As you have probably heard by now, BMO made a big splash in the news last week by offering a 5-year “Low-Rate” Mortgage at  2.99 per cent.

While we applaud lower interest rates (something that should have happened months ago based on the traditional relationship between bond yields and fixed mortgage rates), we do urge our clients to approach “Low-Rate”, “Value”, “Closed” and “No-Frills” mortgages with some caution as they include restrictions which may or may not make them viable on a case by case basis.

In this case, the “Low-Rate” mortgage comes with the following restrictions:

• Application must be filed before January 25th, after which time this product will no longer be available.

• The maximum amortization allowed is limited to 25 years (instead of the more standard 30)
• The maximum amount that can be pre-paid annually is limited to 10% of the original principal (as opposed to 20% which is more common in standard mortgage products)

• The maximum that the regular payments can be increased is limited to 10% / year (also 20% in standard mortgage products).
• Most importantly, this product is fundamentally a closed mortgage and according to BMO’s website cannot be switched or refinanced to another lender before maturity unless “… the property is sold to an unrelated purchaser at fair market value”

There are good options available to our clients that meet their needs and expectations.  We urge all of our clients to Contact Us for a no obligation mortgage review to determine what products and strategies best fit your mortgage needs.

Not unexpectedly, the Bank of Canada kept its target for the overnight rate steady at 1.0 per cent on Tuesday, citing a worsening global economy for the need to maintain the current level of stimulus.

Suprisingly however,  the bank hinted it may have to keep its benchmark interest rate that low for an extended period, good news if you’re in a prime minus mortgage already.

Recent increases in the inflation rate created some worries of a rate increase.  This increase is being viewed as temporary by the bank, stating that “core inflation is expected to be slightly softer than previously expected, declining through 2012 before returning to 2 percent by the end of 2013″.

The Prime rate that most variable rate mortgages are based on remains at 3.0%

The major banks count on the fact that many people will opt for the simplest Mortgage renewal process, and just sign the Mortgage renewal notice they get in the mail.   While this may indeed be the simplest way to renew your mortgage, chances are that is nowhere near the best option for your renewal.

So, what do the big banks offer on their automated renewal notices?……

TD – Renewal letters are sent out and the rate offered is the same as what was offered on the previous term.  Read here about the costly effect of all TD mortgages being Collateral charges!

CIBC - Renewal letters are sent out at posted.  If client signs they get the posted rate.  If they go to the branch they can negotiate.

Scotia Bank – Renewal letters are sent out at posted.  Client is required to go to the branch to sign, at that point they may offer a discount if client asks.

BMO - Renewal letters are sent out at posted.  If client signs they get the posted rate.  If they go to the branch they can negotiate.

Royal Bank - Renewal letters are sent out and the rate offered is the same as what was offered on the previous term.

HSBC - Renewal letters are sent out at posted.

Paying posted rates will cost (on average) $18,000 or more  in additional interest in just 5 years on a $250,000 mortgage amortized over 25 years.  That should be enough reason to not sign that renewal notice without getting some professional advice!

We offer all clients the best discounted rates possible for your mortgage renewal, you don’t have to ask, you don’t have to negotiate!

Please Contact Us if you have any mortgage related questions.

In a market place where variable rate mortgages are growing in popularity the issue of their portability is becoming more and more important.  If you consider that people are moving more often than they have in previous generations, then the issue of portability should be near the top of your list of things to know when considering a variable rate mortgage.

Most clients focus on rate, but if they have to pay a penalty because they are moving, 2 years into a 5 year term, then all of a sudden that quarter point difference in rate is not as important as the penalty they could be stuck with.   Obviously, it’s important to understand this before you enter into a mortgage, and not when you are planning your move.

So, is your mortgage really portable……

TD – Only fixed mortgages are portable, variable mortgages are not portable.  Read here about the costly effect of all TD mortgages being Collateral charges!

CIBC - Fixed  and variable mortgages are portable but variable rate mortgages are adjusted to current discount  from prime available.

Scotia Bank – Fixed  and variable mortgages are portable and variable rate mortgages maintain their current discount from prime.

BMO - Only fixed mortgages are portable, variable mortgages are not portable.

Royal Bank - Only fixed mortgages are portable, variable mortgages are not portable.

HSBC - Fixed and variable mortgages are portable.

We focus on providing our clients with mortgages that are not only completely portable with the existing terms (regardless of whether it is a fixed or variable rate), but also come with a “replacement” option.  If you sell your existing home before your new home closes, the “replacement” option maintains the portability of your current mortgage for up to 90 days.

As always, please Contact Us if you have any mortgage related questions.

The question becomes what will the rate be that I will be locking in to?  Obviously, we can’t predict the precise rate, but we can discuss the basis for how that rate  is set, and whether it is based on discounted rates, or posted rates….. some examples:

TD – Loan officer’s discretion based on how strong they feel your relationship is with the bank. 1% off posted is guaranteed in year one.  Read here about the costly effect of all TD mortgages being Collateral charges!

CIBC - The discount originally offered on your variable rate mortgage (VRM) is what will be applied to their fixed posted rates.

Scotia Bank – Loan officer’s discretion based on how strong they feel your relationship is with the bank.

BMO - Loan officer’s discretion based on how strong they feel your relationship is with the bank.

Royal Bank - Loan officer’s discretion based on how strong they feel your relationship is with the bank.

HSBC - Posted open rate after 3rd year.

We offer clients mortgages with the ability to convert to a fixed rate at the best discounted rates available at the time, rather then relying on the “Loan officer’s discretion”, and the difference between locking in at the posted rate vs the discounted rate cannot be overlooked.  This difference could cost $18,000 in additional interest in just 5 years on a $250,000 mortgage amortized over 25 years.

As always, please Contact Us if you have any mortgage related questions.

So are we.  Ever wondered how your bank might calculate Interest Rate Differential (IRD) penalty on a 5 year mortgage when you are 2 years and 7 months into your term?  The time to understand this of course is not when you are looking to pay out your mortgage, but instead before you commit to your mortgage.  Here are some examples:

TD – Use a 2 year posted rate discounted based on the discount offered on your current 5 year mortgage rate.  Read here about the costly effect of all TD mortgages being Collateral charges!

CIBC - Would use the 3 year posted rate.

Scotia Bank – Use a 3 year posted rate discounted based on the original discount offered on your 5 year VRM.

BMO - Use a 3 year posted rate.

Royal Bank - Would use the 3 year posted rate.

HSBC - Use a 2 year posted rate discounted based on the discount offered on your current 5 year mortgage rate.

The whole idea of the IRD penalty is to allow the banks the opportunity to collect the interest that the client has committed to pay over the period of time that the client committed to paying it!   Based on this the major banks should be charging, like most broker channel lenders do, the difference between what the client was paying and what they can re lend the money out for today for a similar time frame, plus costs.

Yet as shown above, most of the major banks base their IRD calculation on posted rates which inflate the penalty to an amount greater than what the bank would have originally received had the mortgage not been paid out early.

The IRD calculation, like many bank policies, has always been something hidden behind a veil of secrecy and we want our clients to be aware of these potential charges before they enter into any mortgage.  The time to understand the potential costs is not when you are looking to pay out your mortgage, but instead before you commit to your mortgage.

If you plan to be in the market for a mortgage, or are already considering a mortgage with any lender, feel free to Contact Us for a professional second opinion.  After all, it’s free, and comes with no obligation on your part.

As the slight possibility of a Prime rate reduction from the Bank of Canada approaches, we’ve been telling clients that there is a possibility based on this that banks will reduce the spread from prime that banks offer clients for variable rate mortgages.  Today RBC started the trend, by reducing the spread on their variable rate mortgage from Prime minus 0.65% to Prime minus 0.45% increasing the starting rate for a variable rate mortgage to 2.55% from 2.35%.

If you’re in the market for a variable rate, contact us to get a rate hold soon to be safe. While the prime rate can always change (the next scheduled Bank of Canada interest rate meeting is September 7th), some lenders offer 120 day rate guarantees on the spread which we can secure for you.

Meanwhile, we continue to offer Prime minus 0.90% for variable rate mortgage approvals, but we’re not sure how long that will last!

As we’ve mentioned in the past, great care should be taken to not get yourself into a mortgage with hidden limitations.   TD for example registers all their mortgages now (see Switch vs TD Collateral Charges).  Just one change that we would recommend to this article from moneyville.ca - instead of relying on your lawyer to tell you that the mortgage you rate about to enter is a collateral charge, Contact Us before you start the search for a mortgage, and avoid these pifals altogether!

From moneyville.ca

When you apply for a mortgage, you usually just ask about the term, amount, interest rate and monthly payment. Not many people understand the difference between a conventional mortgage and a collateral mortgage. Yet many banks are now asking borrowers to sign collateral mortgages — and it could result in them being tied to this bank, for life.

With a normal conventional mortgage you bargain for a set amount, rate and amortization. Say the property is worth $250,000 — you bargain for a $200,000 loan, at 3.5 per cent, a five-year term/25-year amortization, payments of $998.54 per month.

A conventional mortgage is registered against the property for $200,000. If all the payments are made on time, the mortgage is renewed on the same terms every five years and no prepayments are made, the balance is zero after 25 years.

Should another lender decide to lend you money as a second mortgage, there is nothing stopping them from doing so, subject to their own guidelines. Under normal circumstances the principal balance on a conventional mortgage goes only one way, down. In addition, banks will accept “transfers” of conventional mortgages from other banks, at little or no cost to the consumer.

A collateral mortgage has as its primary security a promissory note or loan agreement and as “backup,” a collateral security, being a mortgage against your property. The difference is that, in most cases, the mortgage will be for 125 per cent of the value of the property. In our example, the mortgage registered will be for $312,500. But you will only receive $200,000. The loan agreement will indicate the actual amount of the loan, interest rate and monthly payments.

The collateral mortgage may indicate an interest rate of prime plus 5-10 per cent. This will permit you to go back to this same bank and borrow more money from time to time, without having to register new security. The lender will offer you a closing service, to register the mortgage against your property, at fees that will be cheaper than what a lawyer would charge you. Sounds good so far, doesn’t it?

However, this collateral loan agreement has different consequences, which are usually not explained to the borrower.

• Most banks will not accept “transfers” of collateral mortgages from other banks, so the consumer is forced to pay discharge fees to get out of one mortgage and additional fees to register a new mortgage if they move to a new lender. Thus the bank is able to tie you to them for all your lending needs indefinitely because it will cost you too much to move.

• Lenders may be able to use the collateral mortgage to offset any other unpaid debts you have. Offset is a right under Canadian law that says a lender may be able to seize equity you have in your home, over and above the mortgage balance, to pay, for example, a credit-card balance, a car loan, or any loan you may have co-signed that is in default with the same lender. In essence any loans you may have with that lender may be secured by the collateral mortgage. Nobody goes into a mortgage thinking about default, but “stuff” happens in people’s lives and 25 years is a long time.

• Let’s say your house value is $200,000. A collateral first mortgage registered on the property is $250,000. The amount owing on the mortgage is $150,000. If you were to need an additional $20,000, but the lender declines to lend it for any reason, then practically speaking you won’t be able to approach any other lender. They will not go behind a $250,000 mortgage. Your only way out would be to pay any prepayment penalty to get out of the first mortgage and pay any additional costs to get a new mortgage.

• Let’s say your mortgage is in good standing but you default under a credit line with the same bank. The bank could in most cases still start default proceedings under your mortgage, meaning you could lose the house.

• Some lenders are offering collateral mortgages in a “negative option billing” manner. Unless you are informed enough to say you want a conventional mortgage, you will be asked to sign documents for a collateral mortgage.

One bank is only offering collateral mortgages.

I spoke with David O’Gorman, the president and principal mortgage broker with MortgageLand Inc. He tells me it is his duty under the law to ensure the “suitability” of any mortgage he arranges for a consumer.

He would be hard pressed to justify the recommendation of this type of collateral first mortgage to any consumer, without disclosing both verbally and in writing the points listed above, and he believes the consumer should have their own lawyer review everything before they sign.

Lending money to people without proper explanation of the consequences is wrong. The banking regulators need to look into this practice and stop it. In the meantime, do not sign any mortgage document without discussing it first with your own lawyer.

Most Canadians understand that it is important to have a good credit score, but do we really understand what that means, or how to get one?

Your Credit Report

A good credit report and credit score are important factors in determining whether or not you will be approved for a mortgage. Here are some simple steps you can take to maintain a good credit history — and improve your chances of being approved.

What is a Credit Score?

Your credit score is a number that illustrates your financial health at a specific point in time. It also serves as an indicator of your financial past, and how consistently you pay off your bills and debts. This is one of the factors mortgage professionals consider in qualifying you for a mortgage.

How to Check Your Credit Score

To find out your credit score, contact Canada’s two credit-reporting agencies:

• Equifax Canada at www.equifax.ca
• TransUnion Canada at www.transunion.ca

For a fee, these agencies will provide you with an online copy of your credit score as well as a credit report — a detailed summary of your credit history, employment history and personal financial information on file. You can also obtain a free copy of your credit report by mail. If you find any errors in your report, notify the credit-reporting agency and the organization responsible for the inaccuracy immediately.

If You Do Not Have a Credit Score

It’s important to begin building a credit history as early as possible. You can begin to build one by applying for — and responsibly using — a credit card.

How to Improve Your Credit Score

Demonstrating your ability to manage credit is key to maintaining a good credit score. There are a number of things you can do to improve your credit score. These include:

• Always pay your bills in full and on time. If you cannot pay the full amount, try to pay at least the required minimum shown on your monthly statement.
• Pay off your debts (such as loans, credit cards, lines of credit, etc.) as quickly as possible.
• Never go over the limit on your credit cards, and try to keep your balances well below the limits.
• Reduce the number of credit card or loan applications you make.

Did you know that the average mortgage lasts barely 3 years, yet over 75% of mortgages are closed for 5 years or longer? 

Based on this stat, a lot of mortgage holders are paying some form of penalty when they refinance or payoff their mortgage early.  Compound this with the fact that today’s 3 year rates are ~ 0.20% lower then 5 year rates, and there are potentially significant savings to be had in a term shorter then 5 years!

Banks are renewing more than half their mortgages at posted rates. 

The posted 5 year rate is about 1.5% higher than discounted rates.   On a $250,000 mortgage that could cost an additional $17,000 over a 5 year term.   While you may be able to talk a bank into offering you discounted rates, we offer them by default without question!

So if you want to avoid potential penalties, and get the best mortgage at the best rate, Contact Us!