TD adds interest on interest
TD is/ was the 1st and only bank to charge higher mortgage prime rate for their mortgages.
TD is now the 1st of the big banks to now charge interest on their late-interest-owed:
https://globalnews.ca/news/6451352/td-credit-cards-compound-interest/
History of Economic Bubbles
This is a most interesting info graphic
https://fortunly.com/infographics/historical-financial-bubbles-infographic/
Economic Bubbles: The History, Causes, and Effects
You don’t need to be an expert to understand what economic bubbles are and how they happen. The simplest definition is the rapid and unrealistic inflation of asset prices without any basis in the intrinsic value of the given asset.
Despite the fact that financial bubbles (also known as speculative bubbles) are not rare, people repeatedly fail to recognize speculative trading as it’s happening. Too often, those involved only identify these risky activities in the autopsy. Once the bubble bursts, it’s already too late.
One of the crucial reasons for this is that bubbles are often driven by strong emotions, blurring people’s ability to make rational decisions. When gung-ho traders who are willing to take huge risks start operating in that environment, you have a recipe for disaster.
Investors’ greed (believing that someone will pay more for something than they paid themselves) is accompanied by strong feelings of euphoria (“wow, this investment will be so profitable, let’s buy!”), but also anxiety. Buyers go into denial when prices start to fall (“this is just a temporary reversal, my investment is long-term”). Then, finally, panic sets in, causing a domino effect: everyone starts to sell, ultimately leading to a crash.
A bubble burst can have a devastating effect on the economy, even on a global scale. The most recent example is the Great Recession after the market crash in 2008. However, depending on the economic sector or industry, bubbles can also have some positive effects.
Just consider the dot-com bubble, which forced the information technology industry to consolidate. Although people lost a lot of capital at the time, that money has since been invested many times over in infrastructure, software, servers, and databases. Pretty much every American house and business is now connected to the internet, which has changed how we live and work for good.
The best way to prevent an asset bubble from happening is strategic, common-sense investing. Unfortunately, humans don’t always act sensibly. Bearing that in mind, chances are economic bubbles will continue to occur in the future.
To help you notice these patterns early, we at Fortunly have created an infographic detailing how some of the biggest financial bubbles in history have formed and then burst. Check it out to make sure you don’t fall victim to the hype of “the next big thing.”
Very coolMark Herman, Best Calgary Alberta Mortgage Broker
Inverted Yield Curves, Impacts on Prime Rate Changes and Variable Rate Mortgages
Summary:
For the 2nd time in 50 years the “Yield Curve” has inverted – meaning that long term rates are now lower than short term rates. This can signal a recession is on the way.
This Means …
- Alberta will look better comparatively to Canada’s hot housing markets which should finally cool down.
- Canada’s Prime rate increases look to be on hold until Spring. This makes the variable rates now look MUCH Better. There were 3 rate increases expected and these may not materialize – making the VARIABLE rate look better.
- Broker lender’s have VARIABLE rates that range between .1% and .65% BETTER than the banks do. If you are looking at variable rates we should look further into this in more detail.
DATA BELOW …
- More on the predictions on rate increases
- WTF is an inverted Yield Curve – lifted from “the Hustle”
-
Predictions on Prime
Three interest rate hikes in 2019 — that’s what economists have been predicting for months, as part of the Bank of Canada’s ongoing strategy to keep the country’s inflation levels in check. But, according to one economist, that plan may have changed.
The BoC held the overnight rate at 1.75 percent yesterday, and released a statement a senior economist at TD, believes hints that the next hike may not come until next spring.
“We no longer expect the Bank of Canada to hike its policy interest rate in January,” he writes, in a recent note examining the BoC’s decision. “Spring 2019 now appears to be the more likely timing.”
Meanwhile the Canadian rates and macro strategist at BMO, puts the odds of a rate hike in January at 50 percent.
“While the Bank reiterated its desire to get policy rates to neutral, the path to neutral is clearly more uncertain than just a couple of months ago,” he writes, in his most recent note. “Looking ahead to January, the BoC will likely need to be convinced to hike (rather than not).”
A VIDEO ON WHY VARIABLE RATE MAY BE THE WAY TO GO FOR YOUR PLANS
- https://vimeo.com/279581066
- This video is from my colleague Dustin Woodhouse and he perfectly presents the story on the variable. He also ONLY works in the BC Lower Mainland; if you live there HE should be doing your mortgage, if you don’t WE should be.
2. WTF is an ‘inverted yield curve,’ and what does it mean for the economy?
For the first time since 2007, the 2- to 5-year US Treasury yield curve has inverted. Historically, this has served as a somewhat reliable indicator of economic downturn, which means people are freaking out, which means…
OK, hold up: What exactly is a yield curve, and why is it inverting?
‘Lend long and prosper’ (so say the banks)
In short, a yield curve is a way to gauge the difference between interest rates and the return investors will get from buying shorter- or longer-term debt. Most of the time, banks demand higher interest for longer periods of time (cuz who knows when they’re gonna see that money again?!).
A yield curve goes flat when the premium for longer-term bonds drops to zero. If the spread turns negative (meaning shorter-term yields are higher than longer maturity debt), the curve is inverted…
Which is what is happening now
So what caused this? It’s hard to say — but we prefer this explanation: Since December 2015, the Fed has implemented a series of 6 interest rate hikes and simultaneously cut its balance sheet by $50B a month.
According to Forbes, the Fed has played a major part in suppressing long-term interest rates while raising short-term interest rates.
Yield curve + inversion = economic downturn (sometimes)
The data don’t lie. A yield curve inversion preceded both the first tech bubble and the 2008 market crash.
Though, this theory has had some notable “false positives” in its lifetime — so it’s not exactly a foolproof fortune teller.
Heck, IBM found the size of high heels tends to spike during hard times. As of now, the experts who believe the sky to be falling remain in the minority.
There is lots to digest in the data above. Please feel free to contact me to discuss in more detail.
Mark Herman, 403-681-4376
Top Calgary Alberta Mortgage Broker
Your Banking Relationship: They leverage your mortgage to rake in credit cards profits.
Below is part of an article where the bank is sad their mortgages are down 500% from last year. At the same time they made 16% more from ramming credit cards and Lines of Credits down their mortgage customer’s throats so it’s all okay in the end. For them… and how about for you?
The blue part shows that mortgage is the key to create what customers feel is a “relationship” with the bank so they can then sell you all their high margin products.
Broker lenders only “sell” 1 thing, mortgages, so consider separating your banking and your mortgage and get the best mortgage possible – through a broker lender.
“Having your mortgage at your bank is only convenient for them to rake it in off of your credit card fees.”
Mark Herman, top Calgary mortgage broker
Here is the article:
Bloomberg News, Doug Alexander, August 23, 2018 …
Canadian Imperial Bank of Commerce’s prediction of a mortgage slowdown has come true…
Despite the mortgage slowdown, CIBC posted a 16% jump in Canadian personal and commercial banking earnings due to a “significant” expansion … and growth in credit cards and unsecured loans amid rising interest rates, Chief Financial Officer Kevin Glass said.
“Those would be the major offsets in terms of mortgage growth declining,” Glass said in a phone interview. “Mortgages are a key product for us — it’s very important from a client relationship perspective — but it’s not a high margin product, so if mortgages come off it has a far smaller impact than rate increases do, for instance.”
What Rates Could Do to Affordability
Here is a great article on rates and what is expected for the year ahead.
Remember the 10 year term is at the all time low of 3.69% right now!
What Rates Could Do to Affordability
When it comes to home values, mortgage payment affordability acts like a giant lever.
A meaningful rise in mortgage payments (relative to income), would bear down on home prices, and vice versa.
Given this relationship and today’s towering home values, mortgage affordability is centre stage. That has inspired a stream of articles about whether swarms of people will default when rates “normalize.”
But how worrisome is that threat really? For insights, we turned to BMO Capital Markets Senior Economist Sal Guatieri.
To preface everything, here are some data points to consider…
…On Affordability
- According to BMO, home ownership is “affordable” (for the median buyer) when mortgage carrying costs—monthly payments, property taxes, heat, etc.—don’t exceed 39% of family income.
- Nationwide, we’re at about 31.6% today.1
…On Mortgage Payments
- If we look specifically at mortgage payments, BMO says the average-priced house currently consumes 28% of median household income, based on non-discounted mortgage rates.2
- That puts us right at the long-term average (see chart below)
- This 28% falls to 23% for people living outside Vancouver and Toronto.
- Compare these numbers to the peaks of 44% in 1989 and 36% in 2007.
What if rates normalize?
The first step is to define “normal.” We can be reasonably confident that the new normal is less than the old normal. Reasons for that include the long-term downtrend in our domestic growth rate (see chart) and proactive inflation control by the Bank of Canada.
To pump life into the economy, the BoC has kept Canada’s overnight rate at just 1.00% for 902 straight days. According to Guatieri, “A normalized overnight rate would be closer to 3.50% given the inflation target of about 2.00%.”
This implies that short-term rates should theoretically jump by about 2.5 percentage points…someday. In turn, long-term rates (such as 5-year fixed rates) should rise less, maybe 200 basis points says Guatieri. That would push 5-year fixed mortgages somewhere near 4.99%.
Other things equal, these new “normalized” rates would drive up mortgage carrying costs (assuming 10% down) from 31.6% of gross income today to 37.2%. That would still fall below BMO’s threshold of unaffordability, which is 39%. But keep in mind, these affordability metrics don’t include other personal debt like car payments and credit cards.
How will borrowers be affected?
RBC Economics writes, “Residential property values are elevated in Canada and, for many households, ownership remains accessible only because of rock-bottom mortgage rates.”
(Higher incomes have also helped affordability, notes BMO.)
But escalating interest rates aren’t necessarily a death knell. Reason being, “the eventual rise in rates will take place at a time when the Canadian economy is on a stronger footing, thereby generating solid household income gains,” says RBC. That, in turn, “would provide some offset to any negative effects from rising rates.”
The key word there is “some.” Guatieri estimates that, “To fully (our emphasis) offset a two percentage point increase in rates, household income would need to rise 19%, which could take six years if average income grows at the 3% average pace of the past decade.”
Incidentally, for major affordability damage to be done, we’d need something equivalent to a rate shock and/or serious unemployment. A rate shock is a fairly rapid increase in mortgage rates of “more than two percentage points,” Guatieri explains.
How far off is the threat?
It’s difficult to estimate the probability of a rate shock, Guatieri acknowledges. “The debt market is even pricing in a small probability of a BoC rate cut later this year.”
RBC notes, “We expect the Bank of Canada to leave its overnight rate unchanged at 1% throughout 2013 and raise it only gradually starting in early 2014—a scenario posing little in the way of imminent threat.”
Take that rate forecast for what it’s worth, but regardless, “affordability is not a major problem and should not become one even when rates normalize,” Guatieri writes in this report.
That’s true even in three of the fastest growing provinces—Newfoundland, Alberta and Saskatchewan.
The affordability exceptions, not surprisingly, are detached homes in Vancouver, Toronto and Victoria. Not coincidentally, these three markets are among the most prone to the one thing that helps affordability the most: a material price correction.
Footnotes:
1 Based on a 2.99% 5-year fixed rate, property taxes equalling 1% of home value, $150 per month for heating cost, a 25-year amortization, plus fourth-quarter 2012 data provided by BMO, including: Q4 household income estimated at $75,300, an average seasonally adjusted home price of $361,523 and a down payment equalling half of personal income (i.e., $37,600 or ~10%).
2 Same assumptions as above, save for the mortgage rate. BMO uses an interest rate of 4.1% for its analysis. This higher rate makes comparisons easier over the long-run, since discounts were smaller in the past and since discounted rate data from the 1980’s is scarce.
Rob McLister, CMT
Alberta homes lead Canada for 2013
Alberta resale housing market tops Canada in annual sales growth
Forecast to lead the country again in 2013
CALGARY — Alberta will lead the country this year and in 2013 in the pace of growth in the resale housing market, according to a new forecast by the Canadian Real Estate Association.
The national association of realtors said Monday that Alberta MLS sales this year will finish up 13.1 per cent from last year to 60,800 transactions and sales will lead the country next year as well with 1.3 per cent growth to 61,600.
Nationally, sales are forecast to decline by 0.5 per cent this year to 456,300 and fall by another 2.0 per cent in 2013 to 447,400 transactions.
The average sale price in Alberta is expected to rise by 2.7 per cent this year to $363,100 and by another 2.3 per cent in 2013 to $371,300.
Across Canada, the national average sale price is forecast to increase by 0.3 per cent this year and next year to $363,900 and $365,100, respectively.
In November, Calgary MLS sales of 1,831 were up 10.6 per cent compared with last year while on the national level sales dipped by 11.9 per cent to 30,573.
The average sale price in Calgary rose by 3.8 per cent to $413,921 but fell by 0.8 per cent across the country to $356,687.
In Alberta, sales increased by 3.2 per cent to 4,034 transactions and the average price was up 4.3 per cent to $365,999.
“National sales activity has remained fairly steady at lower levels since mortgage rules were changed earlier this year, but that stability masks some real differences in trends among local housing markets,” said Wayne Moen, CREA’s president.
CREA on Monday also released its MLS Home Price Index of seven major Canadian markets. Regina’s annual price growth of 11.58 per cent led the nation followed by Calgary at 7.13 per cent.
The national aggregate price rose 3.5 per cent year-over-year, the seventh time in as many months that the year-over-year gain shrank and it marks the slowest rate of increase since May 2011.
Twitter:@MTone123
© Copyright (c) The Calgary Herald
Snapshot of Canadians’ finances
| This is super interesting. Also remember that less than 1% of Canadians work in oil and gas, and less than 20% of Canadians make more than $85,000 a year! It shows how well Alberta is doing. |
| Jason Heath Jun 30, 2012
Who is the average Canadian — financially speaking? According to the Association for Canadian Studies, our median household income is $68,560 per year. Personal incomes are lowest in Prince Edward Island at $21,620 and highest in Alberta at $36,010. We pay $11,000 per year in income tax, donate $260 to charity, contribute $2,790 to our RRSPs and carry a credit card balance of $3,462. Mortgage and household debt comes in at a total of $112,329 Our net worth per capita has continued to rise, most recently clocking in at $193,500 per capita according to Statistics Canada. Real estate gains have continued to drive the increase to our net worth, though many have suggested the Canadian market could be in for a correction — or at least a pause. The Toronto Stock Exchange has risen 59% over the past 10 years, compared with a 3% gain for the MSCI World Index and a 4% loss for the S&P 500 (excluding dividends). Our Canadian dollar has appreciated 47% against the U.S. dollar and 16% against the euro over the past 10 years. This has made global and U.S. stock market returns even worse in Canadian dollar terms. Canada had a double-digit personal savings rate in the ’90s, but over the past two decades, this has dropped dramatically to the current 3.1% — one of the lowest savings rates of all OECD countries. The flipside of this coin is that our current personal debt to income has simultaneously reached an all-time high of 153%. So gains in real estate and stocks have been tempered by a corresponding increase in personal debt. The Economist Intelligence Unit lists Canada’s government debt per person at about US$39,883 or 81.6% of GDP. This compares with the U.S. at $37,953 or 76.3%. Go figure! That said, Greece’s public debt is currently $35,874 or 141.0% and Japan is at $87,601 or 204.9%. Canada’s federal government has been consistently posting budget surpluses of about 1% of GDP since the mid-1990s, a time when many people thought Canada was on the path to a sovereign debt crisis of its own. Quite to the contrary, Canada entered and emerged from the 2008 recession relatively unscathed. And this is the asterisk beside Canada’s 81.6% debt-to-GDP ratio when compared with the 76.3% figure for the U.S. — given our neighbours are currently spending US$1.50 for every US$1 of federal revenue. Call it a “Tale of Two Countries.” Some people suggest the U.S. and Europe could learn something from the Canadian government debt experience of the 1990s. While many people in other Western countries are now suffering as a result of their government’s debt problems, our government is sitting pretty. Our personal debt is the one black spot for the red and white as we celebrate our country’s birthday. Jason Heath is a fee-only Certified Financial Planner (CFP) and income tax professional for Objective Financial Partners Inc. in Toronto |
NEW MORTGAGE RULES
Here is the news release from the Canadian Association of Accredited Mortgage Professionals (CAAMP):
The Federal Finance Minister announced further changes to Canada’s mortgage insurance rules. Four measures were announced:
1. Amortizations reduced to 25 years
2. Refinancing limited to 80%
3. Properties purchased at over $1 million no longer eligible for mortgage insurance
4. GDS and TDS set at 39% and 44%
5. Line of Credits – LOCs – will soon be limited to 65% of the home value or LTV (Loan to Value.)
How the changes will be applied…
So we have until July 9th to get as many applicants under contract in order to access the current mortgage insurance rules. Possession on these contracts must be completed prior to Dec. 31, 2012.
Applicants going under contract on a home purchase drawn up after July 9th will have to qualify for a mortgage under the new guidelines. We will update all pre-approvals on July 9th under the new insured mortgage guidelines.
Q1. What is required to qualify for an exception to the new parameters?
A. The new measures will apply as of July 9, 2012. Exceptions will be made to satisfy a binding purchase and sale, financing or refinancing agreement where a mortgage insurance application has been made before July 9, 2012. While the changes come into force on July 9, 2012, any mortgage insurance applications received after June 21, 2012 and before July 9, 2012 that do not conform to the measures announced today must be funded by December 31, 2012.
These guidelines have existed for some time but are now more solidified. Lenders typically require that borrowers have a credit score of greater than 680 to qualify for these elevated GDS and TDS levels. Now that we are limited to a 25 year amortization knowing exactly what the upper limits on GDS and TDS are going to be critical.
Q2. Why is the Government limiting the maximum gross debt service (GDS) and total debt service (TDS) ratios?
A. The GDS ratio is the share of the borrower’s gross household income that is needed to pay for home-related expenses, such as mortgage payments, property taxes and heating expenses. The TDS ratio is the share of the borrower’s gross income that is needed to pay for home-related expenses and all other debt obligations, such as credit cards and car loans.
The new measure announced today will set the maximum GDS ratio at 39 per cent and reduce the maximum TDS ratio to 44 per cent. These debt service ratios measure the share of a household’s income that is required to cover payments associated with servicing debt. Both measures are already used by lenders and mortgage insurers to assess a borrower’s ability to pay. Setting a GDS limit and reducing the TDS limit will help prevent Canadian households from getting overextended and reduce the number of households vulnerable to economic shocks or an increase in interest rates.
—
More Technical Nerdy Data:
CAAMP believes that Canadians understand the importance of paying down their mortgages. These changes, together with new OSFI underwriting guidelines – also to be announced today – may precipitate the housing market downturn the government so desperately wants to avoid. The changes take effect July 9, 2012.
CAAMP was pleased that it was again successful in ensuring the 5% down payment rule remains intact; however, the government may have overreached with this latest round of changes.
To review this morning’s Globe and Mail article click here
To review the government press release and backgrounders click here
To contact Minister Flaherty or your local MP click here
-Important to note that these rules apply in high-ratio insured mortgage – not conventional mortgages. We will likely see changes to conventional lending over time. Many lenders will opt to apply the same rules to all mortgages but there will be exceptions. Many lender is Canada now only offer insured mortgage regardless of the down payment so these rules are going to impact the majority of applications.
-We have seen changes every year for the last four years and in all cases existing mortgages already approved under the old rules were exempt from the rule changes. I would expect the same response this time with existing approved files not being affected by the current changes. I will let you know as soon as I have some understanding of how pre-approvals will be affected.
-In his new release this morning Jim Flaherty specifically mentions the Toronto/Vancouver condo market so rather than restricting condo development in those two cities they have opted to impact the entire country. They also mention the concern over Canadian household debt which had already consistently been dropping.
-OSFI the mortgage regulator is also expect to make mortgage related changes today. 65% maximum finance for lines of credit and amortization restrictions relative to age have been discussed as additional possibly changes. There is going to be a lot of confusion relative to news releases so check in with me if you have questions on specific client situations.
1. Item one is pretty severe. Fewer buyers will qualify to get into the market, those that do qualify took a haircut on what they can afford.
2. Reduced from 85%. Somewhat immaterial because the reduction from 90-85% limited the refinance market significantly already. Now even more Canadians will not be able to move high interest debt into extremely low interest mortgage debt.
3. We don’t see a lot of insured mortgage files in this price range. This rule appears to be focused directly on Toronto and Vancouver.
4. This one needs some clarification. These higher GDS and TDS ratios have always been around but limited to very high credit score applicants. I will try to get some clarification on the specifics of this changes. I believe that this item is just solidifying rules that have been very subjective historically.
Why putting less than 20% down can lead to a better mortgage rate
This is true – the banks are sending us 2 rates … 1 rate for a CMHC/ Genworth insured mortgage and a slightly higher one for more than 20% down – or a conventional mortgage that is not insured.
The article below fully explains why.
By Garry Marr, Financial Post May 3, 2012
It doesn’t make much sense, but a skimpy down payment on a home might actually get you a better mortgage rate in today’s market.
Blame the government subsidy known as mortgage default insurance, which ultimately makes it less risky to lend money to someone who has only 5% down compared to someone with 20%.
Consumers with less than 20% down must get mortgage default insurance in Canada if they are borrowing from a federally regulated bank. The cost is up to 2.75% of the mortgage amount upfront on a 25-year amortization but that fee comes with 100% backing from the federal government if the insurance is provided by Crown corporation Canada Mortgage and Housing Corp.
“It’s already happening,” says Rob McLister, editor of Canadian Mortgage Trends, who says secondary lenders are now offering rates that are 10 to 15 basis points higher for a closed five-year mortgage for uninsured consumers.
The crackdown on mortgage insurance announced by Jim Flaherty, the federal Finance Minister, could exacerbate the situation. Mr. Flaherty, who mused to the Financial Post editorial board last week about getting CMHC out of the mortgage insurance business, has placed the agency under the authority of the country’s banking regulator, the Office of the Superintendent of Financial Institutions.
Mr. Flaherty also put in new rules on bulk or portfolio insurance. The banks had been paying the insurance premium on low-ratio mortgages – loans with more than 20% down – because it was easier to securitize them.
However, Mr. Flaherty says those loans will no longer be allowed in the government’s covered bond program.
“Long story short, it is going to tick up rates to some degree,” Mr. McLister says. “You are seeing an interesting phenomenon where if you go to get a mortgage today, you are oftentimes quoted a higher rate on a conventional mortgage. Presumably you have less risk because you have more equity.”
“There is a question on whether they will continue doing that or raise rates overall to compensate for higher conventional mortgage costs,” Mr. McLister says.
“When we can’t securitize a deal, there is a different cost of funds but the bank continues to offer the same rate,” said Ms. Haque, adding her bank did charge a premium for stated income deals, which usually means self-employed people, but removed the difference last week. The premium was 20 basis points.
“Looking at the competitive landscape, it was a disadvantage,” she says. “We were aiming to target pricing that was specific and for the risk appetite for that deal itself. We didn’t want one [deal] compensating for the other.”
But the banks have bigger fish to fry than just your mortgage. Those with the larger equity position in their homes may be a costlier mortgage to fund, but they also could be a future line-of-credit customers. There’s also the potential for other business such as RRSPs and TFSA, so losing a few basis points might make more sense in the long run.
Peter Routledge, an analyst at National Bank Financial, says he wouldn’t want to be an investor in a bank that approached its business any other way, though he did acknowledge there is a cost to keeping those conventional mortgages. “It’s in effect a subsidy,” Mr. Routledge says.
While banks may be eating some of the costs for people who are not eligible for a subsidy, if they continue down that road they might not be able to match the rates some of the secondary lenders are able to offer with insured mortgages.
It doesn’t sound like much, but the difference between, say, 3.14% and 3.29% on a $500,000 mortgage amortized over 25 years would be about $3,500 extra in interest on a five-year term.
It’s true that those people getting the better rate pay a hefty fee up front in insurance premiums, but they also represent a greater risk to the taxpayer. Do they deserve a better rate?
More problems with collateral mortgages
Here is more bad news on collateral mortgages.
People refuse to sign a 3 year cell phone contract but then for some reason have no problem in losing every single thing you have ever made and be sued into bankruptcy by your bank for taking one of these mortgages. Again, we do not offer them but TD, Scotia, ING, and RBC have them as STANDARD. I would rather take a new 3 year cell phone contract!
Beware the pitfals of collateral mortgages
By Mark Weisleder | Sat Jul 30 2011
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.
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.