Canada's most outspoken business personality wants to lend you some money.
That's right, Kevin O'Leary – CBC commentator, Dragon, Shark and multi-millionaire – is getting into the mortgage business.
The self-proclaimed "Mr. Wonderful" is launching O'Leary Mortgages in December with a three-pronged plan to help "simplify" your mortgage life.
It's an ambitious plan, but the question is whether Mr. O'Leary's television fame will translate into market share if it's not accompanied by lower rates – a part of his plan that has yet to be announced.
Step one, says Mr. O'Leary, will be to give borrowers a comprehensive written mortgage plan that illustrates the long-term cost of a mortgage, helps you quantify how much you can or should pre-pay annually and gives you tips and tricks on how to do it.
"You don't go into a mortgage for hundreds of thousands of dollars and not understand how you're going to get out of it," he said. "You need an exit strategy."
Of course, a written mortgage plan is not a novel concept. Professional mortgage planners have done it for years. But few have a national public stage to promote the importance of mortgage planning in the way Mr. O'Leary does.
The second prong of his strategy will be to reduce and simplify the stack of mortgage paperwork. "What I disdain about entering into any debt obligation is reams and reams and reams of fine print. I really hate that about it," Mr. O'Leary says, adding that his team has streamlined the approval paperwork like "nothing you've ever seen."
With all the legalese and government disclosure forms, there's only so much that Mr. O'Leary can get rid of, though. So it will be interesting to see just how simplified he can make it.
His third strategy will be to offer a single, straightforward mortgage, at least initially. O'Leary Mortgages is licensed as a mortgage brokerage, but it will be different from most mortgage brokers.
Instead of matching customers with a variety of third-party lenders, it will get its mortgage funding through a single mortgage services provider, which will maintain relationships with institutional investors. Theoretically, that can translate into better rates.
O'Leary Mortgages will offer a simple one-size-fits-all five-year fixed mortgage that, Mr. O'Leary says, addresses the majority of potential home buyers' needs. It will come a 20 per cent annual prepayment privilege, a better penalty calculation than most banks and a "competitive rate".
Unfortunately, O'Leary's single-product focus means his customers won't get the benefit of the comparison shopping that traditional brokers offer.
And then there's the issue of whether people will flock to a company that offers only fixed rate mortgages, rather than variable rate alternatives.
"I am a huge advocate of fixed-rate mortgages, pounding the table every day on television to fix your mortgage," Mr. O'Leary says.
"Rate hikes come exactly when you're not expecting it, for reasons you don't necessarily know."
At the moment, Mr. O'Leary's choice of a five-year mortgage term makes sense for most borrowers, especially risk-intolerant ones. That's true for a few reasons:
- The market price of a five-year fixed mortgage is just 0.35 per cent above a variable rate. That’s one of the tightest spreads in years and it cuts your risk of overpaying, relative to a variable rate.
- The odds of rates rising in the next 18 to 24 months are arguably greater than the odds of them falling.
- Even if rates climb only slightly over the next five years (e.g., 0.75 of percentage point in 2015 and nothing more), a fixed rate still beats a variable–assuming you don’t need to increase your mortgage or break it early.
I asked Mr. O'Leary if someone with a variable rate of prime minus 0.90 per cent – which equals 2.1 per cent at the moment – should now lock into a fixed rate.
"Absolutely," he said. "Look at it this way, we've gone through an extraordinary period of rate declines. We're at a historic low. It could remain that way for 24 to 30 months…or we could get a rate hike in the first quarter. You just don't know."
This is one area where Mr. O'Leary and most mortgage advisers will differ. A prime minus 0.90 per cent variable rate is a collector's item nowadays. They don't make them any more. If you're financially sound, trading a 2.10 per cent variable rate for a 2.99 per cent fixed rate can be just as much a gamble as staying variable.
Mr. O'Leary's company will launch in Ontario and go nationwide later in 2013. Eventually he plans to distribute through brokers and offer mortgages designed for self-employed Canadians with non-traditional income sources.