Many real estate investors took advantage of mortgage deferrals that were offered at the beginning of the COVID-19 pandemic, and while they thought they had received reprieves, they, in fact, opened up another can of worms.
The deferrals were intended to ease pressure on landlords who weren’t receiving rent payments from recently laid off tenants, but some investors thought they could take advantage of the program and that there wouldn’t be ramifications.
Unfortunately, not only did lenders subsequently deny them loans to purchase other properties, they wouldn’t even permit refinancing. Irrespective of the reason, says Dalia Barsoum, the only thing lenders paid attention to were missed mortgage payments.
“If someone has deferred mortgages across their portfolio, every lender has methodology for how they want the money paid back,” said the president and principal broker of Streetwise Mortgages. “In some cases, their monthly mortgage payment increased, and if someone has several properties with higher monthly payments on each one, that eats away at their future cash flow and may impact their ability to qualify for more mortgages, depending on how high their mortgage payments have become.”
The good news is that mortgage deferrals have come due, meaning that, without money owing, investors should be denied neither loans to grow their portfolios nor refinances to take advantage of historically low interest rates.
However, according to Barsoum, should lenders offer deferrals again there are other options for investors, chief among which is using a secured line of credit to take out equity that could be used as a cushion without monthly fees. Securing a line of credit at prime, which was 2.45% when the deferral was first offered, would have covered cash flow deficits.
“If you have a mortgage shortfall where the payment is $1,000 and you don’t have rent money coming in, one option is to use the money from the line of credit to make the payment, and now your interest-only payment is $2 a month,” she said. “You swap your mortgage payment for a line of credit payment until your situation improves or until you get your tenant back on track. Instead of having to come up with cash to pay your mortgage, you use your line of credit instead and only make interest payments on the line of credit.”
Some lines of credit were even “advanceable,” meaning that half a mortgage payment would be interest and the other half principal, and whatever was paid on the latter would become available to the borrower again on their line of credit.
Barsoum also advises investors to refinance their mortgages and clear big debts, like car payments, that eat into their budgets. She says that if the borrower replaced a $20,000 car loan with a line of credit or a mortgage, that monthly payment drops from $1,000 a month to $40 through refinancing.
“You’re replacing expensive money with cheaper money and you’re amortizing it, so you’re not feeling pressure on your wallet,” said Barsoum. “It gives the borrower room and now all of sudden they have extra cash at hand, which they could save or spend, or use to cover a shortfall in their rental portfolio if they run into any problems.”