Holdings’ advice on deciding the best term options for clients, including a detailed rundown on how specific scenarios might impact borrowers using each term type. 

Jared Stanley is the senior director of originations at Neighbourhood Holdings, a mortgage lender based in Canada.