The Details: What you need to know about “discount mortgages.”

Grandma always said, “The price is the price, but the details are the details!”

There are discounted and restricted mortgage rates out there but they do not share the details of their disadvantages up front with you.

  1. Restricted or Limited Products / Bait & Switch

People will not even sign a 3 year cell- phone contact any more but they will try to save $15 a month on a restricted mortgage; which could cost them $30,000 as a payout penalty – BUYER BEWARE is what the regulators say.

Brokers often advertise these products to get you to call them and then they switch you into a “regular product” if you are lucky – or you get a “restricted product” that you probably do not want if you know all the details.

Discount mortgages called “limited” or “restricted” and often have:

  • No rate holds
  • Only monthly payments
  • Only 1 statement a year
  • No on-line administration = call centre only
  • Only 5/5 extra repayment option – most broker lenders are 15/15 + 2x or 20/20
    • The 1st number is the % of the original mortgage amount you can repay every year without penalty
    • The 2nd number is the increase in monthly payment in % you can do without penalty.
    • The 2x = double the payment!
  • And they use the bank payout penalty calculations – as below in the Dirty Trick – AND in addition to that penalty, a 3% fee of the entire mortgage balance added to the penalty!
    • This could easily end up at $30,000.

 The other main “Details” that are not often disclosed are:

2.Collateral Charge

To keep you from leaving the bank for a lower rate when you renew later, the banks register your mortgage as a collateral charge – which is the same as an “I owe you” / IOU for the home. Other banks will not take another banks IOU for a mortgage; which means:

  • A lawyer will have to re-register your mortgage at land titles; $1000.
  • An appraisal is needed as the registration is usually for more than the value  of the home; $450

3. The “Dirty Trick” of how the banks calculate your payout penalty

To avoid these products, or to disucss what your personal situation may be, call us any time at 403-681-4376.

Mark Herman, Top Calgary, Alberta, mortgage broker for renewals, first time home buyers and home purchases.

4 Reasons Canadian Mortgage Rates Are Going to go up Soon

Here is a great summary of what is causing mortgage rates to be nosing up in the near future. They really should have gone up by now but the anticipated “Spring housing market rush” competition with the banks is holding them down.

Mark Herman, top Calgary, Alberta mortgage broker for home purchases and mortgage renewals

The latest round of economic data has real-estate watchers returning their focus to interest rates.

  1. Activity in the bond market and the latest employment numbers are fueling predictions there will be a bump in fixed-rate borrowing costs in the near future.
  2. Employment improvements are generally seen as a harbinger of inflation. That, along with other domestic and international considerations, is pushing up government bond yields, which in turn drive fixed mortgage rates.
  3. There is also the notion that the big, trend-setting lenders will be looking to move rates up to bolster profits.
  4. As well, Bank of Canada Governor Stephen Poloz has hinted he might be willing to let inflation run in order to avoid hiking the policy rate. That would also put upward pressure on government bond yields.

The graph we watch to show us this is here:

19MAY15_30dayCMBonly

Variable Rates:

  • As for variable-rate mortgages, the betting is there will not be a Bank of Canada increase until the middle of 2016, holding variable rates in place for the foreseeable future.

Bank Payout Penalties: The math behind “how they get you!”

This is a great article with the perfect math example.

Remember, there is also the catch of the collateral charge by the big banks that makes it cost about $2500 to leave your bank when your term is up.

Add these 2 things together and the better overall deals are from mortgage brokers.

Mark Herman, Top Calgary, Alberta Mortgage Broker for renewals and home purchases.

by: Angela Calla, AMP.

When choosing between mortgages, knowing how different lenders calculate penalties can be essential. The market and your needs easily shift during the term of your mortgage and the last thing you want is a painful penalty in order to get out early.

Penalty formulas differ radically, depending on the lender. A major bank, for example, will have a considerably higher penalty than a broker-only wholesale lender. Advice on how to avoid painful penalties is a key benefit of working with a mortgage broker.

You need to ask one important question right off the bat: What rates does the lender use to calculate its penalty? The actual discounted rates that people pay, or some artificially high posted rate? Hopefully the former.

Below is an example of how two lenders calculate the same “interest rate differential” penalty in different ways. Ask yourself, which one would save you the most money?

Penalty #1 – Broker Lender
Contract Rate (The rate you actually pay) 4.19%
Current Rate (Today’s new rate, closest to your remaining term) 3.09%
Differential (Contract Rate – Current Rate) 1.10%
Remaining Balance $229,000
Remaining Months 16
Penalty Formula: Remaining Balance x Differential ÷ 12 x Remaining Months $3,358.67
TOTAL APPROXIMATE PENALTY $3,358.67
Penalty #2 – Major Bank
Contract Rate (The rate you actually pay) 4.19%
Current Posted Rate (Today’s new posted rate, closest to remaining term) 3.39%
Original Posted Rate (At the time you got your mortgage) 5.99%
Original Discount (That you received off the Original Posted Rate) 1.80%
Differential (Contract Rate – (Current Posted Rate – Original Discount)) 2.60%
Remaining Balance $229,000
Remaining Months 16
Penalty Formula: Remaining Balance x Differential ÷ 12 x Remaining Months $7,938.67
TOTAL APPROXIMATE PENALTY $7,938.67

As you can see, there can be quite a difference in prepayment charges when you leave a lender early – over $4,500 in this example. And this is a modest hypothetical calculation. Bank discounts today are on the order of 2.00 percentage points off posted, instead of the 1.80 I’ve used here.

Some lenders will even charge an abnormally high penalty (like 3% of principal) despite you being close to the end of your mortgage term. They do this as a retention tool to keep you from leaving. Others will charge a “reinvestment fee” on top of the penalty, tacking on another $100 to $500 in expenses.

In short, penalties can be thousands—or even tens of thousands—higher depending on the lender’s specific calculation formula, mortgage amount, rates and time remaining until maturity. Extreme penalties are not only more expensive, they can even keep borrowers from moving because the amount eats into the money they’ve got for a down payment and closing costs.

Worse yet, some lenders have a “sale only” clause in their mortgages, meaning you can’t even leave them unless you sell the home. If you think, “Oh, that’s no big deal. I don’t plan on selling,” think again. Throughout every path in life, there are moving parts and uncertainties. When you get married, do you plan on divorcing? Likely not. Did you predict the company you were with for 20 years could downsize, or your pension would be reduced or cut? Can you guarantee your health will never throw you a curve ball?

We all want to believe that none of the above scenarios will come to pass, but they can and do. And when they do, what a relief it is to have options.

And last but not least, there is the refinance consideration. If interest rates fall 0.5-0.8%, (which may seem unlikely but is certainly a possibility) there may be opportunities to lower your borrowing costs. But you can’t do that unless you’ve got a low-cost way to renegotiate your existing contract. And as we’ve seen above, that cost is not based on just your interest rate alone.

Another example: When the rates are the same at the bank and the broker = broker deal is significantly better.

Here is what happens when the Current Posted Rate (Major Banks) = the Current Rate (Broker Lender) at 3.09%

Differential (Contract Rate – (Current Posted Rate – Original Discount)) = 2.90%
==> (4.19% – (3.09% – 1.80%)) = 2.90%
==> (4.19% – 1.29%) = 2.90%

Therefore:

Penalty Formula: Remaining Balance x Differential ÷ 12 x Remaining Months
==> $229,000 x 2.90% / 12 * 16
==> $8854.67

Moral of the story – talk to a broker and understand your penalty calculations.
You can talk to your major bank as well, although I don’t think they can spin the penalty calculation conversation into a favourable one for themselves.

My bank REALLY REALLY REALLY wants my mortgage! Really?

Does your bank really, really, really want your mortgage that badly?

Do you know why?

NOT because they make lots of money on mortgages.

NOT because the bank rep needs to fill their mortgage quota this month (this happens too.)

BECAUSE the banks have studies that if they can get you to have 3 or more products with them, your odds of leaving to go to another bank fall by 75%.

This means 2 things:

  1. If they can get you to have the mortgage in addition to your existing checking and savings accounts and or credit card then you will probably not leave for another bank and their cost of customer acquisition is very high.
  1. Then they can cross-sell you the products they really, really make money on:
  • LOCs – line of credits – and more credit cards both with overdraft protection and insurance for the minimum payments if you are injured or laid-off.
  • mortgage insurance – a huge profit for them as they try very hard later not to pay claims in their post-claim underwriting process
  • mutual funds
  • long distance phone plans
  • travel insurance
  • all the rest.

And 1 more VERY important thing:

Banks know that 86% of people will stay with their existing bank at mortgage renewal time. AND if you have the magic 3 products will you move your mortgage somewhere else then?

Banks expect you to chisel them down now, and when you renew they renew you at rates that are typically .25% to .75% higher than they should be. And 86% of people just sign the renewal docs and send them back. (More data from studies.)

This does NOT happen with mortgages via mortgage brokers as the banks know they have to renew you at the best possible rates or the very same broker that took the customer to that bank will be the very same broker that moves the customer to a new bank if for a better rate on renewal.

Do you want to play this game with the banks or just skip it all together?

All this advice from the top mortgage broker in Calgary Alberta, Mark Herman.