Case Study: The Matrimonial Buyout
This case study illustrates two different approaches to the same lending scenario, highlighting the critical difference between ethical and predatory private lending.
Scenario Background
- Borrower: Sarah, who is going through a divorce and needs to buy out her ex-spouse’s share of their principal residence in Richmond Hill, Ontario.
- Property Value: Appraised at $1,200,000.
- Existing Mortgage: $600,000 first position mortgage with a bank.
- Required Funds: Sarah needs to borrow $300,000 to complete the matrimonial buyout. Due to the recent separation and a temporary reduction in income, she does not qualify for a conventional bank loan.
- Loan Request: A $300,000 second position mortgage, which would bring the total debt to $900,000, representing a Loan-to-Value (LTV) of 75%.
Approach 1: The Ethical Private Lender
Sarah’s mortgage broker, a licensed professional, submits her application to an ethical private lender, “SecureTrust Capital.”
- Initial Due Diligence: SecureTrust’s underwriter reviews the application. They note Sarah’s reduced income and a plausible path to recovery once the divorce is finalized. They also confirm the property’s value with a new appraisal from a qualified appraiser.
- Transparent Offer: SecureTrust issues a detailed commitment letter outlining all terms in plain language:
- Loan Amount: $300,000.
- Interest Rate: 10% per annum.
- Term: 1 year.
- Brokerage Fee: 2% of the loan amount, paid directly to the broker.
- Lender Fee: 1% of the loan amount, for administration and legal costs.
- Legal Fees: Borrower is responsible for their own legal fees and SecureTrust’s legal fees, with a clear estimate provided.
- Exit Strategy: The letter explicitly states that this is a short-term, high-cost solution and recommends a plan to refinance with a conventional lender once Sarah’s financial situation stabilizes.
- Independent Legal Advice (ILA): SecureTrust’s lawyer insists that Sarah retain her own independent legal counsel. Before the funds are advanced, Sarah’s lawyer provides her with ILA, ensuring she understands the full implications of the second mortgage, including the consequences of a default and the Power of Sale process in Ontario.
Outcome: The loan is funded successfully. SecureTrust’s transparent process and insistence on ILA protect both the lender and the borrower. Sarah understands the terms and, 10 months later, her income has stabilized, allowing her to refinance with a conventional bank, paying out the private mortgage as planned.