Your own bank will give you the best mortgage in the market place. FALSE
There are misconceptions that long-term clients have with their bank. The biggest one is the reality that banks have aggressive ways of making money from each of their customers and this has allowed them to continually make skyrocketing profits year after year! Have you ever asked yourself how they do it? They have several revenue streams with about 55% of their income coming through lending activities. The six main big banks account for approximately 65% of the mortgage market in Canada.
Don’t get me wrong, these banks are a necessity for sustaining the Canadian economy, they pay billions in taxes per year, support charities, education, sports, the arts and provide disaster relief and support to many important causes. The bottom line is consumers in Canada are in the driver's seat to shop around for alternative mortgage financing solutions to assure that they are signing the best mortgage for each and every individual circumstance. Please do your homework; a mortgage contract is NOT to be taken lightly.
Mortgage Interest Rate is all that matters in a mortgage. FALSE
Many consumers judge a mortgage based on a five-year fixed mortgage rate. It’s kind of like the old saying, “never judge a book by its cover!” with the fixed–rate being the cover.
There are many other terms in a mortgage that are extremely important that should never be over-looked.
Here are just a few to consider:
a) Prepayment penalty: There are different ways to calculate mortgage penalties; the biggest determining factor is whether you are in a fixed-term or variable-rate mortgage.
Variable rate mortgages: the penalties are quite well documented; they are a standard three months' interest penalty.
Fixed term mortgage: the penalty is set at the higher-end of the calculation of a 3 months’ interest penalty or interest rate differential. The real question for your lender is, “will your penalty be calculated using the discounted or posted rate”? Most big banks use the posted rate in their calculations, which results in a much higher penalty!
Article “The hidden Trap,” was published on December 4, 2013 in the Globe and Mail. It was written by Rob Carrick, who has been writing about making sense of the world of money for over twenty-three years. He gave an example of two lenders (ING and Scotia) on how they calculate the penalties for breaking a five-year fixed rate $250,000 mortgage that was arranged three years prior to the article being published.
In the example:
$250,000 = Original mortgage amount
$200,000 = current balance
24 = months remaining on term
3.64% = five year fixed rate
$5,000 = Scotia bank
$1,804.99 = ING Direct
**In this example the prepayment penalty with Scotia bank was so much higher because Scotia added back the 1.5% original discount the client received off the Posted Rate to the 3.64% interest rate the client was actually paying on their mortgage. Very sneaky!
b) Appraisal: If an appraisal is needed, will the lender be paying or will they pass on the fee to the mortgage client?
c) Pre-payment privileges: will you be limited to paying down the mortgage 10-15% per year? Many quality lenders allow for 20-25% pay down options per calendar year. This of course, allows for so much more flexibility and the benefit of paying off the mortgage much faster.
d) Monthly Pre-payment options: a typical lender will allow you to increase your monthly payment up to 20% per calendar year. Some lenders that give you a bargain five year fixed-rate mortgage only allow 10% monthly payment increase, thus limiting the ability to pay down your mortgage!
e) Collateral Mortgage: will this mortgage be registered on your property up to 125% of the mortgages value? These mortgages will cost you $600- 1,100 to transfer or switch to another lender. With most other mortgages, there is no fee.
f) Refinance: if you wish to refinance will you be limited with the refinancing options and be forced to pay higher than market interest rates for the new funds? Often lenders put in limiting factors that force you to stay doing business with them under unhappy terms.
g) Amortization: when purchasing with at least a 20% down payment or refinancing, it's great to have the option of extending the mortgage amortization to 30 or 35 years if you so wish. Many lower rate bargain mortgages stipulate to a maximum of 25-year amortization. This is not favorable for a mortgage holder who would rather keep their monthly payment commitment as low as possible.
h) Port: the term means, being able to take your mortgage with you to another property should you sell the current property. Porting avoids having to break the mortgage and paying any applicable pre-payment penalties for getting out of a contract early. This Porting option is a must since the average homeowner often buys and sells four or five principal residences in a lifetime.
i) Assumable Mortgage: if you sell, can the new buyers upon qualification take over the mortgage? This is a very important feature, as right now in 2015, mortgage rates have never been lower. If a mortgage holder takes out a 5 year term mortgage in 2015 and then sells in 2018, when interest rates are forecasted to be higher, it would be a financial benefit for the buyer to take over an existing mortgage at a much lower rate than starting a new mortgage.
When I Port a mortgage I don’t need to re-qualify. FALSE
Anytime you port an existing mortgage to another property the mortgage applicants have to re-qualify and the new property has to qualify with your mortgage provider. There are many stories of mortgage applicants that sell their properties to pay out high interest debt in the thoughts of porting the mortgage to a lower priced property. Due to stricter mortgage rules, many mortgage applicants find out the hard way that they can’t even qualify for a mortgage loan on the new lower priced property. If you are planning to make a move I strongly suggest consulting with your independent mortgage broker first.
All Port mortgages are the same. FALSE
There are three main details to look for in the mortgage contract that will vary from mortgage lender to mortgage lender:
a) Number of days to Port the mortgage without a penalty: In the industry it’s called “Port with a Gap”. The typical length of time is 60 days but some lenders only offer 45 or even 30 days! Also, look to see if your lender has a policy for partial penalty reimbursement if you are slightly over the set number of days they allow.
b) Location of new property: Will your current mortgage lender allow you the option to Port the mortgage based on the location of the property you are purchasing? Credit unions have defined lending areas, usually regional, based on where they have storefront locations. The national mortgage lenders such as the big banks, non-chartered bank financing, and non-traditional (sub-prime lending) are usually flexible to transfer your mortgage financing across Canada with
the exception of Quebec. Check with your mortgage lenders' list of Approved Lending Areas if this may be a concern.
c) Adding new funds to the existing mortgage: in the mortgage industry it’s called, “Port with an increase,” mortgage lenders have different ways to calculate adding new mortgage funds and interest rate applicable on those new funds to an existing mortgage with an existing interest rate. For fixed term mortgages most lenders will blend the new interest rates and funds with the existing interest rates and mortgage funds.
Variable rate mortgages are a little more complex. Some lenders allow their clients to blend the old funs with the new funds and apply the greater of the existing rate or the prevailing interest rate. Other lenders won’t allow adding new mortgage funds or blending of interest rates, they simply make the mortgage client break the mortgage contract and pay the applicable pre-payment penalties! Not fun!
You cannot get a mortgage until outstanding income taxes are paid in full. FALSE
This is true for all traditional mortgage lenders, if a mortgage applicant owes any income tax, “Proof of payment of outstanding debts with Revenue Canada,” will be a Condition in the mortgage contract that must be met before the mortgage is funded. The good news is, there are viable options to get a mortgage funded without paying out those debts through an independent mortgage broker who has relationships with alternative mortgage financing sub-prime and private lenders.
Self-employed mortgage applicants will get the best mortgage from their own bank who is familiar with their financial situation. FALSE
Today, there are many regulatory restrictions put on traditional banks which limit their freedoms on qualifying even established business clientele for a mortgage that a few years ago was easy to do.
A self-employed construction contractor has income on paper and some customers pay cash.
He wants to purchase a house in the city that provides enough room for his kids, an office, an outside play area and is close to his work.
His profile: he claims $60,000 income on his taxes, has fair credit, owes Revenue Canada $30,000 in back taxes, has $80,000 for a down payment and $53,000 Gift from family.
A) His own bank: Pre- approved him for a $493,000 property purchase based on:
$390,000 = maximum mortgage
$103,000 = down payment after paying out taxesPaying out his outstanding taxes before getting a mortgage.
With these numbers he was limited to purchasing a two bedroom condo, which made him very depressed!
B) Alternative mortgage financing: Approved him for a $892,573 property purchase based on:
$749,573 = mortgage amount
$133,000 = Down Payment
Also, the client did not need to pay the outstanding income taxes before getting the mortgage!
The house he bought included a two-bedroom self-contained rental suite with $1,400 month rental income!
Once I am Pre-approved for a mortgage, a new car payment will not affect my mortgage application. FALSE
When you are pre-approved for a mortgage, you are pre-approved based on your current monthly expenses plus the estimated new expenses including mortgage payments, heating, property taxes and condo fees if applicable of a typical property you are looking to purchase.
If you purchase or lease a car before your purchase of a home is complete, your mortgage provider will be required to include this new car payment into your monthly liabilities. The results are that this new car payment will substantially reduce your home buying power!
Example: A client was approved for a $350,000 mortgage. They had some credit card debt but no car payment.
Before finding a home, this client went out and purchased a new car that had a monthly payment of $650.00. The new maximum mortgage pre-approval dropped to $205,000! Because we now had to include the $650.00 a month payment into this clients monthly expenses!
As you can see, it's better to wait until you have moved into a property because it is easier to qualify for a car than a home. After you move you will be able to put forth a more realistic budget for that new vehicle.
Maximum mortgage amount for a mortgage approval is the same whether for a fixed term or variable rate mortgage. FALSE
Anytime a mortgage request is for either a variable rate mortgage or a fixed term mortgage with less than a five year term in Canada, by law the mortgage is not qualified on the actual interest rate applied on the mortgage contract but on an interest rate called the Benchmark Rate. This benchmark rate was introduced in early 2010 by the federal regulators as a new policy to limit the risk associated with any mortgage borrowers who sign a mortgage contract where they are not protected for a term of five years if rates should dramatically rise. This qualifying benchmark rate is higher than what most borrowers would pay on an actual mortgage. This rate more closely represents a typical five-year term fixed rate that conventional banks offer their clients before a discount is applied. Even further discounts are offered through a independent mortgage broker.
As of April 2015, the benchmark rate is 4.74%.
Below is an example comparing the difference between the maximum mortgage approval for a 5-year fixed-term at 2.49% versus a 5-year variable-rate mortgage at 1.99%.
Example Mortgage Approval April 15, 2015
A mortgage applicant had an annual income of $120,000 a $700 a month credit card payments and a $500 a month car payment.
Term: 5- year fixed at 2.49%
Rate Consumer pays: 2.49%
Rate used to Qualifying: 2.49%
Maximum Approved Mortgage: $590,000
Term: 5 –year variable rate at 1.99%
Rate Consumer pays: 1.99%
Rate used to Qualifying: 4.74%
Maximum Approved Mortgage: $475,000
**As you can see, since the mortgage provider by law has to use 4.74% for qualification purposes for the variable rate mortgage, the clients’ purchasing power dramatically drops!!
As a salary/hourly employee, your own bank will automatically approve you for the best mortgage on the market. FALSE
A seasoned independent mortgage professional will know how to match and maximize a mortgage applicant's strengths and financial goals with one of the many specialty mortgage lending institutions in Canada. Once you have the best options on the table, you can then make an educated decision on which mortgage satisfies your needs the best.
Private Financing is Loan Sharking. FALSE
The business of lending money has become very lucrative with many unsecured and secured loan companies offering incentives to entice clients for their business. The most effective way to compare any loan on a level playing field, is to calculate the per annum interest rate.
One of the fastest growing levels of debt in Canada is the administering of unsecured installment loans. CBC's Marketplace ran an episode called, “Easy Loans: Uneasy Money” which was broadcast on February 27th, 2015. There was a segment done on the
extremely high price of unsecured installment loans. The segment featured a client who had trouble paying back a loan from a company called Easy Financial, where they charged enormous amounts on interest rates for paying back any loan they administer.
Here are a few examples of the annual interest rate you could pay to companies offering unsecured and secured loans compared to credit cards.
57.12% =Easy Financial Services Ltd., on a $5,100 unsecured loan, calculated by Actuary Peter Gorham who provides certification on criminal rates in Canada. Reported by CBC’s Jeannie Stiglic, Jeremy McDonald & Anu Singh.
58.5% = Creditloans Canada Financing Ltd. Is the average interest rate paid by their clients. This was stated by their CEO and president Ali Pourdad. This was also reported by Marketplace on the same “Easy Loans: Uneasy Money” segment aired February 27, 2015.
19-30% = Note that credit cards have different calculations for interest rates applicable on purchases, balance transfers and cash advances. Furthermore, increased rates may also apply if minimum payments are not made as stated in your fine print agreement.
Private Financing (secured)
18-25% = Example: $50,000 second mortgage with 12% monthly interest rate, a 4% lender fee, annual interest rate = 23.747%. Note; if a client is planning to renew the mortgage for a second year, providing market interest rates remain constant and a typical renewal fee of $300, the annual interest rate over the two-year period will drop to under 18%!