That’s the takeaway from a national survey released this week by Rates.ca, which found half of Canadians aren’t aware of the mortgage options available to them.
Not only that, but Canadians are lacking in some other basic mortgage trivia, with an astounding 9 out of 10 respondents not knowing that mortgage interest is charged semi-annually:
28% think interest is compounded monthly;
17% think it’s bi-weekly;
17% think it’s annually;
28% just have no idea.
Should we be concerned?
Dustan Woodhouse, President of Mortgage Architects, and a former active broker who has written multiple educational mortgage books, thinks so.
“Sounds about right. We know about what we pay attention to, i.e., The Kardashians,” he wrote to CMT. “The material concern in this is how easy it makes it for the government to over-regulate the industry, with clients blaming the banks—rather than the appropriate parties. This disconnect is deeply concerning.”
Perhaps even more concerning is the fact that only four out of 10 Canadians (39%) know they can avoid paying default insurance on their mortgage if they make a down payment of 20% or more.
With default insurance running anywhere from 4–5.85% of the mortgage value, we’re talking some serious dinero being spent—potentially unknowingly and unnecessarily.
So, what can be done? Woodhouse admits there are no simple answers, but says making mortgages more tangible to borrowers would be a good place to start.
“The root issue is making mortgages interesting and relevant to clients more often than when they need one,” he said. “It needs to be all about housing, not simply mortgages.”
Paul Taylor, President and CEO of Mortgage Professionals Canada, agrees.
“Unless you deal in mortgages, you only talk about them, generally, once every five years,” he said. “I’m sure at the time of signing, the borrowers understood what their payment obligations were and the schedule; after that, the rest of the information provided was likely filed under ‘nice to know but not relevant enough to me to retain.’”
Making the Case for Mortgage Brokers
With a growing trend towards “do-it-yourself” online mortgage shopping, we wondered if these survey results reinforce the need for mortgage brokers in guiding uninformed borrowers about their mortgage options.
“Big time…more than ever brokers are required,” Woodhouse said.
Taylor added that the stats “clearly demonstrate the need for professional and impartial advice at the time of purchase/renewal/refinance. And while some may suggest they are comfortable purchasing online without counsel, I think we can see that is inadvisable in almost all cases.”
Taylor pointed to the UK as an example. Following the crash of 2008, he noted the country adopted several policies by 2014, including disallowing borrowers to be able to self-declare income, and requiring mortgage consumers to be provided mandatory advice on mortgage products.
“The last point, I think, would likely begin to receive international discussion/attention if online sales begin to increase too quickly given the data this survey demonstrates,” Taylor said. “Given the size of these loans, the personal liability and the potential interest-cost difference for as little as a quarter-point in interest, I expect there may be some scrutiny on consumer outcomes for these self-serve options.”
Additional Survey Tidbits
The Rates.ca survey revealed some additional interesting findings about Canadians’ knowledge gap when it comes to financial products, including:
Nearly 7 out of 10 Canadians (68%) aren’t aware that interest on credit cards is calculated daily.
30% admitted they are unlikely or somewhat unlikely to make the minimum monthly payments on their credit cards.
40% of respondents admitted to not knowing their credit score.
43% said they felt comfortable negotiating their mortgage over the internet.
And 94% believe schools should place greater emphasis on teaching financial literacy.
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
The majority of homeowners are blissfully unaware of alternative mortgages. They presume everyone is entitled to sub-3% mortgage interest rates, with no fees of any kind.
But there is a growing, significant percentage of borrowers who need a different type of mortgage financing solution. Sometimes there is no choice. That is why the alternative lending market (B-lenders) is so important to the overall health of the mortgage industry and, indeed, our economy.
Could this happen to you? Who would you turn to if your bank turned you down for a mortgage? How would you know if you are being given the straight goods, or being sold a bunch of baloney?
If your primary financial institution (bank, credit union, trust company) refuses you a mortgage, you need to source a mortgage broker who can explore alternative financing options for you—hopefully with a B-lender solution. And if that doesn’t work out, then there are numerous private mortgage lenders, too.
Most mortgage brokers are very comfortable working with A-lenders like banks, credit unions and monoline lenders, such as MCAP. And, in recent years, a growing number have expanded their businesses to provide alternative and private lending solutions. Be sure to select a professional who is experienced with these types of specialized products when you are in the market for a non-traditional mortgage.
Mortgage brokers have access to numerous alternative mortgage lenders (B-lenders) who offer excellent solutions above and beyond the traditional branch-based lenders, including:
Expanded debt-service ratios—some alternative lenders will allow GDS and TDS ratios as high as 50%, and are not constrained by 35/42 or 39/44 ratios, as traditional lenders usually are. In fact, if the loan-to-value ratio is low, they can get really creative. (For example, Haventree Bank will allow 60/60 when the LTV is under 65%)
Tolerant of damaged credit histories—they will reserve their lowest rates for those with high credit scores (720 and above, sometimes less) but, at the same time, may entertain your mortgage application with a score as low as 500 or even lower.
Receptive to forms of income that traditional lenders cannot consider, such as Air BnB income, commission income, tips and contributory income from spouses not even on title. And most are more relaxed in their approach to self-employed borrowers.
Suppose for you the door is closed to banks and all A-lenders. How did you get here? Reasons typically include one or more of the following:
Cannot pass the mortgage stress test: inability to meet maximum debt-service ratios.
Low credit scores: could be too many late payments, balances too high on credit facilities, collections and liens, or even a consumer proposal or bankruptcy.
Non-traditional income: could be commissioned or rely on tips and work in a cash-based business. May even be irregular part-time income. Or perhaps you rent out rooms in your home, or have Air BnB income, foster care income, disability income, child tax benefits, etc. Do you buy, renovate and sell houses, and the capital gains are your only income? You could even own “too many properties.” (Yes, that can be a thing!)
Self-employed: you could be a business owner with lots of expense deductions and low reported taxable income. Or maybe you have been self-employed only a short time—fewer than the two years A lenders prefer to see.
How long will it take to graduate back to A-lending?
The length of time you remain in an alternative lending product will vary based on your unique situation, but the ideal timeframe is one to two years. As such, most alternative mortgages are offered as one or two-year terms. There are some lenders who offer three and even five-year terms, but this is much rarer.
There are some borrowers who remain in this space for the long haul. It is unlikely they will ever qualify for a mortgage with an A-lender because of credit and/or income issues and that’s ok. They are grateful there is a reasonable cost alternative.
What added costs come with alternative mortgages?
Your interest rate will be a bit higher than those offered by an A-lender. These days, they mostly range from 3.99% to 5.99%. I don’t have the stats, but it feels like a large percentage of these are in the narrower range of 4.24% to 5.24%.
And the lowest rates are typically for a one-year term, with the two-year term coming in a touch higher.
Here are some sample payments to illustrate the impact of different mortgage rates. The difference is not as much as people expect.
$300,000 at 2.99% with a 30-year amortization = monthly payments of $1,260
$300,000 at 3.99% with a 30-year amortization = monthly payments of $1,425
$300,000 at 4.99% with a 30-year amortization = monthly payments of $1,600
Most of the time, your lender will charge a one-time fee of 1% of the loan amount.
With mortgages arranged with A-lenders, your mortgage broker is paid by the lender at no extra cost to you. This is less the case with alternative mortgages, mainly because the shorter the mortgage term, the less the compensation, yet the workload is at least the same and often more intense.
Therefore, when sourcing an alternative mortgage for you, your mortgage broker will often charge a brokerage fee. They should be upfront about this exact charge early on in the process. The amount varies from broker to broker and from loan to loan. Factors brokers consider are:
The complexity and level of effort they anticipate is involved to fund your mortgage.
The size of your mortgage. The smaller your mortgage, the larger the fee may seem as a percentage of the loan amount, and the larger the mortgage, potentially the smaller the fee may seem as a percentage of the loan amount.
If you are buying a property, lender and brokerage fees come from your pocket. If you are refinancing, they are deducted from the mortgage advance, if there is enough equity to do so.
All fees and costs must be disclosed properly to you according to your provincial regulator’s rules. Lender and broker fees are paid on your funding date
As with most mortgages, you can expect to pay for an appraisal, solicitor and title insurance.
Some lenders charge annual administration or “maintenance” fees of a few hundred dollars, and they typically charge a renewal fee if you accept one of their renewal offers. There is not a one-size-fits-all formula applied when calculating renewal fees.
Monthly property tax administration fees can also be charged (less than $5 per month).
Alternative lenders are a safe route
In the Q1 broker lender market share figures, alternative lenders Home Trust Company and Equitable Bank together held more than 13% of broker market share.
Alternative lenders are not to be feared or disparaged. They serve a very useful role in the mortgage industry and are a terrific midpoint between a bank-issued mortgage and a private lender solution.
When a mortgage borrower does not even fit into the world of alternative lenders, your mortgage broker will need to source a private mortgage solution for you. I will explore this option in future articles.
They say about half of all marriages end in divorce—whatever the figure, complications arise when it comes to dividing assets like homes, and determining who keeps making mortgage payments.
“It’s a commercial transaction irrelevant to marital status,” said Nathalie Boutet of Boutet Family Law & Mediation. “If one person moves out and the other stays in the house, they still have an obligation to pay the mortgage to the bank, so the sooner the separating spouses make an arrangement the better because it could impact credit rating.”
According to Statistics Canada, there were roughly 2.64 million divorced people living in Canada last year—a figure brokers may not find surprising. While divorcing couples often fight over their marital home as an asset, the gamut of considerations is in fact more onerous.
“With the stress test, it’s a lot harder,” said Nick Kyprianou, president and CEO of RiverRock Mortgage Investment Corporation. “The challenge is qualifying again with a single salary. The stress test adds a whole other level of complexity to the servicing.”
Additional complexities include a new appraisal, application, and discharge fees.
“If you have a five-year mortgage and you’re only two years into it, there will be some penalties,” said Kyprianou. “Then there’s a situation of whether or not the person will qualify as a single person for a new mortgage.”
As an equity lender, RiverRock has welcomed into the fold its fair share of borrowers whose previous institutional lender wouldn’t allow one of the spouses to come off title because they were qualified together.
If one spouse is the mortgage holder and the other is not, Boutet explains how the law would mediate.
“Let’s say she owns the house and he moves in and pays her something she would put towards the mortgage but it’s still below market rent, she’s effectively giving him a break,” she said. “Would part of his rent go towards a little equity in the house because he helps pay the mortgage? Or is he ahead of the game because he pays less than he would to rent an apartment? What they have decided in this case is that a percentage of his payment will be given back to him as compensation for helping her out with her mortgage and he will never go on title.”
Boutet recommends that cohabitating couples, one of whom being a mortgage holder, should have frank discussions at the outset about where the rent payments go.
“Sometimes the person who pays rent has a false understanding of paying the mortgage. They have a misunderstanding of what that money is going towards.”
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.”
Many Canadians might want to start their homebuying journey by contacting a realtor and scoping out open houses, but their first step should actually start in a lender’s office. The mission: To get a mortgage pre-approval. In this process, a potential mortgage lender looks at your finances to figure out the maximum amount they can lend you and what interest rates are available to you.
Lisa Okun, a Toronto-based mortgage broker, recommends getting a pre-approval right out of the gates. “You need to understand the financing piece before you start shopping. Through the process of getting a pre-approval letter, you will also get your ducks in a row,” says Okun.
Make yourself house proud.
The key benefits to getting a pre-approval are that you’ll have a ballpark figure for the maximum mortgage you can qualify for and your lender can estimate your monthly mortgage payments. You’ll also be able to lock in an interest rate for up to 120 days. This means if interest rates go up in the months following your pre-approval, most lenders will honour the lower rate that they initially qualified you for.
That said, pre-approvals have some limitations. Okun breaks it all down here.
Photo: James Bombales
Let’s start with the basics. Where do you get a pre-approval?
Mortgages are available from several types of lenders like banks, mortgage companies and credit unions. If you’re getting a traditional mortgage, you can get pre-approved by one of Canada’s major banks or through a mortgage broker or agent. A bank will only be able to offer you mortgage products under their umbrella. Mortgage brokers and agents don’t actually lend the money directly to you. Instead, they arrange the transactions by finding a lender for you and then get a commission from the sale. Unlike a bank, brokers and agents have access to dozens of mortgage products.
Not all mortgage brokers have access to the same products, so it’s important to shop around, do your research, and compare interest rates and products before you settle on ‘the one’. Even half a percentage point can make a massive difference in the size of your monthly payments and the total interest you’ll pay over the life of your mortgage.
Photo: James Bombales
Your pre-approval is not a guarantee.
With a pre-approval, your lender is approving you. With a final approval, they will be approving the property you intend to buy, along with ensuring your finances haven’t changed since you were initially given the green light.
“A lender is always going to reserve the right to approve you on a live transaction,” says Okun. “Let’s say someone’s credit score dropped in the six months that they were shopping. That could change things. Now, I may have to assess you at a lower debt servicing ratio.”
In addition to the possibility of your financial snapshot changing, the lender may not like the property you want to buy (remember, as the primary investor, it’s their house too). “If they believe they would have trouble unloading that property in the event of a default, they may not go for it,” says Okun. “For condos, many have minimum square footage requirements. If there’s an environmental issue, they may have concerns about that. Or if they decide that you overpaid for it, they might only be willing to finance the property to a certain amount. Then it’s up to the client to decide if they want to come up with the difference, or if they want to walk away from that property.”
Whether you go to a bank,mortgage broker or agent, you will need to provide documentation that shows your current assets (whether it’s a car, a cottage, stocks, etc.), your income and employment status, and what percentage of your income will go towards paying your total debts.
Proof of employment
Your lender or broker may ask you to provide a current pay stub or letter from your employer stating your title, salary, whether you’re a full-time or part-time employee, and how long you’ve been with the organization.
If you’re self-employed, your lender will need to see your taxes from the last two years (Notices of Assessment from the Canada Revenue Agency). “Ideally, it’s going to show two years of working at the same business,” says Okun. “If you had one venture and then you abandoned it and you started something new, that’s not going to show as well as if you’ve had the business for three years and your income has steadily increased.”
If you are currently employed, this is not the best time to switch up your resume. “If someone is full-time employed and they just started in a new job, I can still use a job letter and paystub,” says Okun. “But ideally, I want it to say they’re not on probation. Not to say that would kill it but it’s a bit easier if they aren’t.”
If you’ve recently switched jobs, your lender may ask to see your tax returns from previous years to confirm that you’ve had continuous employment and have stayed within a relative income bracket.
Photo: James Bombales
Proof of downpayment
Your lender will want to have an understanding of how liquid your downpayment is. “I usually don’t ask for a history of the funds when we’re discussing pre-approval, but I will ask a lot of questions about where the funds are and how accessible they are,” says Okun. This could include details on whether you’re waiting for an inheritance or gifted funds, selling stocks or other investments, or corralling funds spread across multiple accounts.
Your lender should also have a conversation with you about closing costs, moving costs and ongoing maintenance costs to ensure you’re prepared for the total cost of owning the house you’re approved for.
Before you meet with a lender to get a pre-approval, order a copy of your credit report and review it for any errors.
If you don’t have a good credit score, the mortgage lender may refuse to approve your mortgage, decide to approve it for a lower amount or at a higher interest rate, only consider your application if you have a large downpayment, or require that someone co-sign with you on the mortgage.
Your credit score will also have an impact on how much mortgage you qualify for. Lenders figure this out by looking at what percentage of your income will go towards your housing costs and total debts (including housing). If your credit score is higher, you are allocated the maximum percentage allowance, which means you get more house for your money. “If your credit score is above 680, the limit for your gross debt service ratio (GDS) is 39 percent and total debt service ratio (TDS) is 44 percent,” says Okun. More on that below.
Photo: James Bombales
Calculating your total monthly housing costs and total debt load.
Your gross debt service (GDS) ratio encompasses your monthly mortgage payments, property tax, heating and 50 percent of condo fees (if applicable). This is sometimes referred to as PITH (Principal, Interest, Taxes and Heating).
Your lender will also do a calculation called total debt service ratio (TDS) that determines what percentage of your income is going towards servicing your total debts (including the housing debts you’ll be taking on).
To calculate your TDS, add up PITH and every other debt you have including car loans, credit cards, lines of credit, student loans, etc. Then see how that stacks up against your income.
The guidelines state your GDS should be no more than 32 percent and your TDS should be no more than 40 percent. However, as mentioned above, if you have a fabulous credit score you can stretch this maximum to 39 percent for GDS and 44 percent for TDS.
You might be wondering how your lender can calculate your property taxes when there isn’t a property in question. To do this they set aside one percent of the forecasted purchase price. On a $600,000 property, this amount would work out to $6,000 a year. “It’s not going to be that much but that’s the calculation your lender will use,” says Okun. That’s why it’s a good idea to run the numbers with your lenders every time you find a property of interest so they reflect your actual affordability.
Photo: James Bombales
Levers you can pull if you aren’t pre-approved for the amount you want.
Maybe your affordability isn’t reaching as high as you’d like. In this case, there are a few levers you can pull. One option is to go with a “B lender” — an institution that offers a lower barrier to entry to qualify for their products. The only problem is that this can often be offset with higher interest rates and fees.
“There are B lenders that would have different debt servicing ratios, and will let us push those numbers a little bit further,” says Okun. “But you’re going to pay a higher interest rate and there’s going to be a one percent fee to do your deal with them.” Say your mortgage is $800,000. Prepare to be dinged at least $8,000. And it’s not just a one-time fee — if you have to renew, they’ll ding you again.
“There’s always a solution, but you have to ask yourself, ‘Is it worth it and how much is it going to cost?’” says Okun.
Another suggestion Okun shares is to add a cosigner. With an extra income, you’ll have access to a higher purchasing price. “You’re also going to be taking that person’s liabilities onto the application now, so they have to be a good applicant in terms of their debt,” she says.
You could also contribute more to your downpayment to ensure you’re putting down at least 20 percent. This will give you access to a 30-year amortization, instead of a 25-year (this is the amount of time you’re given to pay your mortgage back in full). “This stretches your loan over 30 years instead of 25 which changes the payment significantly,” says Okun. “That allows you to essentially afford more.” Another strategy is to pay off significant debts so they aren’t tipping your debt servicing ratios over the edge.
Where there’s a will (and a patient lender), there is often a way.