Canada First Mortgage

James Pasternak, Financial Post

It is a legal document that stretches about 30 pages and runs about 10,000 words. Its execution takes no more than a couple minutes and when the ink dries on the signature lines, more times than not it is never read and gets slipped into a file folder, largely forgotten.

But despite its casual handling, the residential mortgage agreement governs the largest debt of over 5 million Canadians and within its fine print are the provisions that can make or break a household’s financial future. There’s a lot at stake. At the beginning of 2004, Canadians held $517.7-billion in mortgages.

“I think most of the major bank representatives do a good job of explaining these provisions to their clients but I think most people zone out and don’t really listen. All they think about is getting a mortgage at 3.8% and ‘I want to get this done’,” says Len Rodness, Partner, of Toronto-based law firm Torkin Manes (www.torkinmanes.com)

But beyond the interest rate there are a wide range of options and clauses in the mortgage agreement that deserve scrutiny. In a competitive lending environment, shopping for the right mortgage can bring significant savings and peace of mind through the amortization period.

Take the case of Hamilton, Ont., couple Kathy Funke and Dan Perryman. When they were shopping for a home in 2003, the interest rate was the top priority. They also wanted flexible prepayment options and accelerated weekly mortgage payments. To leverage the competitive interest rate they received, they went with a variable rate mortgage. They paid off a $230,000 mortgage in 5 ½ years.

“The power in these things comes from people who know how to manage [the] various privileges. It has a huge [savings] effect on amortization….The ideal thing is to understand what your privileges are and then combine them to your advantage — to what you can afford to do; to fit your lifestyle and ability to pay,” says Jeff Atlin of Thornhill, Ont. based Abacus Mortgages Inc.

And privileges there are. You just have to shop for them.

Accelerated Payment Options: Getting the loan paid earlier

It just seemed like yesteryear when everyone was paying their mortgage on the 1st of every month. Now, in addition to the first of the month option, some of the more common options are accelerated weekly and biweekly or semi-monthly options.

These frequency options result in long term savings. For example if one selects the accelerated biweekly option one is making 26 payments in a year, the equivalent of two prepayments per year over the monthly option. When a $150,000 mortgage amortized over 25 years is paid under an accelerated bi-weekly option, the debt is retired in 21 years and the interest savings are around $18,000.

Toronto resident and electrician Karl Klos, 26, selected “weekly rapid” payments on a mortgage amortized over 35 years. The mortgage payments are made each week but he added the “rapid” option by increasing the amount paid. Mr. Klos says that the payment frequency will pay off his mortgage in 25 years instead of 35 years.

“I can’t understand why anybody would do monthly payments anymore now that the banks offer the ability to have weekly payments. It may be a cash flow situation. If you do a weekly mortgage payment it could save you a significant amount of money,” says real estate lawyer Len Rodness.

Restating mortgage agreement vows

It doesn’t take long after one signs a mortgage agreement to hear from a neighbour or friend that they received a better rate. So when you dig out the mortgage agreement see if there’s a clause that allows borrowers to renegotiate their agreement before the end of the term. The bank might use a model called “blend and extend.” For example, if one has a $100,000 mortgage at 6% mortgage with two years to go they might blend it with the current five year rate of 3.79%. So according to mortgage broker Atlin when they average out 2/5 of the mortgage at 6% and 3/5 are at 3.79%, the customer will get a new reduced rate of about 4.6%. But the borrower is tied to the bank for another 5 years.

Putting spare cash against the mortgage with no penalty

Almost all mortgage agreements have options for mortgage prepayment without penalty. Klos’s mortgage agreement allows prepayments of up to 15% of the annual balance. Most financial institutions provide prepayment options in the 10-20% range. Some lenders allow borrowers to make the prepayment any time during the year while other agreements restrict the prepayment to the anniversary date.

Also, some financial institutions allow customers to make multiple smaller prepayments during the year as long as they don’t exceed the annual limit. Funke and Perryman were able to retire their $230,000 mortgage in 5 ½ years primarily because of the prepayment provisions in their mortgage.

Coming up with more money for each payment

Some lenders will allow borrowers to increase the payments without penalty. Depending on the wording of the mortgage agreement the increased payments can range from around 15% to 100% of the current payment. So if one is paying $1,000 per month under the 15% rule, a borrower can raise it to $1,150 per month. Klos’s weekly rapid payment plan was based on him raising the weekly payments by 5%.

“Payment and amortization are a function of each other. Any time you raise the payments you shorten the amortization; any time you shorten the amortization you raise the payment,” says Mr. Atlin.

The mortgage prenuptial: Penalties for getting out of your mortgage

“A mortgage is a contract first and foremost. It is a contract between a borrower and the lender,” Atlin says. And if someone hasn’t felt that cold business approach during the course of their mortgage, they certainly will if they try to leave early. Most borrowers pay out their mortgages when they sell their house, win a lottery or are offered a better interest rate by another company. Until recent years, the standard penalty for breaking a mortgage agreement was three months of interest. Paying out a $200,000 mortgage could amount to a $2,500 penalty.

In many current mortgage agreements, the penalty for an early exit (and not extending) is either three months of interest or an interest differential, whichever is greatest.

The mortgage differential penalty can be quite expensive. If a mortgage is at 5% interest rate and you have three years left in your term, the bank will use the difference between the agreement rate and the current market rate to calculate the penalty. Using the 5% case above, let’s say the current 3-year mortgage is available at 3.5%. The bank will charge the difference between 5% and 3.5% for the balance of your term.

Bank customers who have an open mortgage with a variable rate can usually pay them out with little or no penalty. Some mortgages are closed for the first few years and then revert to an open option. The penalties, if there are any, would be much lower once the mortgage converts to an open one. If one can, it would be best to wait until the mortgage kicks into open status.

When paying out the mortgage try to have some of it calculated as your annual no-penalty prepayment option. Therefore, if you are paying out a $200,000 mortgage and you also have a 20% per annum prepayment option you might be able to save penalties on $40,000. If the mortgage prepayments can only be done on the anniversary date, make sure that is the day you select to pay out the mortgage.

Mortgage Lifelines

Mortgages are often signed and sealed with the borrower having every intention to pay. However, the world is paved with best intentions and recessions are everyone else’s problem until the boss comes into your office with the bad news.

“That is something that nobody turns their attention to at the time. The original document is done. The legal issues are in that original document. For a practical point of view given the state of the economy these [clauses] might be something beneficial,” said Len Rodness of Torkin Manes.

Some mortgages include a Rainy Day option. This option allows the borrower to skip one principal and interest payment each mortgage year. The interest portion of the skipped payment or payments will be added to the outstanding principal balance.
Read more: http://www.financialpost.com/personal-finance/mortgage-centre/story.html?id=2631845#ixzz0iTZkol9e

Something interesting to observe in differences between the US and Canada equity positions…

By Garry Marr, Financial PostApril 23, 2009

Canadians continue to have more than two-thirds more equity in their home than Americans, according to a new survey.

The study for the Canadian Association of Accredited Mortgage Professionals shows Canadian homeowners have, on average, 72% equity in their house, compared with 43% for Americans.

“It is a very positive part of the Canadian housing story,” said Jim Murphy, chief executive of Toronto-based CAAMP. “Canadians pay down their mortgages. Canadians are just more conservative than Americans.”

The study also found that Canadians have dramatically reduced the amount of equity they are taking out of their home. A year ago 22% of Canadians had accessed the equity in their home through measures such as lines of credit. Today that is down to 15%.

“This speaks to the whole thing about people belt-tightening,” said Mr. Murphy.

Despite the drop in prices in the Canadians marketplace, only 2% of Canadian mortgage holders have negative equity, in which the value of their mortgage is higher than the value of their home.

About the only new risk Canadians seem to be taking on is longer amortizations. While 83% of Canadians have an amortizations of 25 years or less, the number with 30-year and 35-year amortizations is rising. In the past six months, 46% of new mortgages have been for amortization of more than 25 years.

“I don’t think it’s a worry because [Canadians] are paying down their mortgages,” said Will Dunning, chief economist with CAAMP, noting the percentage of Canadians in arrears on their mortgage is rising but the total is still 0.38% of all mortgage holders. “That’s the middle of historical averages.”

Mr. Dunning said the study also indicates that subprime mortgages are likely a very small percentage of the Canadian marketplace. Only 2% of all Canadian mortgages have interest rates of 8% or higher — the low-water level for what would constitute the rate on a sub prime mortgage.

The survey did show that Canadians are also taking advantage of continued drops in interest rates by increasingly buying into variablerate products. CAAMP says 28% of Canadians have variable-rate products that are tied to prime. The number is rising, with 36% of new mortgage orientation in the past 12 months going into variablerate products.

With the Bank of Canada’s decision to lower rates another 25 basis points and its commitment to not change rates for another year, Canadians are expected to continue to take advantage of a record-low prime rates, which are 2.25% at most financial institutions.

© Copyright (c) National Post

Ok…so we know it’s harder to get a mortgage these days.  Now-a-days, lenders and insurers want to know why you missed a payment a year ago, or 2 yrs. ago!  Sometimes it’s easy to forget to make a payment here and there, but when you “forget” to make the payment two months; THREE months in a row, they want to know what’s up!  The lending guidelines have definitely tightening the reigns…there’s no question.  A year ago, a missed payment or two would have been overlooked by many and discarded as, “ahh-well…at least they are “current” on all their debts NOW.”  Nope.  There’s more reason for lenders and insurers to clamp down on lending after the lax guidelines of yesteryear.

Just when you thought it was getting hard, Genworth (competitor to CMHC) decided that they are going to make things a little tougher.  Effective April 18th, if you want to refinance your home (between 90.01% - 95% of the value of your home), your minimum “allowable” credit score is going from 650, to 700.  A refinance on your home (between 85.01% - 90%) will require a 660 score; this is up from 600.

Also, currently if your credit score is above 680 - you are allowed up to 44% of your household income to go towards your monthly financial obligations (like credit cards, loans, etc.) and mortgage payments (Principle, Interest, Heat, and Taxes) - a.k.a; Total Debt Service (TDS).  Come April 18th, the total percentage allowable to go towards TDS will be 42%.

Business for self individuals?  It gets tougher.  Minimum down payment required is 10%.  This is up from a minimum of 5% down.  Credit score still needs to be impeccable minimum of 700.

At present, CMHC has not come up with any changes to their programs…but time will tell.  Usually when one moves, the others at least LISTEN really closely.  Am I worried about these changes?  I have to be honest…  At first glance when I read this, I thought - damn…that closes the doors on a lot of potential customers.  BUT, I can’t help but notice that the mortgage industry is simply taking a step back, and practising some very basic lending guidelines that were in effect years ago.  We have to remember that it wasn’t long ago that we had all these (what seemed like) ”rights” on the mortgage front.  We have to remind ourselves that getting a mortgage is still a priveledge…not a right.  We have to prove ourselves to banks…maybe a little more than what we had to prove ourselves with them a couple of years ago.  I know, I know….I can hear you screaming now; “you can’t just give all these allowances, and then take them away just like that!!”  Ummm….yes they can.  Let’s flip it over on it’s back for a second…

Let’s say YOU are the bank.  It’s YOUR money.  YOU have to make the decision on who to give a mortgage to, and who not to give a mortgage (your money) to.  After being fairly easy with your money and allowing mortgages on “lighter” guidelines, you found yourself losing a lot of your money.  Wouldn’t you want to tighten your belt too?

We know the old adage “one bad apple spoils the bunch”, right?  It’s not much different.

So, at the end of the day what we are left with is mortgage guidelines that look a little retro.  It’s not a bad thing….it’s an adjustment thing.

Sincerely,
Dan Mass, AMP

dan@canadafirstmortgage.com

403-294-0033

As this past year may have you believe that getting a mortgage is more difficult (yes…it certainly is), that doesn’t stop the lenders competing for “pole position”.  Yes, it’s has been a progressive (past) year of mortgage product pinching, mortgage lender dissolving (aka; sub-prime), economic spiralling uncertainty…but let’s look at what’s happening lately…

Within a very short period of time, many lenders have realized that there is great business to be had in this market and have set extremely attractive mortgage pricing in place.  Why?  Because they can…  In the meantime - brokers watch, listen, and advise.  As mortgage associates, we have been programmed to determine the possibilities of mortgage options for each of our customers. 

We’re looking at a brisk Spring and Summer in terms of the housing market here in Alberta and surrounding provinces simply because of softening house prices, and the ever low interest rates across the board.  This is creating a hunger for the First Time Homebuyer - the Investor - or simply the folks sitting on the fence!  It’s all good news in terms of a market that was simply at a stand still not too long ago.

A handful of lenders that we deal with have aligned “special programs” with us.  This means price dropping to the extreme to get your business.  We are simply providing great rates to customers OAC…no charge for these special discounts.

If you’re thinking about it…do it.  Gear up.  Get that pre-approval to see exactly what that means to YOU.  The lenders are hungry for your business and they are showing the brokers that they WANT IT!

If you have any questions…please don’t hesitate to let us know!!

Sincerely,

Dan Mass, AMP

dan@canadafirstmortgage.com

403-294-0033