ADVICE TO SURF THE WAVES OF MORTGAGES

Brokering the best mortgage deal
Experts able to navigate through choppy waters
By Denise Deveau
For Postmedia News March 30, 2011

Cheryl Hutton and Aaron Coates always thought getting a mortgage would be a challenge.

But within 18 days of visiting a mortgage broker, they were able to close a deal on a new townhouse in Calgary without a hitch.

Now in their early 30s, both have careers in the theatre, something Hutton says has been a bit of a sticking point with banks.

"In our industry, we never fit the paperwork guidelines (for the banks). For some reason people don't think we pay our bills."

Although it was their first home purchase, Hutton says it was surprising how easy the whole process was once they had someone who could walk them through it.

"He sat us down, told us what our options were, showed us that it was possible, and explained all the steps we needed to take. If it wasn't for him, we may not have made the leap," she says.

Sorting through a mortgage process and negotiating rates can be overwhelming for first-time and seasoned homebuyers alike.

That's why people such as Hutton and Coates turn to brokers to do the legwork for them.

Yet mortgage brokers will tell you that a good number of homebuyers out there don't really understand what they do.

"Part of the challenge we have in our world is that people aren't really sure what a mortgage broker is," says Gary Siegle, regional manager for Invis Inc., a mortgage brokerage firm in Calgary.

Brokers should not be confused with "rovers" -mortgage specialists attached to a specific financial institution who visit customers outside of banking hours, he explains.

"They only deal with that bank's product. A broker, however, is an intermediary whose job is to make a match between a lender and a borrower. We represent the individual, not the bank."

About 30 per cent of mortgages in Canada are done through a broker, says Perry Quinton, vice-president of marketing for Investor Education Fund, a Toronto-based, non-profit financial information service.

"The reason more people don't know about them is because the banks are so visible," he says.

"It's easy to gravitate to them when you have your savings accounts, credit cards and investments there already."

Going for the comfort factor could cost you though, she adds.

"A broker has access to different lenders including banks, and can shop rates and features. A half per cent may not sound like much, but that could make a difference of about $20,000 for a $250,000 mortgage amortized over 25 years. Any little bit helps."

For anyone considering a broker, Quinton advises people to do a bit of groundwork first if they have the time.

"It helps to educate yourself about options and what you can afford. Look at all your living expenses, including student loans and credit card debt. Chances are you are understating those."

Another thing to look into is the different types of available mortgages and features, including interest rates, payment frequency, amortization, cash back programs, and the ability to make lump sum payments.

"Knowing these things before you go in can save you a lot of money," she adds.

Photo By: alfcfishing

NEWS FROM THE HILL

Ottawa toughens mortgage rules
By Andrew Mayeda
Postmedia News January 17, 2011

OTTAWA -- Finance Minister Jim Flaherty is cracking down on Canadians' ability to qualify for a mortgage, in the government's latest attempt to rein in consumer debt.

Flaherty announced Monday the government is reducing the maximum amortization period for government-backed mortgages to 30 years from 35 years. The change will affect mortgages with loan-to-value ratios over 80 per cent.

Canadians will only be able to borrow up to 85 per cent of the value of their homes, down from 90 per cent.

In addition, the government is withdrawing backing for lines of credit secured by people's homes.

Flaherty said the changes are designed to prevent the kind of housing bubbles that developed in other countries, most notably in the United States, where the collapse of the subprime mortgage market triggered the global financial crisis.

"The main reason we're taking the action is for the longer term, that we avoid even the beginning of the development of the kinds of issues in some other countries that have been very damaging to families," the minister told reporters after unveiling the mortgage changes.

Flaherty said the decision was based on the long-term goal of protecting household finances and the broader economy, rather than on any particular data on the housing market.

A number of economic observers, including Bank of Canada Governor Mark Canada, have recently expressed concern about the record-high debt levels of Canadians. Based on the ratio of debt to income, Canadians are actually deeper in the red than American households, which are still struggling to dig themselves out from the debt taken on before the financial crisis.

Flaherty said Canadian families must keep in mind that interest rates will eventually rise from their relatively low levels. Economists have expressed concern that a sharp rise in interest rates could leave Canadians stranded with too much debt.

"I think people need to demonstrate that good Canadian trait of prudence and reasonableness and common sense in terms of their debt assumption," said Flaherty.

Speculation has been building about whether the opposition parties will support the government's upcoming federal budget. The NDP, for example, has outlined a series of proposals, including help for Canadians' home-heating bills and the revival of the home-renovation tax credit. But Flaherty said the government doesn't plan to bring back the popular renovation credit, which was part of the government's economic-stimulus program.

Last Friday, Prime Minister Stephen Harper acknowledged his government was considering changes to the rules governing mortgages. He said the government "remains concerned about growth in the level of household debt.

In February 2010, Flaherty moved to toughen up the mortgage rules amid worries that Canada was in the midst of a housing-market bubble. The reforms, since introduced, compelled borrowers to meet standards for a five-year fixed-rate mortgage, even if the buyer wanted a shorter-term, variable rate loan.

They further required purchasers of rental properties to issue a 20 per cent down payment as opposed to five per cent. The moves played a role, observers say, in slowing down real-estate activity. While the federal government looks to curb borrowing, economists say the Bank of Canada may have to follow by raising its key interest rate sooner rather than later.

The central bank issues its latest rate statement Tuesday and it is expected to hold its benchmark rate at its present one per cent level as signs indicate the economy may be benefiting from renewed business and consumer confidence in the United States.

The tightened mortgage rules take effect March 18, 2011. Under federal law, lenders must obtain mortgage insurance when homebuyers pay a down payment of less than 20 per cent of the purchase price of the new home. The government then backs the insured mortgages. The new changes apply to such government-backed mortgages.

The withdrawal of government insurance on home-equity lines of credit takes effect April 18.

"Taxpayers should not bear any risk related to consumer debt products unrelated to house purchases. Those risks should be managed by the financial institutions that originate and offer these products," Flaherty said.

Changes to take affect this spring

The New Measures:

- Reduce the maximum amortization period to 30 years from 35 years for new government-backed insured mortgages with loan-to-value ratios of more than 80 per cent.

- Lower the maximum amount Canadians can borrow in refinancing their mortgages to 85 per cent from 90 per cent of the value of their homes.

- Withdraw government insurance backing on lines of credit secured by homes, such as home equity lines of credit, or HELOCs.

Photo By: Digital Agent

ANSWERS = PEACE OF MIND

When it comes to mortgage details, most people just 'zone out'
James Pasternak, Financial Post
Published: Tuesday, March 02, 2010

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.

Changing amortizations

Although financial institutions can change the amortization with the click of a mouse, they are reluctant to do so. In fact, some say outright that they don't allow it and this is written into the mortgage agreement. If there are any requested changes it's much easier to go from a higher number (lets say 25 years) to a lower number (lets say 15 years), than the other way around. But the inside scoop is not to take no for an answer. If you are looking to increase the amortization, keep going up the chain of command until the CEO says no.

Photo by: Marco Bellucci