More bad news about collateral loans
More collateral info in the press. As we have been saying for more than a year now; collateral loans can trap you later. Leverage the expertise of a person who has dealt with mortgages all day for more than 10 years when deciding what is best for you.
Short version of the article below: it is going to cost you about $2,500 to get out of a mortgage with a collateral charge when the term is done. That is not a “payout penalty” but the cost to re-register your mortgage later at a different bank when they try to renew you at a higher rate at the end of your term.
Mark Herman, top Calgary Alberta Mortgage Broker for Renewals
Search "collateral" in this blog search bar to see the other articles on this topic.
A collateral mortgage can trap you: Roseman
You may want to change lenders at the end of a mortgage term. But with a collateral mortgage, your freedom to move will be constrained.
Your residential mortgage is coming up for renewal. Your lender won’t match the competition, so you decide to get a better rate elsewhere.
Moving a mortgage at the end of a three-year or five-year term is no big deal. The new provider usually covers any transfer fees.
But switching is more costly if you have a collateral mortgage. You must hire a lawyer and pay about $1,000 to discharge the mortgage before you can move to a new lender.
Since 2010, TD Canada Trust has sold only collateral mortgages. Tangerine Bank (formerly ING Direct) changed to collateral mortgages in 2011. National Bank also offers them.
Having a collateral mortgage affects your ability to transfer your mortgage to a new lender and your ability to borrow additional funds. It can also affect your ability to discharge the mortgage after repaying the loan in full.Many people don’t know the difference between a conventional and a collateral mortgage, since the information is buried in the fine print of a detailed agreement.
Last August federal Finance Minister Joe Oliver announced an agreement with eight major banks, under which they would voluntarily disclose general information about collateral mortgages at their websites by Sept. 1, 2014, and in their branches by Nov. 30, 2014.
Finally, the banks would provide specific information to consumers who were entering into a new mortgage agreement by Jan. 31, 2015.
Has voluntary disclosure worked? I found almost nothing when checking the banks’ websites. But the Canadian Bankers Association’s website has an article, “Mortgage Security,” to which individual members can provide links.
With a conventional charge, only the amount of the actual mortgage loan is registered against your home. If you borrow $250,000, the lender will register a $250,000 amount as a liability on your property.
With a collateral charge, an amount higher than the actual mortgage loan may be registered against your home. If you borrow $250,000, the lender can choose to register a $300,000 or $400,000 amount.
This allows you to get an extra $50,000 to $100,000 at a later date, secured by the mortgage, without having to discharge the loan and go through a costly refinancing. However, you must meet certain conditions in order to borrow more money.
“You will need to apply and be approved by the lender for the increased amount, based on the current criteria of the lender, your ability to repay the mortgage loan and verification that your home’s value supports the mortgage loan request,” says the CBA.
Dan Faubert, an Ottawa mortgage broker, wrote a blog post last August about thepitfalls of a collateral mortgage. He used the example of John Smith (not his real name), who was denied a loan to fix up his home.
The man owned a home worth $375,000. He had $25,000 left on his mortgage and a $250,000 balance on his home equity line of credit — a total debt of $275,000.
Unfortunately, he didn’t know the bank had registered a $375,000 mortgage against his home. Most collateral mortgages are registered at 100 per cent of the property’s value and some go up to 125 per cent, depending on the lender.
Smith wanted $25,000 to renovate. He was planning to sell his house. But since he was retired and had a lower income than when he borrowed the money, he didn’t qualify for a bank loan.
Faubert couldn’t get him any more money, nor could any other mortgage broker, since the collateral mortgage was registered for 100 per cent of the property’s value.
Smith had borrowed $275,000 and his home was worth $375,000, but there was no equity against which to register a mortgage. It is a dilemma that could face other Canadians who carry a mortgage with them into retirement.
“Any mortgage with any bank that has multiple products in one mortgage is also registered as a collateral mortgage,” says Faubert, who recommends asking lenders for an explanation before agreeing to new financing.
I predict the trend to collateral mortgages will spread. Banks benefit by making it more difficult — or impossible, in some cases — to switch lenders before a mortgage is discharged.
Oliver should check the banks’ voluntary disclosure under the agreement announced last year. Customers need to know in clear terms, explained by a real person and not just in fine print, about a key change to the standard mortgage contract.
http://www.thestar.com/business/2015/02/17/a-collateral-mortgage-can-trap-you-roseman.html
CMHC not insuring luxury homes with sales price of more than $1M
This was announced about 4 months ago so it is no surprise – unless you have been sitting on a huge pile of cash and just now thought it is a good time to buy a home for $1,000,001 or more.
Another great example of rules that we have been working under for months that did not make the headlines …
—
CMHC no longer offering mortgage insurance for luxury homes
CALGARY – Canada Mortgage and Housing Corp. says it will no longer offer mortgage insurance for homes that cost $1 million or more, starting July 31, even if the buyer has made a deposit of 20 per cent or more.
It also announced on Friday that it will no longer insure loans that are used to finance construction of multi-unit condominium projects, effective immediately.
…
In Calgary, luxury home sales for the MLS market, for properties of more than $1 million, were 359 year-to-date until the end of May, representing three per cent of total sales activity. For the same period a year ago, there were 318 sales, still equating to three per cent of total sales.
Last year, a record was set with 727 MLS sales in the luxury bracket, representing 3.1 per cent of all residential sales in the city, according to the Calgary Real Estate Board.
“Consumers were already required to have 20 per cent down for million plus homes, and insurance was not required for these properties,” said Ann-Marie Lurie, chief economist with CREB.
http://www.calgaryherald.com/business/cmhc+longer+offering+mortgage+insurance+luxury+homes/9915137/story.html
CMHC and Flood Damaged Homes in YYC / Calgary
We get this question often as there is lots of fully bizarre data out there.
Here is what we are seeing. Remember, as the #1 mortgage brokerage/ franchise in ALL of Canada for 2013 at the countries largest SuperBroker – Mortgage Alliance we see lots of deal flow so this is based off of many hundreds of conversations with the insurers and lenders:
- IF the flood damage has been repaired AND you are in the flood zone then an insurer (CMHC/ Genworth/ Canada Guarantee) WILL / can insurer your purchase with as little as 5% down as long as all the other normal criteria are met.
- IF there is damage that is not repaired then the odds of an approval with an insurer are very, very LOW. Often, even if you put 20% or more down, and do the purchase without CMHC involved, the lenders are not taking the risk and doing them.
the KEY is to fix the damage first, then sell.
Call if you have any questions on this as there are many specific examples that are not mentioned above.
Mortgage Mark
403-681-4376
More on how Banks “get ya” with payout penalties
The beginning of a great article below goes more into the details on what the BANKS do to you when you get their low rates deals like the BMO 2.99% – which everyone now says is not a great deal as you must sell your home to get out of it – among other things. Ensure you always use a broker for your mortgage.
Low mortgage rates tempt, but penalties for breaking can be high!!
You want some of these record low rates on the market but you’re locked into a mortgage. Just break it, right?
Not so fast, there’s a key question you need to ask before you commit to break a mortgage: how much will it cost you? Actually, it’s a question you should be asking before you sign up in the first place.
Don Hurman, a 64-year-old from Okotoks, Alta., learned the hard way when he incurred a $10,000 penalty after selling his house halfway through a five-year mortgage term. Some mortgages let you port the loan to a new home but Mr. Hurman was forced to break his and pay what is called the interest rate differential.
http://business.financialpost.com/2014/04/12/be-careful-before-you-break-that-mortgage/
Lump Sum Payment Strategy / Use your RRSP refund pay down your mortgage
Here is a great way to use your tax refund to repay / pay down your mortgage. It does make a difference.
But you still have to live. I recommend using 1/2 of it for this and the other 1/2 for something you NEED, not want.
Lump Sum Payment Strategy
Tax Season is fast approaching and the average Canadian tax refund is approximately $1600. An excellent use of these funds would be a lump sum mortgage payment. If a client was to do so they could save thousands of dollars in interest over the life of their mortgage. For example:
Mortgage Amount $300,000
Mortgage Interest Rate 3.25%
Pre-Payment $1,600
Approx. Interest Savings Over 25 years $1,600 x 3 = $4,800
The above savings might seem trivial if looked at as a one-time event, however if you continue this strategy on a yearly basis they could save over $17,000 in interest over the life of their mortgage. Additionally, this would help you become mortgage free almost 5 years faster.
***note the above calculations are based off a 25 year amortization, a higher interest rates would increase the savings***
the 2.99% BMO deal is not that great
My colleague in Toronto wrote this and he puts it very well:
Don’t let the Banks Play you for a Fool.
With all the press surrounding the 2.99% % year fixed rate mortgage from BMO we thought we should clarify some if its characteristics. There is no point in saving 0.05% on a mortgage if it means having to pay outrageous break fees, or be limited to dealing with one Lender for the entire term of your mortgage. Believe it or not, many Lenders offer the same 2.99% without the draconian terms the Bank insist upon you.
Even though the Government of Canada is trying to put the brakes on the red hot housing market there are lots of great mortgages to be had in the market. It seems every major Lender in Canada will be offering a really low 4 Year or 5 Year Fixed Rate Mortgage by the time spring really has sprung. But you should be careful.
One such incredible rate that many people are asking about is BMO’s 2.99% 5 Year Fixed Rate Mortgage. We did a few interviews last week with different news outlets and made some comments on this offering and few others.
We have been doing our best to explain the perils of some of these new low rate products, as most are extremely restrictive. For example the BMO mortgage doesn’t let you break the mortgage unless you are selling your house. Consumers quickly find that additional value added features are typically removed from these products. These include your ability to pre-pay, to port your mortgage, to have someone assume your mortgage, or add or remove someone from the title.
Since most Canadians augment their mortgage in some way at about the 3rd year of their mortgage, we should be really careful about what type of product we choose. For instance, right now when it makes sense for many people to be breaking their mortgage to save money with the lower rate fixed and variable rate offerings many clients are locked in with no ability to change their rate or Mortgage Lender.
In short, be careful when picking a mortgage! Weigh all your available options before making a decision. Make sure that you are not sacrificing tens of thousands of dollars in penalties in the future for a small rate benefit today. Ask an expert, typically Bank Branch Representatives are not Licensed Mortgage Agents, and can only offer you one set of products.
Ask about our special “Mortgage Breaker Program” going on right now. If your mortgage is locked in for the next 2 or 3 years at 3.5% or more you could be saving thousands of dollars by breaking.
With all the people you have to worry about playing tricks on you today at least your mortgage will be safe.
Alberta creates 9/10 jobs in ALL OF Canada for 2013
I have about 50 posts saying the continued inbound immigration from all places in Canada and the world supports our home prices and high qualify jobs down town. Here is more awesome news …
… It was the highest pace of monthly job creation in nearly three years and well above the average gain of about 6,000 since the end of the 2009 recession.
And Alberta accounted for a stunning 87 per cent of all the jobs created in the entire country since February of last year.
and the link is here: http://www.calgaryherald.com/business/Steady+hiring+climate+expected+Calgary+region/9603604/story.html
Great news!
CMHC Rate Increase & More…
This is the blog version of the Winter Update 2014:
Insurer Rate Increase – Technical Details – and the B20 Rules Phase In.
1. Much to do about nothing: CMHC increases mortgage insurance.
- May 1st the new CMHC fee increase goes into effect.
- Genworth quickly followed, matching the effective date and premium increases. Canada Guaranty has not yet but is expected to increase their rates by the same amount – so rates for all will be the same but are not right now.
- To AVOID the increase:
- The purchase must be underwritten and submitted to the insurer by the bank BEFORE end of day April 30. We will still be in the Spring rush so banks may be backed up; it is important to avoid last minute rushes during this time.
- The fee is inconsequential. A $400,000 mortgage has a monthly payment increase of less than $10.
|
Down Payment |
OLD: One-time CMHC fee added to mortgage |
New fee May 1, 2014 |
|
5%(borrowed) |
2.90% |
3.35% |
|
5% |
2.75% |
3.15% |
|
10% |
2.00% |
2.40% |
|
15% |
1.75% |
1.80% |
Nowhere in the news: Very little is being discussed on self-employed borrowers without traditional proof of income. Their premiums are going up as well.
|
Down Payment |
OLD: One-time CMHC fee added to mortgage |
New fee May 1, 2014 |
|
10% |
4.75% |
5.45% |
|
15% |
2.90% |
3.35% |
|
20% |
1.64% |
1.9% |
|
25% |
1.00% |
1.15% |
|
35% |
0.80% |
0.90% |
Bottom line: for those qualifying on their tax paid income- much to do about nothing. For those needing to use self-employed “declared” income, there is a much greater premium increase.
2. More Importantly – Full Implementation of the B20 (and soon the B21) Rules
- Some of the banks are already underwriting with the new rules causing unexpected declines and delays.
- Banks are about to start using 3% of the balance for unsecured loans and credit cards as the monthly payment. Right now some are and some are not.
- Clients that have multiple properties or want to keep their existing home as a rental, to purchase another property are increasingly having a difficult time for various different qualification reasons. (rental offsets or rent added to income, secured lines used for down payment etc.)
Bottom line: Buyers that are close to the limits of the lending guidelines may no longer qualify. Many of them are self employed buyers but even the first time home buyer with a little bit of credit debt are having trouble. It is important that a buyer’s application is presented properly to the right lender and the right insurer the first time.
The Mortgages are Marvellous Advantage
Why not take advantage of the skills, years of experience, and non-biased advice of a professional, dedicated, top- broker with top-tier access to a variety of lending institutions for your buyers?
We fully pre-qualify your buyers before you go shopping: Your pre-approval is fully underwritten by a past senior bank employee. Income, down payment and credit information are in the file upfront and any wrinkles are ironed out before putting in an offer.
Mark Herman; AMP, B. Comm., CAM, MBA- Finance www.MarkHerman.ca
Katie McDowell ; Broker of Record
WINNER: #1 Franchise for Funded $ Mortgage Volume at Mortgage Alliance Canada, 2013
Mortgage Alliance w Mobile: 403-681-4376 w Secure e-Fax: 1-866-823-1279
Get your RRSP deduction & use it for down payment !! A legal loophole.
If you know you are buying your first home in the next 90 days, you can make a $25,000 RRSP contribution or $50,000 for two people. That means a big refund in April. You then withdraw the $25,000 or $50,000 to pay for that initial home’s down payment.
- Most people have the RRSP room to make a contribution. If you are buying a house by June and you have the down payment in cash, you can make the contribution to get the tax return.
- The “catch” is the contribution normally has to be in the plan for 90 days before you can take it out.
Proof the Banks do not Love you – Big Bank (TD) does 25% car loan
On a daily basis people call me to talk mortgages and think that the big Canadian Bank loves them. It does not!
Only in Canada do we feel great if they rip us off – just give me the security blanket of a big bank – and I’ll gladly pay more of my hard-earned, post-tax dollars!
Below is an article that this is now happening in areas other than mortgages too. So …. do you still think that they love you OR do they love their shareholders?
http://www.cbc.ca/news/canada/british-columbia/couple-feel-robbed-by-25-interest-td-car-loan-1.2483342