We take a lot of calls from people looking to buy expensive homes (or even just average homes in Vancouver) who are being declined by their bank due to a “sliding scale” issue. If you are considering financing a high end home (anything over $750,000) you may run into a sliding scale at your bank, and the purpose of this post is to explain what they are, how they work, and why I should be representing you if you are thinking about looking for any financing over a million dollars.
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TRANSCRIPTION OF VIDEO BLOG:
Today’s topic is going to be high end homes and why they are really tricky for us brokers often to get people financing that they are looking for. The most misunderstood concept, and something that seems to bite high end buyers on many occasions is the concept of a “Sliding Scale.”
The way a sliding scale works is lenders, for the most part, don’t run into a sliding scale with the average home. If you are purchasing something that is less than $750,000 as a purchase price, you probably have never run into this. You probably have never even heard of it. However, for very high end homes, and we are talking homes that are three, four, five million dollars plus, this becomes a very real concern.
So here is how a sliding scale works: I’m going to use one of the institutions that we use, CIBC. They’ll allow you to finance 80% of the first $750,000 and 60% of the balance. So if you are looking at something that is $5,000,000 and you are thinking, “well, I don’t want to have CMHC fees, so I’d like to put 20% down,” when you go and look at that 80% overall financing is NOT going to be available through that bank that has a sliding scale. This becomes really prevalent with institutions like HSBC and some of the credit unions because they are smaller in size, they are a little tighter in terms of what they’ll accept and how much money they are going to lend on any one property.
Some of them will only lend 80% of the first $500,000 and 50% of the balance. So if you imagine a $5,000,000 home like some of the stuff in West Vancouver is way up there, and also in Point Grey. I’ve seen properties that are listed for $11,000,000. Let’s look at a $5,000,000 property. So they’re going to give you 80% of the first $750,000 and only 50% of the balance. So you are going to have to have a down payment of upwards of $2,500,000. Now, the number buyers that has that kind of money, is not very high. Most people looking at those properties are tying to put a block of 25% or 35% down. It is doable, but it is not doable through an institution with great bank rates across the board.
Often what we end up having to do is take whatever the maximum amount an institution is going to do – we’ll do that with, say, CIBC. We’ll do that, then we have to get a second mortgage and “top it up” and the 2nd mortgage may have higher rates, and may have a little more punitive terms. But, when you are dealing with ultra high end real estate the banks are going to be very conservative.
The reason is marketability. If you look at a high end home during a market decline, it is very hard to move them. I would say impossible. During the slowing down following the Lehman brothers meltdown back in October 2008 through maybe March of 2009 there were virtually no sales of these high end homes. It made life very very difficult for these sellers.
There is one property that one of my clients is looking at that was listed for $7,000,000 and it has come all the way down to (just over) $4,000,000. Now if you think about that, that is only over a one year period of time. So banks that loan something, even in their sliding scale, may have ended up “under water” even though they only gave a loan of 50% – 55% of the actual purchase price when that client purchased it.
If you or somebody you know is looking at buying something that is ultra high end, you’ve got to work with somebody who is used to dealing with it, knows how sliding scales work, knows where exceptions can be made, and where they can’t be. I can help you with that. I’m Rowan Smith for the mortgage centre.