Interest-rate volatility has been a major concern this year, impacting virtually every aspect of the Canadian economy. And as inflation, global currency fluctuations and fears of recession continue to dominate the financial headlines, that’s likely to be the case for some time.
That’s why First National Financial – one of Canada’s largest non-bank lenders – created the Mid-Range Hedge.
What is the Mid-Range Hedge? It’s the industry’s first 9-month rate lock program to address interest-rate volatility on maturing CMHC-insured multi-unit property mortgages, construction take-out loans and funds needed for long-dated purchases.
To better understand why First National created this important new hedge program, take a look at these stories of First National clients whose needs inspired the concept.
Hedging in January for a $90 million mortgage renewal in June
In January 2022, the private owner of eight apartment properties in Vancouver noted that his mortgages were scheduled to mature in June. Despite almost two years of generationally low interest rates, he felt that surging inflation was bound to cause the Bank of Canada to raise rates by the time he renewed. Being loyal to his incumbent financial institution, he asked if it would lock in a rate of interest six months in advance? He was told no. When he spoke to First National, the answer was yes.
That same month, First National placed a Mid-Range Hedge through June 2022 on $90 million of mortgage proceeds at an effective interest rate of 2.6% inclusive of hedging costs. The client took the proceeds as part of a CMHC term loan and noted with satisfaction that Mid-Range Hedge not only allowed him to rest easy, knowing exactly what his mortgage payments would be for the full five-year mortgage term; it also made a material difference to his interest costs. Had he waited to renew at maturity, the interest rate would have been 4.25%, reflecting three Bank of Canada rate increases between January and June.
Of equal importance, the comparatively lower lock-in interest rate allowed the borrower to achieve a higher loan amount on closing because of more favourable debt coverage. Extra proceeds empowered the borrower to more aggressively pursue his business objectives.
Hedging for a $180 million construction take-out mortgage with maximum flexibility
By nature, developing properties comes with significant risk. The most common are the risk of construction material and labour inflation, and the risk of construction setbacks and delays in receiving occupancy permits (a requirement for CMHC insured loans) or achieving full lease-up (a conventional term loan requirement).
Now, the development industry needs to add the prospect of volatile interest rates to their risk assessments – a factor that can materially alter project profitability if pro forma assumptions change because of rising rates. As part of a broader risk-management strategy, one West Coast developer recently chose a First National conventional construction loan, but also opted to apply for and pay the premium on a CMHC construction loan so that it could guarantee itself insured term financing on occupancy – a smart strategy.
Unfortunately, the client encountered delays in receiving the building occupancy permit. Fortunately, this client had already arranged a Mid-Range Hedge to guarantee the interest rate on its term takeout loan. As each day passed without the occupancy permit, market rates changed, but the interest rate on the client’s $180 million takeout financing did not. In the end, Mid-Range Hedge was extended for four weeks – an unheard-of level of flexibility for any rate-lock program. Then, within one day of the arrival of the occupancy permit, First National converted the construction loan to a CMHC-insured mortgage.
What’s important to know
- Mid-Range Hedge is a feature of First National’s financings on insured loans and is available for select transactions of $20 million and above
- The hedge can last anywhere from 91 days to nine months (or beyond) and is the only product of its kind in Canada to mitigate interest rate volatility for such an extended time
- Clients can choose an arbitrary funding date and set up a corresponding hedge expiry date but close out the hedge earlier if they wish for maximum flexibility
- First National can lock the rate once the loan has been committed prior to CMHC approval, as long as the commitment fee has been received
- Mid-Range Hedge can be activated quickly
“First National is dedicated to empowering clients with tools that enable them to focus on their fundamentals, rather than divert attention to the vagaries of the bond market,” says Evan Pawliuk, Assistant Vice President, Commercial Mortgages. “We took all of the lessons learned over the years in offering hedges case by case and, with the assistance of our treasury team, applied them to develop the Mid-Range Hedge program.
“Our clients really like knowing that Mid-Range Hedge is available to them if they want it. It’s considered an insurance policy that turns business assumptions about interest-rate costs and loan amounts into guaranteed outcomes.”
Speak to a First National advisor to see if your requirements align with the criteria for the powerful Mid-Range Hedge program.