Changes to OSFI's Guideline B-20 left many business-for-self (BFS) Canadians on the sidelines of the housing market, unable to qualify for a prime mortgage and unwilling to engage in the shadow market. Rather than see these would-be home owners frozen out, First National introduced Excalibur, an alternative mortgage product that is rapidly becoming the preferred and referred choice of mortgage brokers working with BFS borrowers. In this quarter's edition of Excalibur Exchange, Elena Robinson, Excalibur's Regional Sales Manager, provides insights you can use to improve your success rate in securing First National funds for your BFS clients.
Elena, of all the Excalibur mortgage clients you've served, how many are in business-for-self?
Roughly speaking, 50%, so definitely the predominant users of Excalibur.
Why are BFS borrowers the largest users?
I would say for a few reasons. First, the entrepreneurial class is growing steadily. I saw some Statistics Canada data the other day that suggested 2.9 million Canadians are self-employed. This means about 200,000 more entrepreneurs are now in the workforce than in 2014. So, a bigger population is one driver. Another is that recent restrictions like the B-20 stress test have perhaps disproportionately disadvantaged BFS borrowers, making it difficult for them to qualify for a Prime mortgage. As well, I would say BFS borrowers are enthusiastic users of the mortgage broker channel, which is of course where Excalibur lives.
You mentioned it's difficult for BFS borrowers to qualify for a Prime mortgage. How do they qualify for Excalibur?
We have a straightforward worksheet that we share with our broker partners. Let me summarize it. Number one, the applicant needs to provide 6 months of business bank statements. These statements allow us to verify current income and study the consistency of cash flow. Two, we require an itemized list of fixed expenses to get a complete picture of the business's overhead burden. Three, we require a copy of the articles of incorporation or business license to prove business ownership, although we will accept an HST/GST return. Four, we need copies of invoices or, depending on the business type, copies of sales order contracts. Five, we ask for information on what the business does. Six, we need to know how many years the owner has been in business. And seven, we want to know how many employees the business has. Many of these requirements relate back to Know Your Client rules as specified under AML legislation and are not unique to First National's deliberations, but this gives you a sense of the documentation we need to make the loan happen. And the faster we get this information, the faster we can act.
Are there certain types of businesses owned by applicants that just won't make the grade?
Generally, we are very open, which is why we have borrowers who own all sorts of enterprises, from consultants to restaurateurs. In looking at the type of business being operated, we seek to understand if the income reported is reasonable or makes sense based on what that business does.
You mentioned you need to know how many years the owner has been in business.
Correct, we want to see at least two years of ownership, but we will look at the owner's prior experiences and education in cases where there isn't this much history.
Will you accept a borrower whose business has no employees beside the owner?
Absolutely, our interest in knowing about the number of employees simply gives us a better understanding of the business, its expense obligations and cash flows. If you looked at our Excalibur borrower profile today, you'd see there is a very healthy contingent of sole proprietors. Those Stats Can figures I mentioned earlier show that sole proprietors make up almost half of all BFS Canadians today, so they are a force in the workplace and for Excalibur.
Why not take the borrower's notice of assessment… why do you need to review bank statements?
We find that some business owners don't pay themselves regularly, preferring to store retained earnings for things like retirement or future business investments. A notice of assessment doesn't capture this information and can disadvantage the applicant if it was the only document provided. That said, we may look at business and personal NOAs as part of our due diligence.
What if a BFS borrower has a past bankruptcy or had to file a consumer proposal, does it automatically disqualify them from using Excalibur?
No, it all depends on the circumstances. For example, we've written mortgages for borrowers whose lives – and finances – were previously disrupted by the death or departure of a business partner, a marital separation, or illness. We dig deep to understand the root causes of past financial strife and if we satisfy ourselves that it was a life event that was unique and perhaps outside the borrower's control, all things being equal, we will lend to them.
Is Excalibur used by business-for-self borrowers to refinance existing loans?
Definitely, we see applications every day from borrowers who are seeking to take equity out of their homes for business reinvestment purposes, or to put their kids through university or to buy an investment property. Excalibur funds have also been used to satisfy a debt to Canada Revenue Agency after a tax reassessment. All are acceptable uses of the product.
Can a BFS borrower use gifted funds to cover the down payment minimum of 20%?
Yes they can. We just need a copy of the gift letter signed by the donor with the amount provided.
What Beacon Score you will accept for BFS clients?
550 is the minimum. But just to demonstrate how credit-worthy our borrowers really are, the average score in the past year has been over 700. If it wasn't for the introduction of new B-20 rules, I would say most of our Excalibur clients would be in the Prime market.
What debt service ratios will you accept?
Maximum gross debt service ratio is 45% and maximum total debt service ratio is 50%, which are pretty standard in the industry.
Why should a mortgage broker recommend Excalibur over the other alternatives available today?
One of the big reasons is that this product doesn't penalize borrowers with extra costs or somehow treat them like second-class citizens. While the borrowing rate is higher than for one of our Prime products, we've steered clear of applying things like monthly maintenance fees. Excalibur's early payout feature is also much better. With some other alternatives, the fees to exit early are so prohibitive it forces the borrower to delay a home sale. By contrast, our early payout fee is the greater of three months interest or the interest rate differential. Essentially, we've fashioned Excalibur to be like a First National Prime mortgage.
How so?
We provide 120-day interest rate guarantees for home purchases and 90 days for refinancing. Our repayment options of 15% + 15% + doubling up are industry leading. We are open to weekly, bi-weekly, semi-monthly and monthly payment frequencies. We give Excalibur borrowers access to the Echelon Home Warranty Program, which is the same product available to our Prime borrowers, and we offer bridge financing solutions. Brokers tell us that after digging into our offering and comparing it to the competitive universe, they choose Excalibur because it saves their clients money while also offering a level of service and convenience they value.
Final thoughts?
Business-for-self Canadians are important contributors to the economy. With Excalibur, we're able to illustrate how important they are to First National and our broker partners.
If you have an Excalibur question or are ready to do business, you can reach Elena at elena.robinson@firstnational.ca or 416-320-3138.