Interest rates have been making headlines in recent months as they are at their all-time low. This is an attractive source of funding - if you can get it.
At C21 Financial, we sometimes find business owners and developers get distracted by headline rates and lose sight of the true total cost of funding vs the value of an opportunity ahead of them. To help clients put things in perspective, we are often discussing their weighted average cost of funding.
Let's begin with the basics. First-mortgage rates are at their all-time low, with banks currently offering mortgage rates below 4 per cent. At the same time, alternative (non-bank) first mortgage lenders are lending money at about 6 to 10 per cent. We also have second-mortgage rates which are sitting between 15 and 25 per cent.
Now, let’s suppose you have a project at $750k in total debt – $500k at 4 per cent and $250k as a second mortgage at 18 per cent.
Their overall weighted average would be 8.7%. On paper, it's about the same rate that they would get if they financed the entire amount with another alternative (non-bank) first-mortgage lender - if not cheaper.
But many lenders we work with have the ability for no penalty, early re-payment option. Therefore, once they have repaid the second mortgage, they are back down to 4 per cent as a cost of funding, with no further legal costs in and out.
If you are needing non-bank lending, be sure to consider the weighted average cost of funding and the ease of transitioning between funding arrangements.
We are happy to assist in answering any questions or concerns you may have.