Annual reality check for your mortgage

Most of us tend to think of our mortgage as the ultimate “buy and hold” purchase. After all, who wants to spend any more time in the “borrower” chair than is absolutely necessary? You get a 5-year term, and then go on automatic pilot until it comes due again. You might wring your hands over your other finances, but your mortgage is set in stone, right?
Well, not exactly. In fact, it’s a great idea to have an annual mortgage review to see if it’s really working for you – especially in the context of the rest of your financial picture.  After all, a lot can happen in a year – especially during our “mortgage years”, when we tend to be juggling many commitments in our busy lives! Think of all the financial commitments we carry during these years: care of our children, tuition or school expenses, one or more cars, vacations, home renovations, travel… the list seems to go on and on.
Chances are that something in your financial life has changed since you took out your mortgage. Life doesn’t stand still, after all. The mortgage planners at Mortgage Architects – an elite firm of Canadian mortgage brokers – have identified a list of the most common reasons why a mortgage may need some adjustment:
•    You’re considering a move to a new home in the next year or two;
•    You wonder if you can tap into some of your equity for a special renovation project to upgrade your home;
•    You’re wondering if you can afford a vacation property;
•    You’re considering the benefits of investment property ownership;
•    You’re a bit concerned about a large expense looming in your future:  like university tuition, a wedding, a leave from work, a new career or business, a big vacation or a new vehicle, for example;
•    You’re making more money – or less money – than you were when you began your mortgage;
•    You’re carrying some credit card or other high-interest debt that is eating away at your monthly cashflow;
•    You’re worried that you’re not saving enough for your retirement years, and you’ve heard there’s a way to convert your non-deductible mortgage debt into deductible investment loans using a re-advanceable mortgage.  You’re interested in collecting annual tax refunds, paying off your mortgage faster, and having an investment portfolio for the future.
If any of these sound familiar to you – and if you have held your mortgage for a year or more – then it’s worthwhile to contact a qualified mortgage planner to give your mortgage a reality check.
At Mortgage Architects, the company’s mortgage planners provide this service free of charge and with no obligation.  They tailor each mortgage to their client’s current needs and long-term goals, with an overall focus on mortgage planning, Mortgage Planners believe that a mortgage is not just a single transaction done in isolation of your goals and overall financial situation, but that a mortgage can accomplish so much more when property structured and integrated into your overall financial plan.
Mortgage Planners look at the mortgage as a financial keystone - the right mortgage can build your wealth, protect you from a financial downturn, and save you thousands of dollars. That’s why an annual mortgage review is part of their overall service offering.  It’s also a smart financial move for Canadian homeowners. 

This article is brought to you by Steven Porter, Mortgage Agent/Planner of Mortgage Architects Inc., steven.porter@mtgarc.ca, 1-905-875-2582

Three Big Mortgage Complaints

When it comes to complaints about banking products, mortgages are second only to credit cards.

That’s according to the banking Ombudsman’s (OBSI’s) recently-released annual report, which lists three of the most common grievances from mortgage customers.

“We are seeing a lot of complaints related to mortgages…” Brigitte Boutin, Deputy Ombudsman, Banking Services said in the report. Those complaints revolve mainly around mortgages prepayment penalties and pre-approvals, but it seems that mortgage portability has also “become a bigger issue.”

The Big One: Penalties

The Ombudsman sees a constant stream of borrowers protesting their bank’s prepayment charges. Those complaints are usually dismissed after an appropriate investigation, with a finding that the bank did nothing wrong.

OBSI says:

“When investigating mortgage prepayment penalty cases, we examine the signed agreements between the client and the bank and review the accuracy of the penalty calculation.

We also look at the manner in which the client was informed of the penalty before they proceeded with the mortgage transfer.”

A common claim by customers is that they were not told how the bank calculates its mortgage prepayment charges. Frequently the problem stems from the comparison rate changing before the borrower can pay off the mortgage.

The comparison rate is the rate the bank compares to your rate, to judge the interest rate differential, or IRD (i.e., determine the difference between your rate and the rate the bank can supposedly lend at today, for your remaining term).

Timing is key. If you’re 2.5 years from maturity, for example, the comparison rate might be the three-year fixed rate (say 3.04%). If you’re 2.49 years from maturity—one day closer—the comparison rate might be the two-year fixed rate (say 2.59%). The actual comparison rate used can increase the IRD and lead to unexpectedly high penalties.

In any case, with all the prepayment regulations nowadays, lack of disclosure is getting harder to argue. In one case on its website, OBSI found that: “The fact that the client was not told all the specifics of the calculation did not change the fact that he had the necessary information to make an informed decision.” OBSI ruled in favour of the bank in that instance.

Portability Caveats

“People sometimes take for granted that their mortgage is portable before selling their home,” Boutin said in the report. “It’s interesting – we’ve seen cases where the bank refused portability because the borrower’s financial situation no longer met the bank’s lending criteria. However, the client was able to get approved somewhere else right away.”

She raises a key point that all borrowers should be aware of. Given that the property is the lender’s security, you can’t move your mortgage to a different home without the lender’s consent.

Porting requires a whole new application process, documentation and approval. Failing that approval, people with closed mortgages have little choice. They can either not move or they can pay the lender’s penalty (potentially thousands of dollars) to discharge the mortgage and find other financing.

Boutin adds: “A bank can refuse to transfer a mortgage from one property to another because the client’s situation has changed and we can’t force a bank to lend money when its lending criteria is not met.”

She advises: “…Read the terms in your mortgage agreement carefully. Check if there are certain criteria related to portability and check if you meet your lender’s criteria before deciding what to do.”

Common portability considerations include:

• the amount of time the lender gives you to port
• the rate the lender gives you if you “port and increase” (add more money to the mortgage)
• the lender’s policy on bridge loans (commonly needed when your new purchase closes before your sale)
• the type and location of property the lender will lend on, and
• the types of income the lender allows (e.g., key, for example, if you become self-employed and can’t prove income in the traditional manner).

Pre-Approvals

“…We’ve seen an increased number of files relating to mortgage pre-approval,” Boutin notes. “Banks may not verify everything in detail when they pre-approve a mortgage. Then, when people go to finalize a mortgage, the bank will ask for more information and for supporting evidence of what was previously disclosed.”

“Sometimes that new information will lead the bank to change financing terms or refuse financing altogether. People can then get caught, especially if they removed the condition for financing on their offer to purchase a home.”

I’ve written about pre-approvals many times and continually hear cases where people thought they were unconditionally approved, but hadn’t even provided income and down payment documentation. Often it’s a matter of the mortgage adviser not clearly explaining that pre-approvals are rarely fully underwritten (including by the default insurer, when the down payment is less than 20%).

“A pre-approval document indicates certain conditions that need to be met,” adds Boutin. “Be careful that you’ve given the right information to your bank and that your documents match (emphasis ours) what you provided at the beginning of the mortgage process.”
 -Robert McLister

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Federal Regulator Tightens Up

On how borrowers may fare:

Mortgage applicants, particularly foreign borrowers and self-employed applicants who don’t earn a traditional T4’d salary, should expect to be asked for more income documentation (e.g., tax documents, pay statements, bank account statements, etc.)
Some homeowners who can’t prove income in the traditional manner will be pushed into the arms of non-federally regulated lenders (credit unions, mortgage investment corporations and private lenders).

In turn, more of those borrowers will be forced to pay interest rate premiums, as federally regulated lenders have traditionally provided the lowest cost of borrowing in this market.

Lenders will make fewer debt-ratio exceptions. As a result, a small percentage of borrowers will see their requested loan sizes cut back.

In certain cases, homeowners with rental income will not be able to use as much of that income to qualify for their mortgage.

Lenders may no longer be able to rely on the 5-year posted qualifying rate (currently 4.74%) when measuring a borrower’s debt ratios. If this qualifying rate is raised, it will further restrict credit (maximum loan amounts) for borrowers with above-average debt loads.

Some lenders may start calculating and relying on more conservative lending values, as opposed to normal appraised values. This could slightly reduce the equity available to homeowners, a key consideration for those who want to refinance up to 80% of their property’s value (the current refi limit for prime mortgages).

Allow yourself choice. Contact a Mortgage Broker. We work for you. 


- Posted by Steven Porter, Mortgage Agent - Mortgage Architects
Steven can be reached through his website at www.1800Mortgages.ca