No-payment mortgage plan ‘looks crazy’
February 16, 2021
A Vancouver firm is launching a no-payment mortgage plan starting in B.C. and Ontario, but one mortgage expert said the scheme “looks crazy.”
Fraction Technologies Inc. revealed February 10 it has raised $289 million in a mix of equity and debt financing from Primetime Partners, Panache Ventures, and others.
Fraction has developed a platform whereby customers take out loans with interest rates tied to the appreciation of their home’s value.
There would be no monthly mortgage payments as required under conventional mortgage loans.
“For us it's really about how can we make a difference in homeowners’ lives. We put the homeowner first, not the banks,” CEO and co-founder Hayden James told Business in Vancouver.
Instead of monthly rates, the interest rate is payable upon the sale of the home.
If, for instance, a home appreciates an average of 5 per cent over a five-year term, that then becomes the effective rate. If a home depreciates in value, Fraction charges a minimum rate of 3.49 per cent.
For homes that appreciate significantly, Fraction charges a maximum rate of 7.99 per cent.
There is a caveat on the scheme however: a homebuyer must be able to afford a 60 per cent down payment, compared to a minimum of 5 per cent to 20 per cent in the conventional mortgage market.
According to the Fraction website, “If you have 60 per cent down on a home, you can work with Fraction to purchase the home with no monthly payments.”
On the typical home in Metro Vancouver, now priced at $1.1 million, a buyer would be required to put down $660,000 cash to secure Fraction financing.
“This looks crazy,” said Peter Kinch, a Port Moody-based mortgage broker and consultant with Mortgage Alliance, who has been in the industry for more than 20 years.
Aside from the high down payment, Kinch noted that the scheme would only work in markets with strong asset appreciation
“It may not fly in Calgary,” he said.
“As well, for homeowners who experience negative appreciation the interest rate charged on funding is about three times higher than the current five-year mortgage rate,” he added.
The strategy appears aimed at existing homeowners with substantial equity who want to refinance without making monthly payments. But, as Kinch noted, conventional reverse mortgages are available at similar lending rates, and also don’t require monthly payments.
Fraction’s platform is currently available to homeowners in B.C. and Ontario.
“The Fraction Appreciation Mortgage is ideal for older adults eager to age in place but faced with insufficient retirement funds to cover the cost of their healthcare and other expenses,” according to Abby Miller Levy, managing partner of Primetime Partners, which is among the Fraction backers.
Peter Kinch of Alliance Mortgage questions plan.