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 are 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.

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.

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.

A lesson from RBC’s mortgage rate increase

I love this article from the Globe as it explains why rates are going up a bit and what expectaions are for the near term.

Call for a rate hold if you are thinking of buying in the next 4 months!

“Borrowers who use a mortgage broker pay less …,” Bank of Canada.

See our reviews here: https://www.markherman.ca/CustomerREVIEWS.ubr

Mark Herman, Top best Calgary mortgage broker

The lesson home buyers should take from RBC’s mortgage rate hike

TD collecting all your data on-line

TD does collateral registrations and also look at everything you do on line. Not only do they love your money, they also love your data!

Stop trusting the big banks and talk to a mortgage broker to protect your data and your money.

Mark Herman, Top Calgary Alberta Mortgage Broker.

 

TD Visa customers’ browsing activities open to ‘surveillance’ by bank

Bank denies collecting general information about what customers do online

By Rosa Marchitelli, Go Public, Posted: Nov 30, 2015 5:00 AM ETLast Updated: Nov 30, 2015 9:11 PM ET

A B.C. man decided to Go Public after discovering Canada’s second-biggest bank can access and collect information on all of its customers’ online activities, even those that aren’t banking-related.

 

Colin Laughlan is one of thousands of Canadians who had his Visa cards switched from CIBC to TD in 2014 after the Aeroplan rewards program changed banks.

“When I saw this — I really had to read it two or three times to make myself believe I was reading what I was reading,” he said.

He points to two lines in the 66-page Visa cardholder agreement that allows TD to collect details about anything — and everything — customers do online.

Under the privacy section of the cardholder agreement:

“COLLECTING AND USING YOUR INFORMATION — At the time you request to begin a relationship with us and during the course of our relationship, we may collect information including:

  • Details about your browsing activity on your browser or mobile device.
  • Your preferences and activities.

Laughlan, from Vancouver, has a background in privacy issues as a former journalist and communications specialist. He said his radar was up when his new TD Visa card and cardholder agreement arrived in the mail.

“I couldn’t see any reason they had to do that sort of surveillance on Canadians and they weren’t being particularly forthright about it. This was slipped into the fine print of the policy and I’m well aware that the vast majority of people don’t read these things,” he said.

Laughlan said it took almost a year before his complaint finally reached TD’s privacy office.

TD’s privacy office crossed out the lines that Colin Laughlan found problematic in his cardholder agreement and an official signed them. (CBC)

The bank eventually apologized ….

http://www.cbc.ca/news/technology/td-visa-clients-browsing-open-to-surveillance-by-bank-1.3339148?cmp=googleeditorspick&google_editors_picks=true

Numbers on why this recession is not that bad

All recessions are tough – but the sky is not falling. Below is one of the better articles we have seen on why this one will not be that bad.

Mortgage Mark Herman,

Calgary Alberta mortgage broker for home purchase and mortgage renewal.


Only two recessions in Calgary since 1987 and both more severe than 2015 forecast

http://calgaryherald.com/business/energy/only-two-recessions-in-calgary-since-1987-and-both-more-severe-than-2015-forecast

How the US may start to raise interest rates

This bite of an article is as interesting and as funny as US interest rate increase articles can be.

See why it is better to have your mortgage broker follow this stuff for you then to read it yourself!

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


Bill Gross, the former Pimco “bond king” … believes the Federal Reserve could – and should – raise interest rates in September and then hold off on another rate hike for at least six months, a strategy he calls “one and done.”

The strategy adheres in principle if not specifics to numerous messages conveyed recently by influential Fed policy makers, including Fed Chair Janet Yellen, who have said rates will rise “gradually” after the initial rate hike is announced.

“The Fed … seems intent on raising (short-term interest rates) if only to prove that they can begin the journey to ‘normalization,’” Gross wrote in his September Investment Outlook. “They should, but their September meeting language must be so careful, that ‘one and done’ represents an increasing possibility – at least for the next six months.”

Gross, who has been calling for higher interest rates for months, suggested the Fed may have missed its opportunity to raise rates earlier this year when markets were rising steadily and the U.S. economy seemed to be humming along nicely.

In recent weeks, global turmoil has rocked U.S. markets, leading to volatility that pushed all three U.S. stock markets into correction territory last week. A strong bounce-back this week has raised optimism that the downturn was temporary but also led to concerns that markets could be in for a volatile run.

Any mention now by the Fed of returning interest rates to a more normal level of say 2% “cannot be approached without spooking markets further and creating self-inflicted ‘financial instability,’” Gross wrote.

from Fox Business – I know it’s Fox but it’s true: http://www.foxbusiness.com/economy-policy/2015/09/03/bill-gross-fed-likely-eyeing-one-and-done-hike-strategy/

Alberta sky is not falling

The graph below shows the expected Alberta GDP growth rate for the end of 2015 and 2016. The numbers are still positive – just not as high as they were before.

If the Calgary to Edmonton corridor was a country it would have the 2nd highest growth rate in the world after China.

Now these numbers are back to earth, things will continue as normal as oil slowly works it’s way back to about $70 a barrel.

Mark Herman, Top Calgary, Alberta mortgage broker

Click on the chart to see it larger.

image

Calgary housing market a low overall risk of price delines

All the hot air about Calgary housing being over-valued looks to be hot air as CMHC’s report notes below.

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

Calgary housing market a low overall risk: CMHC

Slight mortgage rate increase on the way?

We watch lots of technial things to see where rates are going. One of those is the CMB – Canadain Mortgage Bond.

Today, the benchmark government of Canada five year bond yield ended the week at 0.79%, up from 0.73% the previous week.

that means that fixed rates may move up from their 2.74 – 2.79% soon.

Get your rate hold / applicastion in!

Mark Herman, AMP, B. Comm., CAM, MBA-Finance

WINNER: #1 Franchise for Funded $ Mortgage Volume at Mortgage Alliance Canada, 2013 and 2014!

Direct: 403-681-4376

Accredited Mortgage Professional | Mortgage Alliance | Mortgages are Marvelous

Toll Free Secure E-Fax: 1-866-823-1279 | E-mail: mark.herman@shaw.ca |Web: https://www.markherman.ca/