Kevin O'Leary talks Mortgages and the Market

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You have probably watched the TV shows Shark Tank and CBC's Dragon's Den. Now in its seventh season, one of the more controversial dragons on the show is also a very savvy investor. Of course, I'm talking about Kevin O'Leary, a Canadian entrepreneur, venture capitalist, and television personality. Kevin, welcome to the show.

Thank you, Aaron. Great to be here.

Great to have you! We've been looking forward to a little more attitude, so we trust you won't disappoint.

Hey, listen, you know I'm just an investor trying to scrape out a living.

Yeah, no, I like that. So listen, I have to ask you, because you're a busy guy and you're involved in so many different ventures. What motivated you to get into the mortgage business? What possessed you to get into the mortgage business?

You know, I look at sectors as investors, as you've pointed out, and I look at the long-term probability of them. So the good analogy for me would be back in 2007-2008, when the markets were in disastrous turmoil, and I got into the mutual fund business. I like to get into sectors when everybody hates them. Right now, you can't find a more hated sector than mortgages because everybody's making the assumption real estate's going to go flat or down. Rates are going up; it's a disaster out there. No one's making any money in the mortgage business. I love all that stuff. I love chaos. I like to enter during periods of chaos and build value from there. I look back now at O'Leary Funds, our mortgage business, which has a billion dollars in it in only a short four years, so I'm pretty happy with that outcome.

Now, O'Leary Mortgages uses the term "the honest mortgage." Can you explain that?

Let's just think about what a mortgage is in a person's life. And this is, you know, I discuss this a lot in the books I write and when I teach kids in school. Going into debt of this size, because usually the mortgage is the largest commitment people are making in their lives, they're buying their home. They're in for hundreds of thousands of dollars in most cases. And this is what I find remarkable: they have no plan on how to manage that debt. They go into it not knowing how they're going to pay it back. And when you do that, you're being dishonest with yourself. You're getting into a commitment that could ruin you if you don't manage it properly, put you in a horrible place down the road, over-commit you to things you can't actually support, and you're not being honest with yourself. So I look at it this way: saying, "Look, I want to sell you a mortgage, but I want you to understand what the commitment is you're making." And by the time you get educated through my process at O'Leary Mortgages, you may do a lot of things differently, and we'll both be in a better place because I want you to buy products and services at prices you can afford, not just today but for the next seven years.

So Kevin is part of that process, helping the borrowers understand how to pay that debt down faster because the banks, they're not in the business to help you pay off your mortgage faster, and they'll typically offer you extended amortizations. Is that something you're going to do a little differently?

No, of course. I mean, I don't have the same incentives the bank has. I'm trying to help you as someone who's going into debt to manage the process. I'm much better off if you understand what you're getting yourself into, and you know how you're going to get out of it. So things that I focus on are: what is going to be the duration? What's the amortization schedule? How much are you actually going into debt for? What are the attributes or the features of the mortgage that allow you to accelerate paying off the principal if you wanted to? These are many questions people never ask. I obviously have, with a brand like O'Leary, people come to me for things like mortgages and mutual funds. And then what I want to do is work with them. A lot of this can be done online now, which I'm really excited about, to help you make your decision from all the various lenders, including me. I may not be the right person to actually fund your mortgage; there may be somebody else. At least going through me is going to force you through a process that I think is going to make you a better borrower.

Kevin, all of your mortgages have a feature that you have trademarked called "Secure Rate." Can you tell us more?

I'm a huge advocate for fixed income right now, or in terms of a fixed rate, so that you know going in that there's not going to be a change in your monthly cost. What we had was so popular for so long as rates were coming down is a variable rate mortgage. I offer those, but I don't advocate them. What I'm saying to people is, at the very least, lock in your rate now for five years. If you're in a variable rate mortgage, switch out of it and lock in your rate. When you lock in a rate for five years, you're guaranteeing yourself what your nut is every month, and that's so important.

I'm guessing that the reason you're not really promoting variable rates right now is because of current market conditions. Obviously, that commentary would change if things were different in two or three or five years from now.

Well, I'm worried about the volatility in the rate markets because I've lived through three interest rate cycles. And so what I can't provide you with is a forecast of what your servicing costs are going to be if you have a variable rate mortgage. The old bank would say to you, "Listen, don't worry about it. Variable rate mortgages are only scary if we have a massive rate increase." Well, we've gone through those. What I'm scared about is having just a two percent increase on people that have borrowed too much. That puts them over the top, and in my estimates, that's as many as 38 percent of the market right now. They're just making the assumption rates stay low forever. They're going to be in real trouble if rates go up two percent. With rates where they are, especially with the five, seven, even some of the ten-year rates, it's hard to argue that would be the good bet these days.

I go back, and I'm, you know, I'm a student of history. The 40-year average of the 10-year note in Canada was 6.2 percent. Mortgages were priced above that. At some point in our lifetimes, we'll get back there because that's the mean, that's the average, that's the long-term number. You're talking about mortgage rates around seven percent in that situation. In the best case, nobody's talking seven percent anymore. Everybody's making the assumption they're going to get their mortgage between three and four percent long-term. That is probably not going to be the case. So that's why I'm saying to people now, if you're buying your first condominium or your first home, lock that thing in at around three percent. That's probably what you can get, and for the next five years, you know that with certainty, you're paying three percent. When that five years is over, I think it's going to be a whole different ballgame. So shy away from the uncertainty now.

Your in-house mortgage products are called the Honest Mortgage, Value Mortgage, and you also have the Entrepreneur Mortgage. Can you also explain that further?

An Entrepreneur Mortgage is for somebody who's not insurable, and that generally includes people that have started their own business and aren't working for somebody else. When they go to get an insured mortgage from a bank, they're obviously rejected and they're put in a different situation. So there's a whole different market that lends to those people, and that's what I'm trying to help them with because there are all kinds of options, some of which are very expensive, and some are not. I'm a good resource in terms of helping people decide which way they're going to solve that problem. If you're an entrepreneur and you have a business and it's growing or it's stable and you're paying yourself from it, I should be able to get you a mortgage. It's just not going to be as cheap as an insured one, and it may want to have some attributes that are more flexible for you, particularly in your ability to pay down the principal.

Because what happens with entrepreneurs sometimes is they are very successful, and they want to be in a product where they can just eradicate the debt a lot sooner than they were planning. We know that more and more entrepreneurs are coming into the marketplace. It's a trend that's not going to change; it's actually increasing. Yet there has been no product or a real effort to fill that need. It's refreshing to see that you're actually trying to do something about this.

Well, one of the problems is it's been a perfect storm. Balance sheets on banks have been asked to deliver for the last, you know, since 2008 when we put all these new restrictions on banks. We're not even finished doing it, so you can't really fault their behavior. Where they used to be far more aggressive in providing debt of all kinds to entrepreneurs, they've shied away from that. Now, the truth is a small cap or mid-cap business in Canada can't usually get a loan anymore from a bank. I mean, they don't tell you that; I'm telling you that. And so they have to go to the alternate credit markets, and they have also dried up because investors are far more conservative. What happens in the case of a very viable entrepreneur that wants to buy a home? It requires a fair amount of due diligence—in other words, understanding exactly what his or her circumstance is and then matching it to either one of our funds or another lender that's interested in providing a source of equity to them. It's challenging from that perspective because banks used to embrace this and have teams that would work on it, and they've all stopped doing it. So you're right, this is a really difficult market. I've never seen it as dry as it is today, and yet there are lenders, and some of them are from the United States, that provide funds to Canadian equities, believe it or not. We have to look at all these alternatives.

You know, you hit on it earlier: it's going to cost more, there's no question about it, because the companies that provide it have to do a lot more work in the background. I see a huge opportunity in the marketplace, and you're right: sometimes when you do see chaos, you do see opportunities.

I see you getting some great success with this! Any final points you want to tell our listeners about all your mortgages?

I just think that the lesson is it's worth coming and looking at elainemortgages.com just to learn from it because we've approached this in a completely different way. You know, I talk a lot about in the two books I've written, "Cold Hard Truth" and "Men, Women, and Money." There's a whole section on mortgages, and I'm writing my third right now called "Love and Money." You know, the more I meet young people, the more I realize the mortgage is probably the tipping point in their life. It's a time of great joy because it's the first portion of real substantive ownership. But in many cases, I find it to be very traumatic later because they just didn't do it right and they got themselves in huge trouble.

Part of the calculator of getting into debt is: what can I really afford? Often, what I find, just in final thoughts, is that home you wanted to buy? You should have bought something 20 percent smaller. That's really, if it's your first home, your first condo—downsize your optimism a little bit about your situation so that you don't borrow too much. I've met thousands of people, and so this is a consistent message I give all of them now. You've got to be very careful about how much commitment you make to a mortgage and it's from a guy that's selling mortgages.

Yeah, well, I like people that like to shake it up and certainly make a difference. And boy, oh boy, Kevin, you're certainly doing that. Thank you very much. I appreciate your time.

Yeah, it's been great having you on the show. Thank you.

Thanks, Kevin, for taking the time out of your very busy schedule, and we look forward to the next time. And a big thank you to our other guests: Ruth Valentine from Real Pro Canada, Daryl Fursten from Sage Six Condos, and Build Chairman Steve Upton of Tridel. Just a reminder that we cover a lot of very important topics on the show, and we interview some of the top experts in the business so you can get the inside scoop on what's really going on.

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