When arranging a private mortgage, your client must have a realistic exit strategy for the mortgage to be considered suitable. Under MBLAA, mortgage professionals must ensure that recommended products are suitable for a client’s individual needs. This helps protect clients from debt traps and reduces liquidity risk for lenders.
FSRA’s findings show that private mortgages lacking a documented, viable exit plan are often unsuitable for the consumer they are presented to.
In addition, agents and brokers must discuss the exit strategy with both the borrower and lender. The law also requires that you disclose all material risks to the borrower and lender.
Private mortgages are, in most cases, intended to be a temporary solution. As many borrowers turn to private mortgages due to financial challenges, the exit strategy represents their path back to lower cost financing.
For the lender, particularly individual investors, it defines the timeline for repayment. If a lender is relying on repayment at the end of a one-year term to fund their own obligations, the borrower’s ability to exit the private mortgage becomes a key risk. This risk must be clearly disclosed and understood.
Moreover, there is often confusion regarding an agent’s or broker's involvement after a deal closes. To be clear: agents and brokers are not responsible for managing a borrower’s personal circumstances or carrying out the exit strategy on their behalf.
However, mortgage professionals are expected to engage with and understand a borrower’s intentions to ensure the proposed strategy is realistic based on current and known future circumstances, and therefore that the product is suitable given this information.
For example, if the strategy is for the borrower to move to a conventional lender at the end of the private mortgage term, the broker must verify that the borrower understands the requirements to do so, whether it’s improving their credit score or increasing their income.
If the strategy relies on selling a property, the agent or broker should confirm there is sufficient equity today to cover the principal, interest and closing costs. A plan based on speculative price growth is not a valid or reasonable strategy.
Finally, suitability is not a future consideration but must be considered from the beginning. A mortgage might appear affordable for a 12-month term with an interest reserve but is unsuitable if the borrower is left with no options at maturity. Failing to establish that the borrower has a viable exit strategy often leads to situations where escalating renewal fees and high rates consume the borrower’s home equity - a practice that presents serious regulatory concerns for FSRA.