UPDATE: NHBI Canada

Here is an UPDATE to the Canadian New First Time Home Buyer Incentive Program

A Calgary lawyer recently had an opportunity to review the program and attend a basic seminar. He said he would not recommend the “down payment equity share” program to a first time home buyer for the following reasons – BUT here are our replies  … and the Program DOES make sense to do.

NEGATIVE POINTS and the reasons FOR the program are below:

  1. It will take much longer to be approved for this program than for a normal mortgage loan and sellers may not accommodate the longer condition time.
  • We normally pre-approve buyers with these files and this program in advance so there is no extra time needed at the lenders for conditions.
  • The math for this program is complicated and buyers that use this program need to be pre-approved as they need the mortgage to match the affordability guidelines and to shop in the right price range.
  • The extra time is at closing when 2 sets of documents are needed by the lawyer. As long as this is known in advance, the closing date can be long enough to allow for the extra paperwork to be requested and completed.

 

  1. Higher legal and appraisal costs will result as two separate mortgages have to be prepared and registered (one for the lender and one for the equity share) and an extra appraisal will have to be obtained and paid for by the owner if paying out the incentive mortgage prior to the ultimate sale of the property.
  • A 1st and 2nd mortgages go on title at the same time as closing.
  • Appraisal on purchase is not involved as it has to be a CMHC approved mortgage (CMHC is responsible for the appraisal in this case) and the program is based on the purchase price.
  • If the owner wants to pay it off / back sooner, then an appraisal is needed at buyer cost ~$350.
  • This would happen if the owner wanted to do extensive renovations to the home.
  • An appraisal should not be needed on a bonafide sale, to a 3rd party, via a realtor, and when listed on MLS.
  • An appraisal MAY be needed – as the owners cost – if the sale if it is a “private sale” and/ or believed to be below market value.
  • (This is to stop the owner from selling the home to a family member for $1.00 and then attempt to repay the loan with $0.05.)
  • The buyer has already saved many times the extra costs, savings are about $100 – $150/ month, from day 1. Paying-out at 10, 15, 20 years later … they have already saved $100 x 12 x 10 years = $12,000, in the bank, already.

 

  1. A disincentive to improve/renovate the property will exist as any appreciated value is shared with the government notwithstanding that they don’t contribute to the renovation costs.
  • True.
  • Upon repayment, improvements will be included when determining the market value, therefore the Homebuyer will have to consider the cost and benefit of the planned renovations, and decide whether to repay the Incentive prior to making any home improvements.
  • IMPORTANT: It may be beneficial to the Homebuyer to repay the Incentive prior to conducting any major renovations to the home.

 

  1. A potential trap is being created for non-permanent residents who are legally authorized to work in Canada who can qualify to buy under this program but will have extreme difficulty in selling when their work permit expires as they will not have sufficient equity to satisfy the required withholding requirements under the Income Tax Act
  • We have been the largest Mortgage Alliance brokerage in Canada for 6 years in a row, and we do about 20 deals a year for 9xx SIN buyers; 99% of our customers are unaffected by this.
  • Again, this program is surgical in for who it works for. The program is not for everyone.

 

  1. It may be more difficult to refinance the property (it is not clear whether  the Government will permit refinancing of the first mortgage and postpone their security to the new financing)

Updated rules have been released:

  • The home CAN be refinanced without triggering repayment of the incentive, however, the shared equity mortgage will only be postponed to the outstanding balance that would otherwise be owing under the first ranking mortgage (i.e. no equity take-out will be permitted ahead of the shared equity mortgage).

Note:

  • The combination of all charges on a refinance must not exceed 80%.
  • This program DOES allow Assumption of the mortgage. Standard rules apply: full requalification by the parties assuming the mortgage directly with the lender. The standard on-going ramifications to the seller still apply.
  • This program does NOT allow a PORT of the mortgage to another property. It would have to be paid out at that time.

 

  1. If refinancing of the first mortgage will not be possible without paying out the government’s equity share, then the first mortgage lender will have a captive borrower.  The lender will have no incentive to reduce posted mortgage rates on renewal resulting in substantially higher interest rates in the second and subsequent mortgage terms for the homeowner.
  • As above, the rules do allow the home to be refinanced without triggering repayment of the incentive.
  • The renewal rate offered by the lender is independent of the 2nd charge on title.

Side note: We see that lenders are already applying the “Stress Test” under-the-covers on renewals when calculating the renewal rates. More on my blog here: https://markherman.ca/2019/06/

 

 We love this New Home Buyer Incentive Program – NHBI

Mortgage Mark Herman; Best, Top Calgary Mortgage Broker

Details of the FTHBI – First Time Home Buyer Incentive

Picuture of Calgary Tower in Alberta

The First-Time Home Buyer Incentive (FTHBI) officially starts on September 2, 2019. Introduced help first-time home buyers, the FTHBI will provide shared equity loans of 5% toward the down payment of a resale home, and 5% or 10% for newly-built homes.

The idea is that by boosting the size of buyers’ down payments, the FTHBI lowers the monthly mortgage payment and is some relief on the costs of home ownership.

Details of Qualification

To qualify for the FTHBI, home buyers must satisfy the following:

  • At least one person in the household must be a first-time home buyer, meaning they have not owned a home, or dwelled in a home owned by their spouse, over the last four years. (An exception is made for buyers who’ve had a breakdown of marriage or common-law relationship.)
  • Buyers must have a minimum of 5% down payment from “own resources” to qualify for a CMHC insured mortgage.
  • Buyers’ combined household income cannot exceed $120,000. This includes the income of any guarantors co-signing on the mortgage, as well as any rental income generated if part of the home is tenanted out.
  • The buyers’ Mortgage-to-Income Ratio (MTI) cannot exceed 4x their income, including the portion that’s provided by the FTHBI. This means the maximum down payment for a resale home cannot exceed 14.99%, and 9.99% for a new build.

Details of How It Works

The funds provided are registered as a second mortgage on title, and don’t incur interest.

This second mortgage must be paid back in full when the first insured mortgage matures at 25 years or when the home is sold, whichever comes first. Homeowners may pay it back as a lump sum early without penalty. (Details of how the value at the time of payout are yet to be released.)

Because it is a shared equity mortgage, the amount to be paid back fluctuates along with the value of the home over time: if the home’s assessed value rises, the loan repayment will increase by the same percent. However, the same will occur if the home has lost value by the time it is sold or the mortgage matures.

There are more details on the last post on savings including this chart below: https://markherman.ca/updates-to-cmhc-first-time-buyer-incentive-program/

Savings Over Time

This is a handy chart to see the savings on the monthly payment when using the program.

OVERALL

The program looks to be a helper for saving on payments and that is a great thing.

Mark Herman, Top& Best  Calgary Mortgage Broker

How the Big-5 Banks Trap You in Their Mortgages

Yes, the Big-5 banks do not love you, they love your money.
 
 
Now they can “trap” you in their mortgages with the Stress Test to get more of your money that they love!
 
 
Highlights of the article below show how the new mortgage rules – called the B20 – allow the banks to renew you at almost any rate they want – or at least not a competitive one – if your credit, income, or debts should mean you can’t change banks.
 
 
If your mortgage is at your main bank they can see:
 
  • what your credit score is
  • your pay and income going into your accounts
  • your debt payments
  • other debt balances on your credit report
  • your home/ rental addresses so they can accurately guess at your home value.
 
AND this means they can calculate if you can pass the new “Stress Test.”
 
 
If you can’t pass it then they know you can’t change banks, are you are now totally locked into them for your renewal. They can renew you at POSTED RATES … 5.39%, not actual discounted rates they offer everyone, today about 3.69%.
 
 
The GOOD NEWS is broker banks do not do any of this … so having your mortgage at your main bank only helps them “grind you” later on. …. so how convenient is having your mortgage at your bank now?
 

Highlights of the article link below are:

Canada’s biggest banks are tightening their grip … as new rules designed to cut out risky lending make it harder for borrowers to switch lenders …  the country’s biggest five banks … are reporting higher rates of renewals by existing customers concerned they will not qualify for a mortgage with another bank.

B-20 has created higher renewal rates for the big banks, driving volumes and goosing their growth rates,” said Eight Capital analyst Steve Theriault. “It’s had the unintended consequence of reducing competition.”

Royal Bank of Canada (RBC), the country’s biggest lender, said last month that mortgage renewal rates [are up …] due in part to the B-20 regulations and also to improvements it has made to make it easier for customers to renew.

Ron Butler, owner of Toronto-based brokerage Butler Mortgage, said the changes leave borrowers with less choice.

“Even if they are up-to-date with their repayments, borrowers may find they don’t qualify with other lenders so they’re stuck with their bank at whatever rate it offers,” he said.

Senior Canadian bankers such as RBC … and TD … voiced their support for the new rules prior to their introduction, saying rising prices were a threat to Canada’s economy.

While analysts say RBC and TD are expected to benefit from higher-than-normal retention rates in 2019, not everyone is sure borrowers will benefit.

“The banks are becoming more sophisticated in targeting borrowers who would fail the stress test and they can charge them higher rates at renewal knowing they can’t move elsewhere,” Butler said.

Link to the full article is here: https://business.financialpost.com/news/fp-street/canadas-big-banks-tighten-grip-on-mortgage-market-after-rule-changes

We saw the “Mortgage Renewal Trap” coming long ago when the Stress Test was announced. It is more important than ever to consider Mortgage Broker Lenders for your mortgage now.

Mark Herman, Top Calgary Alberta Mortgage Broker.

payout penalties

Fixed-Rate Mortgage Penalties: Larger Than Ever!

math for IRD calculations

Many people are unaware the Big-6 banks, and all the banks you can walk into, calculate the payout penalties at much higher amounts than mortgage broker lenders.

The cost of how penalties are calculated is even more concerning when fixed-mortgage rates stay flat or rise slightly over an extended period – exactly what is happening right now.

Summary:

  • You could be looking at an extra $7,000 in penalty cost on a $250,000 mortgage, or an extra $11,200 on a $400,000 mortgage, that is broken two years early with any Big-6 lender.
  • Mortgage broker lenders still calculate the payout “the old way” – to your advantage!

Short Version:

Fixed-rate mortgage penalties are almost always calculated based on “the greater of three months interest or interest-rate differential (IRD)”. But there are key differences in the actual rates lenders use to calculate your IRD.

  • These differences are magnified in a flat or slightly rising interest-rate environment.
  • This is a big deal as the IRD calculations used by the banks below can trigger a penalty that is more than 5 times what you would be charged at a wide range of other lenders.

Long Version – hold on this is MATH!

Let’s say your current mortgage balance is $250,000 on a five-year fixed rate mortgage at 2.59%. We’ll also assume that you are three years into your term (with two years remaining) and that interest rates are the same when you break your mortgage as they were when you first got your loan.

First, we calculate the cost of three month’s interest, which we can quickly determine is $1,619.

Here is the formula we use to arrive at that number:

2.59% x $250,000 x 3/12 = $1,619

We then compare this cost to the cost of your IRD penalty, which will almost always be calculated using one of three methods: Standard, Discounted or Posted.

 

  1. The Standard IRD Penalty (used by Mortgage Broker Banks)

When using a standard IRD penalty calculation, your lender starts by taking the difference between your contract rate (2.59%) and their current rate that most closely matches your remaining term. Since you have two years left on your mortgage,  that would be the lender’s two-year fixed rate (we’ll use 2.29%, which is widely available today). The difference between these two rates is 0.30%.

The lender multiplies this difference (0.30%) by your mortgage balance ($250,000) and the time remaining on your mortgage (expressed as the number of months remaining on your mortgage divided by twelve).

Here is the complete formula:     (3.29% – 2.99%) x $250,000 x (24/12) = $1,500

And here is a table which explains where each number in the formula came from:

Standard IRD Calculation

2.59% = Your contract rate

2.29% = current rate the most closely matches your remaining term

$250,000 = remaining mortgage balance

24 = months remaining

$1,500 = IRD Penalty charged

That’s it; the standard IRD calculation. It is used by a wide range of lenders who compete with each other to offer borrowers the best mortgage rates available.

In this case the cost of three months’ interest ($1,619) is greater than the lender’s Standard IRD calculation ($1,500), so you would have to pay $1,619 to break your mortgage.

AND here is where the differences are: well-known lenders have tweaked their IRD calculations to skew the interest rates used in their formulas heavily in their favour, and as you will now see, that can have a huge impact on the size of your penalty.

 

  1. The Discounted Rate IRD Penalty (Used by RBC, BMO, TD, Scotia and National Bank)

When using the Discounted Rate Penalty, the lender takes your contract rate and compares it to the posted rate that most closely matches your remaining term MINUS the original discount you got off of their five-year posted rate (which in this case is 2.05%). Here is the contract wording taken straight from TD’s website. Key section is underlined:

{Your contract rate will be reduced by] the current interest rate that we can now charge for a mortgage term offered by us with the term closest to your remaining term. The interest rate will be our posted interest rate for the term minus the most recent discount you received.}

In other words, this lender will take the discount they gave you off of their five-year posted rate and apply that same discount to the posted two-year rate they use in your penalty calculation.

This tweak makes a big difference to the cost of your penalty and is blatantly one-sided because lenders don’t discount shorter-term fixed-rate mortgages nearly as deeply as they do their five-year terms (.30% vs. 2.05% using this same lender’s rate sheet as of today).

The table below shows you the key numbers used to calculate the Discounted Rate IRD penalty:

Discounted –Rate IRD Calculation

2.59% = Your contract rate

2.84% = current rate the most closely matches your remaining term

2.05% = discount you received on your original Contract Rate

0.79% = 2-year rate used to calculate your penalty

$250,000 = remaining mortgage balance

24 = months remaining

$9,000 = IRD Penalty charged

Yes, Ouch!

But fasten your seat belt because other major lenders dig even deeper into your wallet. The Grand Daddy of them all is the Posted Rate IRD Penalty.

 

  1. The Posted Rate IRD Penaltythe Real Pain (Used by CIBC)

Here is a breakdown of CIBC’s posted-rate penalty calculation:

In this variation, the lender calculates your IRD penalty using the five-year posted rate that they were offering when you got your mortgage. Here is a sample of the wording used to explain how the penalty is calculated (taken from CIBC’s website). Underlined, key sections:

The interest rate differential amount is the difference between the Interest on the Prepaid Amount for the remainder of the term at the posted rate at the time you took out the mortgage, and interest on the Prepaid Amount for the Remainder of the Term using a Comparable Posted Rate. Interest is calculated at the interest rate posted by [the lender] for a mortgage product similar to your mortgage product on the date the payout statement is prepared.

Now CIBC’s defence of this tactic is that they substitute posted rates for both your original rate and the rate that most closely matches your remaining term. But as we have already outlined above, this is a terrible trade that no informed person would make because Big-6 lenders must make huge discounts to their five-year posted rates to make them competitive with market five-year fixed rates, and those same discounts shrink dramatically on shorter fixed-rate terms.

If we used the same rates in this example that we used in the discounted-rate method outlined above, the posted-rate method would yield the same sized penalty. But CIBC’s posted rates tend to be higher (which they were at the time this post was written), and for that reason, their penalties earn the moniker of “The Grand Daddy of Them All”.

Here is what that small change to the wording in your contract does to your penalty:

Posted-Rate IRD Calculation

4.79% = 5-year posted rate that was offered when you got your mortgage

2.84% = current rate the most closely matches your remaining term

$250,000 = remaining mortgage balance

24 = months remaining

$9,750 = IRD Penalty charged

 

Long Summary – thanks for getting this far!

Don’t be Surprised. These inflated mortgage penalties generate substantial profits for the lenders who use them and when uninformed borrowers choose to negotiate directly with their lender, is it that hard to imagine that some of those lenders would word the fine print to their advantage.

To be clear, there is not a problem with mortgage penalties in principle. When you break a mortgage contract, your lender incurs costs when they unwind agreements related to your loan (these agreements can relate to hedging, servicing, secularization etc.). The penalty charged is supposed to cover these costs while also recouping part of the lender’s lost profit. Fair enough. That’s why they’re called “closed mortgages”. But is it fair for some lenders to use these early terminations as “gotcha” moments?

There is no way on earth that the average Canadian mortgage borrower has any idea that there are significant differences in the way fixed-rate mortgage penalties are calculated, and the largest Canadian lenders, who have milked that lack of awareness to their advantage for years, have been in no hurry to explain it to them.

Summary: a conscientious and well informed independent mortgage planner should be able to explain how penalties are charged by any lender they are recommending.