The median age of first-time home buyers has increased to 33, the oldest in records dating back to 1981, according to a National Association of Realtors report released Friday. The median age of all buyers also hit a fresh record, 47, increasing for a third straight year — and well above the median age of 31 in 1981.
While the median age of first-time home buyers only rose by one year, the increase reflects a variety of factors facing Americans searching for a home.
A nationwide shortage of affordable housing, coupled with lower mortgage rates, has stoked prices in cities from the coasts to the heartland. At the same time, student loans and other debts make it harder for Americans to save tens of thousands of dollars for a down payment, while tight lending standards can make getting a bank loan difficult for borrowers with less-than-stellar credit scores.
“Housing affordability is so difficult today, especially when coupled with rising rents and student loan debt, that they’re finding different ways to enter home ownership,” said Jessica Lautz, vice president of demographics and behavioral insights at the Realtors group in Washington.
The characteristics of home buyers have changed in recent years. The share of married couples has declined as unmarried couples and those purchasing as roommates has risen.
As buyers’ ages have increased, so have their incomes. The typical income of purchasers rose to $93,200 in 2018 as a lack of affordable options squeezed lower-income potential buyers out of the market.
Higher prices of homes have also changed how first-time buyers are entering the market. Nearly a third of first-time home buyers said they used a gift from a relative or friend to fund their down payment.
Builders have cited a shortage of affordable lots and labor as reasons to build fewer or bigger single-family homes, leaving America’s growing population to consider more of the existing housing stock. New homes as a proportion of all purchases fell to a low of 13% in records dating back to 1981.
The report reflects survey responses from 5,870 people who purchased a primary residence in the period between July 2018 and June 2019.
One of the biggest hurdles land lease communities face is a lack of awareness Canadians may have about this housing option. Many do not understand how the arrangement works. Surprisingly, two in three Canadians are unaware that land lease is even a home-ownership alternative. Here are some frequently asked questions about land lease home-ownership, and answers that correct the myths.
1. What happens when your lease is up?
Some people mistakenly think that their lease could change dramatically, or worse, they could lose their home. At end-of-lease term, a homeowner can either renew their lease or continue on a monthly basis. If someone sells, it just starts a new lease. “We must follow the provisions set by the Residential Housing Act and Planning Act, which means increases and changes to the lease are governed by law,” says Robert Voigt, director of planning for Parkbridge. “Leases are typically 21 years in length, and depending on the project, we have mechanisms for creating longer-term leases. Our main focus is to work collaboratively with residents within the legal framework.”
2. Does the value of your home rise like freehold homes?
Homes in land lease communities go up in price the same way as other homes on the market. “In our experience, if you have a well-maintained home in Parkbridge, it will appreciate in value the same as freehold homes do in the same market,” says Voigt. “Homeowners sell their homes using real estate agents with support from the Parkbridge property team. As an example, our records show that for homeowners in the Antrim Glen community near Hamilton, well-maintained homes have experienced an average seven-per-cent increase in value per year over the past decade.”
3. Are people in land lease homes typically lower income?
“While perception may be that residents are lower income, in reality, they have simply chosen to leverage the equity in their home for the lifestyle they want to live or enter the housing market,” explains Voigt. They’re just looking for ways to make their money go the furthest and get more living space for less.
4. Does the 21-year lease make it difficult to get a mortgage? Since most mortgages have a 25- or 30-year amortization, the 21-year lease for most land lease homes could require adjustments. “You may have to have a shorter amortization period based on your lease, which will mean higher monthly payments, but your home would be paid off more quickly,” says Voigt. “And it could still be less money than you’d spend monthly for a freehold home of equal value.” Parkbridge is working with financial institutions to support financing options.
5. Is it difficult to sell a land-lease home?
Not at all, says Voigt. “Homes go up at the same rate as freehold homes in the same area. If the home is well looked after, you should have no trouble selling it at a similar rate of return as any other house in your community.”
6. Is the community closed off from the larger neighbourhood?
These are not gated communities. “They are built to the same quality and look like other houses, streets and park areas in the broader local community,” explains Voigt.
Whether through ads or our own experiences dealing with banks and other lenders, Canadians are frequently reminded of the power of a single number, a credit score, in determining their financial options.
That slightly mysterious number can determine whether you’re able to secure a loan and how much extra it will cost to pay it back.
It can be the difference between having a credit card with a manageable interest rate or one that keeps you drowning in debt.
Not surprisingly, many Canadians want to know their score, and there are several web-based services that offer to provide it.
But a Marketplace investigation has found that the same consumer is likely to get significantly different credit scores from different websites — and chances are none of those scores actually matches the one lenders consult when deciding your financial fate.
‘That’s so strange’
We had three Canadians check their credit scores using four different services: Credit Karma and Borrowell, which are both free; and Equifax and TransUnion, which charge about $20 a month for credit monitoring, a plan that includes access to your credit score.
One of the participants was Raman Agarwal, a 58-year-old small business owner from Ottawa, who says he pays his bills on time and has little debt.
Canadian company Borrowell’s site said he had a “below average” credit score of 637. On Credit Karma, his score of 762 was labelled “very good.”
As for the paid sites, Equifax provided a “good” score of 684, while TransUnion said his 686 score was “poor.”
Agarwal was surprised by the inconsistent results.
“That’s so strange, because the scoring should be based on the same principles,” he said. “I don’t know why there’s a confusion like that.”
The other two participants also each received four different scores from the four different services. The largest gap between two scores for the same participant was 125 points.
The free websites, Borrowell and Credit Karma, purchase the scores they provide to consumers from Equifax and TransUnion, respectively, yet all four companies share a different score with a different proprietary name.
Credit scores are calculated based on many factors, including payment history; credit utilization, which is how much of a loan you owe versus how much you have available to you; money owing; how long you’ve been borrowing; and the types of credit you have. But these factors can be weighted differently depending on the credit bureau or lender, resulting in different scores.
So, which credit score is giving Agarwal the clearest picture of his credit standing?
Marketplace learned that none of the scores the four websites provide is necessarily the same as the one lenders are most likely to use when determining Agarwal’s creditworthiness.
We spoke with multiple lenders in the financial, automotive and mortgage sectors, who all said they would not accept any of the scores our participants received from the four websites.
“So, we don’t know what these scores represent,” said Vince Gaetano, principal broker at MonsterMortgage.ca. “They’re not necessarily reliable from my perspective.”
All consumer credit score platforms have small fine-print messages on their sites explaining that lenders might consult a different score from the one provided.
‘Soft’ vs. ‘hard’ credit check
The score that most Canadian lenders use is called a FICO score, previously known as the Beacon score. FICO, which is a U.S. company, sells its score to both Equifax and TransUnion. FICO says 90 per cent of Canadian lenders use it, including major banks.
But Canadian consumers cannot access their FICO score on their own.
To find out his FICO score, Agarwal had to agree to what’s known as a “hard” credit check. That’s where a business runs a credit check as though a customer is applying for a loan.
Lenders are contractually obligated not to share a copy of the report FICO provides with the customer. They can only discuss the information and provide insight.
A hard check comes with risk. Unlike the “soft” check Agarwal agreed to from the four websites, a hard check could negatively impact his credit score.
As Credit Karma’s website explains, “Multiple hard inquiries in a short period could lead lenders and credit card issuers to consider you a higher-risk customer, as it suggests you may be short on cash or getting ready to rack up a lot of debt.”
Mortgage broker Vince Gaetano offered to do a hard credit check for Agarwal, as if he was applying for a loan, so he could learn his FICO score.
Agarwal took him up on the offer and was stunned to learn his FICO score was 829 — nearly 200 points higher than the lowest score he received online.
“Oh my god!” Agarwal said when he heard the news. “I am really happy, but totally surprised.”
Doug Hoyes, co-founder of Hoyes, Michalos and Associates Inc., one of the largest personal insolvency firms in Canada, was also surprised by the disparity between Agarwal’s FICO score and the other scores he’d received.
“How can you be poor somewhere and fantastic somewhere else?”
Marketplace asked all four credit score companies why Agarwal’s FICO score was so different from the ones provided on their sites.
No one could provide a detailed answer. Equifax and TransUnion did say their scores are used by lenders, but they wouldn’t name any, citing proprietary reasons.
Credit Karma declined to comment. However, on its customer service website, it says the credit score it provides to consumers is a “widely used scoring model by lenders.”
‘A complicated system’
The free services, Borrowell and Credit Karma, make money by arranging loan and credit card offers for customers who visit their sites. Borrowell told Marketplace the credit score it provides is used by the company itself to offer loans directly from Borrowell. The company could not confirm whether any of its lending partners also use the score.
“So there are many different types of credit scores in Canada … and they’re calculated very differently,” said Andrew Graham, CEO of Borrowell. “It’s a complicated system, and we’re the first to say that it’s frustrating for consumers. We’re trying to help add transparency to it and help consumers navigate it.”
From Agarwal’s perspective, the credit companies are simply using the scoring system as a marketing tool.
“There should be one score,” he said. “If they are running an algorithm, there should be one score, no matter what you do, how you do it, should not change that score.”
The FICO score is also the most popular score in the U.S. Unlike in Canada, Americans can access their score easily by purchasing it on FICO’s website, or through FICO’s Open Access Program, without any risk of it impacting their credit rating.
FICO told Marketplace it would like to bring the Open Access Program to Canada, but it’s up to Canadian lenders.
“We are open to working with any lender and their credit bureau partner of choice to enable FICO Score access to the lender’s customers,” FICO said in an email.
Hoyes, the insolvency expert, suggests instead of focusing on your credit score, a better approach to monitoring your financial status would be to shift attention to your credit report and ensuring its accuracy.
All four websites Marketplace looked at provide credit reports to consumers.
A credit report is the file that describes your financial situation. It lists bank accounts, credit cards, inquiries from lenders who have requested your report, bankruptcies, student loans, mortgages, whether you pay your credit card bill on time, and other debt.
Hoyes said consumers are trying too hard to have the perfect credit score. The fact is, some activities that could boost a credit score, such as getting a new credit card or taking on a loan, aren’t necessarily the best financial decisions.
“My advice is to focus on what is better for your financial health, not what is best for the lender’s financial health.”
He said paying off debt and increasing savings is a better idea than focusing solely on the factors that can increase your credit score.
You focusing on this one metric, that isn’t the same thing the lender is using anyways, is really pointless, and I think it leads to bad decisions.– Doug Hoyes, Hoyes, Michalos and Associates Inc.
He points to billionaire investor Warren Buffett, the third richest person in the world, as an example.
“Would you rather lend to Warren Buffett, who’s got … cash in the bank but has a lousy credit score because he’s never borrowed and hasn’t built up any history, or some guy who has five credit cards and he constantly … moves the balance from one to the other and keeps his utilization under 20 per cent?”
The real estate, mortgage and auto lenders Marketplace spoke with said they look at more than just your credit score before making a lending decision. They also consider things like your income, your history with their company, the size of a downpayment, and other factors not reflected in your score.
For Hoyes, those factors are much more important than a three-digit number.
“You focusing on this one metric, that isn’t the same thing the lender is using anyways, is really pointless, and I think it leads to bad decisions.”
The good news, according to Borrowell CEO Andrew Graham, is that if you’re doing things like paying your bills on time and not maxing out your credit cards, you will see improvement in whatever credit score you track.
Mortgage Pre-Qualification vs Mortgage Pre-Approval vs Mortgage Approval
What are the differences between each stage of the mortgage process?
By Kara KuryllowiczSeptember 18, 2019
In early 2019, several Canadian banks launched digital apps that offer home buyers easy, hassle-free mortgage pre-qualification in 60 seconds or less. Sounds great, right? The problem is many consumers believe a mortgage pre-qualification is a lot like a mortgage pre-approval or mortgage approval. As a result, prospective home buyers and sellers are left expecting the financial institution associated with the app to lend them hundreds of thousands of dollars, despite the fact they simply keyed their names, addresses, contact information and gross income into various online fields.
Getting Mortgage Approval
“Every week, as many as 40% of my new clients come to me because they’ve just bought a home and discovered that mortgage pre-qualification is meaningless and that they do not have the financing required for the purchase,” says Tracy Valko, owner and principal broker of Dominion Lending Centres Valko Financial Ltd., and a director at Mortgage Professionals of Canada.
Let’s get real: A mortgage pre-qualification gives the financial institution warm leads (names, contact information, purchasing timeline) and tells consumers how much money a financial institution might loan them. There is no way any financial institution will actually lend consumers hundreds of thousands of dollars just because they spent 45 seconds with the company’s mortgage pre-qualification tool.
Lenders do everything they can to ensure the borrower will repay the loan. A mortgage pre-approval looks at how an individual manages his/her money to determine that person’s creditworthiness. The next step is the mortgage approval which assesses that specific person’s ability to repay a loan of a certain amount at a set interest rate on a particular home.
“Always get a mortgage pre-approval before you start searching for a home and have a mortgage approval in place before you waive your financing condition on the offer – back out of a deal after it’s firm and you could be sued by the seller.” says Valko. “A mortgage pre-approval will tell consumers and their realtors what they can realistically afford to buy.”
Let’s further define the terms consumers need to fully understand before they commit to a real estate agent and start shopping for a home.
What is Mortgage Pre-Qualification?
It takes less than 60 seconds because it requests only the most basic information, whether it’s submitted to an online app or a financial representative. Mortgage pre-qualification never requires supporting documentation that proves the consumer actually has a full-time job, is paid a weekly salary and has earned a good credit score. At best, a mortgage pre-qualification can provide a very loose, broad estimate of a consumer’s home-buying power based on the consumer’s unverified data. Because the consumer typically inputs the information into an online tool, it takes just seconds for the software, not an experienced, professional underwriter, to pre-qualify a consumer for a mortgage.
If consumers notice and bother to read the apps’ fine print or legal disclaimers, they’ll likely see a statement like this one: “This is not a mortgage approval or pre-approval. You must submit a separate application for a mortgage approval or a mortgage pre-approval and a full credit report.”
In other words, they’re not actually promising you a dime, let alone enough the hundreds of thousands of dollars you’ll likely need to buy a home anywhere in Canada.
What is Mortgage Pre-Approval?
In general, it will take two to five business days to investigate an individual’s financial circumstances and the risk that a person might represent to the lender. The underwriter will need the basics, such as name, address and contact information in addition to detailed data on their income, assets (e.g. stocks, RRSPs, property, vehicles, savings), liabilities (e.g. debt, loans, mortgages) and their credit rating and report as well as the available down payment. Supporting documentation may be required to prove any or all of the above.
Unlike a pre-qualifying app, lenders’ underwriters may request a letter of employment, a Notice of Assessment, pay stubs, or T4 for the two most recent years as well as documentation indicating the down payment is available. The lender or mortgage broker will also require the consumers’ permission to pull credit scores and credit reports from organizations such as Equifax.
Your credit score, typically 300 to 800+, is based on feedback from lenders who confirm that you do or don’t pay your bills in full and on time every month. The credit report includes your name, address, social insurance number and date of birth as well as your credit history, for example, your debts and assets and whether you’ve ever been sent to collection or declared bankruptcy.
“Lenders want to know how well or how poorly you manage your money and will be looking for patterns of insufficient, late and missed payments,” says Valko.
A mortgage pre-approval is generally valid for up to 120 days at a specific interest rate unless the consumers’ circumstances change, for example, employment status, down payment, or income. For example, a consumer may not realize it, but their probationary status with a new employer, whether it’s three, six or 12 months, does matter to lenders. Likewise, a move from a salaried to a contract or self-employed position will also be seen as a higher risk.
“I’ve had clients believe they were full time, salaried employees, then discover they’re still on probation when we start underwriting,” says Valko. “An electrician client left his full-time salaried position to work independently and didn’t realize it negated his mortgage pre-approval, which was based on the guaranteed weekly paycheck versus the sporadic earnings associated with self-employment.”
What is Mortgage Approval?
This is the big one. Once consumers have identified the homes they want to purchase, they need mortgage approval to buy that specific home. Lenders assess the age and condition of the homes and consider comparable homes to confirm the price being paid is fair and market value. The mortgage approval is valid until the closing date unless the buyers’ circumstances change.
“Only the mortgage approval accounts for property specifics, such as taxes or condo fees, so give your underwriter/lender time to ensure the numbers previously used are still valid and that the property is acceptable to the lender,” says Valko.
If you’re serious about the home search and purchase process, skip the mortgage pre-qualification apps. Instead, take the time and make the effort to get mortgage pre-approval, then find the home suits you best, then get mortgage approval to close the deal. Then? Enjoy your new keys.
Source: REW.ca – Kara KuryllowiczSeptember 18, 2019
Brokers must be willing to take on the role of educator when preparing the next generation of homebuyers to apply for a mortgage. A recent survey by Refresh Financial found that only 41% of Canadians know their credit score, and 20% are too scared to even find out their score.
Millennials (those born between the early ’80s and mid-’90s) and generation z (those born from the early ’90s to mid-2000s) are particularly anxious about their credit history and uninformed about how to build good credit. Thirty-nine per cent of millennial and gen z respondents said they were more stressed about their credit score than they were a year ago, and 25% admitted they’re not sure what makes up their credit score. In addition, a third of 18- to 34-year-olds said they believe their credit score is holding them back from making important life choices such as purchasing a home.
The FTHBI is here. Learn how it can save you money on your first home purchase.
By Kara KuryllowiczSeptember 5, 2019
For the first time in years, Canada’s first-time buyers have a reason to feel optimistic. September 2, 2019, marked the launch of the Canadian Mortgage and Housing Corporation’s all-new First-Time Home Buyers Incentive (FTHBI), a financial incentive designed to help middle-class Canadians buy their first property.
The Perfect Time for the FTHBI
The timing for the FTHBI couldn’t be better. Beyond the First-Time Home Buyer Incentive itself, there are three key real estate factors that actually favour all buyers as we head into 2019, not just first-timers. Fixed mortgage rates remain at an all-time low. Most markets across the country are balanced or even a little soft. And maybe best of all (and as discussed in this recent Fall Trends article) buyers typically don’t buy homes in the lead-up to a federal election, giving first-time buyers some added leverage as markets slow before October 21.
“The First Time Home Buyer Incentive will reduce the monthly mortgage for your first home by up to $286,” says Jean-Yves Duclos, Minister of Families, Children and Social Development and Minister Responsible for Canada Mortgage and Housing Corporation. “This will help up to 100,000 families across Canada to buy their first home.”
How Does the FTHBI Work?
In effect, the FTHBI reduces their monthly mortgage payment without increasing the amount they need to save for the down payment. First-time buyers can finance a portion of their purchase through a form of shared equity mortgage with the Government of Canada. Home buyers will still have to pass the B-20 stress test and have mortgage pre-approval and mortgage approval.
“No doubt, some first-time buyers will benefit, and we’ll have to wait and see just how many families it affects,” says Paul Taylor, President and CEO, Mortgage Professionals Canada, Toronto.
Who Qualifies for the FTHBI
A combined household income of less than $120,000
The insured mortgage and incentive cannot be more than four times the participants’ qualified annual household income
Incentive is 5% on a resale or existing home
Incentive can be either 5% or 10% on a newly constructed home
No payments are due on the incentive until the home is sold or at 25 years
The incentive can be repaid in full at any time without penalties (repayment must be in a lump sum of the current % valuation of the home.)
The incentive must be repaid after 25 years, or when the property is sold, whichever comes first
At 25 years, or resale, the homeowner repays 5 or 10% of the home’s value at that time rather than the amount received from CMHC (if the home lost value, the owner and CMHC share the loss and conversely, both parties benefit if the home increased in value)
For years now, unaffordable, astronomical properties have been getting all of the attention. In reality, those homes co-exist with some reasonably-priced, affordable homes in the very same cities, including Toronto, Montreal and Vancouver. Of course, those homes may be smaller apartments, older homes and/or in less desirable neighbourhoods, but they’re out there and may be perfectly suited to first-time buyers and their families.
The Financial Impact of the FTHBI
“CMBA is in favor of the FTHBI because by sharing equity with the government, first-time home buyers in specific segments are able to reduce the cash required for their weekly or monthly payments,” says Vancouver-based Rob Regan-Pollock, senior mortgage broker, Invis Inc., and co-chair of the Canadian Mortgage Brokers Association. “It’s another tool in the quiver for mortgage brokers and agents that are helping first-time home buyers earning less than $120,000 annually get into markets where they can purchase a home for under $500,000.”
Let’s look at the financial impact the FTHBI would have on a family buying a $200,000 and a $500,000 home. With a 5% or $10,000 ($20,000 total with FTHBI) down payment on a $200,000 home, the buyers will save $114 a month or $1,372 a year. If they put $25,000 down ($50,000 with FTHBI) on a $500,000 home, they’ll reduce their monthly payments by $286 a month or $3,430 annually.
Now that you know exactly how the FTHBI could help you achieve your dream of home ownership, you can start planning your future to take advantage of the upcoming federal election, the staggeringly low fixed rate interest and softer markets in various regions of Canada.
Source: REW.ca – By Kara KuryllowiczSeptember 5, 2019
I recently had clients who were refinancing their mortgage completely reject a very attractive offering from one of the big chartered banks.
Their reasoning? All of this bank’s mortgages are registered as collateral charges, and all of their online research into this topic spooked them completely.
Over the years, dozens of articles have been written on the topic of collateral mortgages, often tending to a negative bias. But as Rob McLister once said, and I agree with him, “collateral mortgages shouldn’t be portrayed as a supreme evil of the mortgage universe, when in fact they offer advantages to some.”
One can present persuasive arguments in favour or against collateral mortgages. But this client’s response compelled me to revisit the topic with fresh eyes and offer an updated perspective.
Mortgage loans are typically registered as a standard-charge mortgage or a collateral charge mortgage. So, let’s explore both types…
What Is a Standard Charge Mortgage?
A standard charge only secures the mortgage loan that is detailed in the document. It does not secure any other loan products you may have with your lender. The charge is registered for the actual amount of your mortgage.
If you want to borrow more money in the future, you’ll need to apply and re-qualify for additional money and register a new charge. There may then be costs, such as legal, administrative, discharge and registration fees.
If you want to switch your mortgage loan to a different lender at the end of your term, you may be able to do so by simply assigning your mortgage to a new lender at no cost to you.
Monoline lenders such as MCAP, First National Financial, CMLS and others default to standard-charge mortgages, unless offering a product such as MCAP Fusion (which has a re-advanceable HELOC component)
What Is a Collateral Charge Mortgage?
A collateral charge is basically a method of securing a mortgage or loan against your property. As explained here previously, “unlike a standard mortgage, a collateral charge is re-advanceable. That means the lender can lend you more money after closing without you needing to refinance and pay a lawyer.”
You can keep re-using this charge, and a new charge will only be required if you want to borrow more than the amount that was originally registered.
Most chartered banks offer both types of mortgages. A couple (TD Bank and Tangerine) only register their mortgages as collateral charges.
Most chartered banks also offer a type of combination home financing, which consists of a mortgage component and a line of credit component. (Actually there could be several components.) For example, the Scotia Total Equity Plan (STEP) mortgage.
If you have a Home Equity Line of Credit, you have a collateral charge mortgage.
A collateral charge can be used to secure multiple loans with your lender. This means credit cards, car loans, overdraft protection and personal lines of credit could also be included.
Arguments people make in favour of collateral charge mortgages
1) If you wish to borrow more money during the term of your mortgage, you can tap into your home equity without the expense of a mortgage refinance. You can save legal fees. (This is assuming of course, your personal credit and income are sufficient to qualify for more money.)
2) If you have a mortgage and a Home Equity Line of Credit (HELOC), it may be structured such that every time you make a mortgage payment, the amount you pay towards your principal balance is added to your HELOC limit. Large available credit, used wisely, is usually a good thing.
3) Collateral charges are often best suited to strong borrowers with lots of equity. They might readily access contingency funds at no cost down the road. This could be by increasing their mortgage loan amount or adding a home equity line of credit to the mix.
Ironically, our same clients who objected strenuously to the collateral charge actually fit this profile. After refinancing their current mortgage, they will still have $500,000 in equity left in their home. Who knows, down the road they may want a Home Equity Line of Credit or to increase their mortgage. If they register their mortgage today for more than its face value, they could avoid all refinancing costs at that time.
Arguments people make against collateral charge mortgages
1) Some people trash the collateral charge because there is often a cost to switching lenders at renewal. I think that’s overstated and no longer factual.
It’s so competitive out there, if you’re still considered strong borrowers, chances are someone is willing to eat the costs to move you.
Also, some lenders are now offering no-cost switch programs for collateral charge mortgages. That was not the case a few years ago, and the list of such lenders is growing.
And keep in mind the moment you wish to change any material aspect of your mortgage (for example, the amortization period or the loan amount), it is no longer considered a switch, but rather a refinance—so legal and appraisal costs are in play anyway.
2) Others argue you could be offered less competitive interest rates from your current lender at renewal than you will be from a new lender. Again, if you are a strong borrower, someone is going to offer you low rates, and your current lender, under pressure, will often match or beat competitive offers. For that reason I view this as less of a concern.
3) Some lenders register a collateral charge for more than the loan amount—to as much as 125% of the appraised value of your home. Some just do this by default and others may ask you to choose the dollar amount to be registered. The rationale being you will retain the benefits of your collateral charge, even as your home increases in value.
This is where you might pause to reflect.
If, down the road, your personal finances take a U-turn, or you no longer qualify for additional financing with your current lender, then you might find a high collateral charge impairs your ability to seek secondary financing elsewhere.
For example, we are presently working with two Ontario-based clients who need a private second mortgage, but the collateral charge registered against their home is roughly the same as the value of their home. Even if their current mortgage balance is very low, unless a private mortgage lender’s lawyer can cap the collateral charge at that lower balance, these homeowners will find alternate lender sources are unlikely to lend new money.
4) A collateral charge mortgage is not only a charge on your home, but can include other credit you have with that same lender. These lenders have a “right of offset,” meaning they can collect from the equity in your home on any financial products you have (or co-signed for) that are now in default.
There is also the potential that when asked to pay out the mortgage at the time you leave your collateral charge mortgage lender, they can also add in overdraft, credit card and line of credit balances. Resulting in less funds to you than you expected and may need.
That said, it is unclear how often this happens, if ever, to borrowers with spotless records.
Industry insider Dustan Woodhouse points out, “(Even) co-signing a credit card or car loan for somebody (who then stops making payments) carries a risk of a foreclosure action against your property as a remedy for what was perceived to be an unrelated debt.”
Collateral charge mortgages are here to stay. More lenders are adopting them and you should have a good understanding of what type of mortgage you are being offered. Most of the time, it probably will not matter much to you how your mortgage is registered.
For all the arguments about extra costs if you wish leave your lender at renewal, as long as your borrower profile is strong you should be able to avoid any incremental out-of-pocket costs.
But if you want to take a conservative approach, consider the following:
Choose a standard charge mortgage if it really bothers you, and if you have a choice of lenders.
Or, when given the option, just register the collateral charge mortgage for the actual face amount of the mortgage, rather than a much larger amount.
In closing, Woodhouse has some sage advice: “It is perhaps a key consideration that one should in fact not have all their banking, credit cards and small loans with the same institution as their mortgage…mortgage with Lender A, consumer debt/trade lines with Lender B, and perhaps any business accounts with Lender C.”