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Friday, April 13, 2012


Gary Marr of the National Post has written a great article regarding those deal mortgages banks want to offer you. It’s almost a chicken-and-egg argument, deciding whether the government comes first in the crackdown on consumer borrowing or if the banks should be responsible for reining in Canadian debt. This month, Finance Minister Jim Flaherty sounded like he’d had enough of banks posturing for the federal government to get tougher on borrowers and called on financial institutions to clamp down on their own customers. “I’ve tightened up the mortgage insurance market three times … I really don’t want to do it again,” he told reporters while commenting on the condominium sector. While some bank chief executives have put it on themselves to tighten their own lending rules, others continue to look to Ottawa to take the lead. In the interim, all you have to do is walk into a branch, grab some pamphlets and you will see an array of offers that could get you into even more debt trouble. Related Canadians expect banks to set debt limits, survey shows Why you need to pay off your debt NOW One of my favourites is the cash-back mortgage. It is offered to a varying degree by most of the major banks, so there is no point in picking on any one institution. Here’s the offer: Take out a mortgage for more than five years and get 5% of the value of the mortgage up front to a maximum of $25,000. In other words, get a $500,000 loan and immediately get $25,000 back. “It’s great for first-time buyers,” we’re told. Really? If the loan is at the posted rate of 5.44%, which it usually is for these types of mortgages, you could easily land into more debt trouble long term. Another deal tries to lure me over to a new bank with an offer of 2% cash up front, or up to $4,000 on $200,000 if I switch to the financial institution. But what about the costs to break my existing mortgage, and is there really any point in switching products to get that cash right away if I’m going to end up with a higher rate and a less-flexible mortgage? “Somebody is going to pay for it,” says Kelvin Mangaroo, president of, about the cost of the promises. “Sometimes there is more fine print than the actual offer.” “Somebody is going to pay for it. Sometimes there is more fine print than the actual offer” There are other deals out there. One mortgage will offer you travel points, another will let you take “payment holidays,” but the details are scarce on both as to whether they’ll cost you more and ultimately make it even harder to pay down your debt. And let’s not forget the home-equity line of credit. You finally pay off your mortgage and there’s the bank ready to offer you more debt. “You tap into your home equity,” reads a headline from one bank about solving some issues like a home renovation or your child’s education. It sounds so simple. Advertisement Jeffrey Schwartz, executive director of Consolidated Credit Counseling Services of Canada Inc., says the banks and government will continue to battle over the issue of how to control debt levels, but the consumer has to take some responsibility. “These are all fantastic marketing tools,” says Mr. Schwartz, about some of the offers available to consumers. “Any product can be dangerous if people are living beyond their means.” Mr. Schwartz wonders whether enough has been done to change the behaviour of consumers and get them to pay down debt. Based on a survey from PwC, consumers seem to want to be babied. The firm found 82% of Canadians want banks to help them manage their debt problems. Scott Hannah, president and chief executive of the Vancouver-based Credit Counselling Society, says consumers have to have their eyes a little more open. He sees the worst of the worst debt offenders, like people who have racked up bills on their credit cards so they could claim travel rewards and are completely oblivious to their massive debt. So who is responsible for reining these people in? Is it the banks? Is it the government? “It’s the consumer,” says Mr. Hannah, about where the ultimate responsibility for handling debt lies. He adds that competition among financial institutions has created more financial products but also produced less customer loyalty, putting more onus on the consumer to understand what they are buying. “Consumers look at the bells and whistles. They also just go with the company that will help them and they don’t listen as to why they are getting the money,” Mr. Hannah says. “Think about it. Why would anybody use a payday loan when they know the annualized rate of interest is in excess of 600%?” Good question. The bigger one seems to be whether these people need to be protected from themselves. Posted in: Refinancing Tags: Consolidated Credit Counseling Services of Canada Inc., Credit Counselling Society, household debt, mortgage, Garry Marr

Tuesday, April 3, 2012


As the deadline for banks to disclose their penalty calculations draws closer, this topic of penalties will be more prevalent. As clients become more aware, will it be a new area of competition forcing lenders to change standard charge terms and all play on the same level field? Breaking your mortgage: Understanding the rules You can pay a high price to refinance a mortgage before maturity. Lenders will soon have to give more information on what to expect. By Ellen Roseman Mortgage rates are falling. You want to break your closed mortgage and get a new five-year loan at 2.99 per cent. Hold on. Take a deep breath. Talk to your lender first. Find out how much you will have to pay to get out of your mortgage early. The penalty could wipe out all your profit on the deal. Mortgage penalties come as a big surprise to borrowers who aren’t prepared for them. Banks are often unprepared as well, since the information is buried in the fine print of a mortgage contract. As a result, bank employees don’t give accurate quotes to customers who want to leave a closed mortgage before the term expires. Vanessa had four years left on a $300,000 mortgage when she sold her home last year. She went with another bank to get a better rate, rather than porting the existing mortgage to her new property. “When I called to find what the penalty would be to end my contract,” she says, “I was told it would be three months’ interest (equivalent to $2,600). Nothing was said about the IRD.” Most closed fixed-rate mortgages have a prepayment penalty that is the higher of three months’ interest or the IRD or interest rate differential. Most variable-rate mortgages do not have IRD penalties. Only after the sale did Vanessa learn she’d paid an IRD penalty of $15,000. It was based on the bank’s posted rate when she took out the mortgage — and not the discounted rate she had actually received. I’m not against the IRD. I believe lenders should be compensated when borrowers make an early exit at a time of falling rates. However, I’m against the inconsistent way that lenders calculate the IRD. They can plug in their own numbers to decide how much money is at stake when a closed mortgage is opened up. Luckily, banks will have to give more disclosure under a new federal code of conduct that comes into effect by November of this year. They’ll have to tell you how prepayment charges are calculated and how you can pay off a mortgage more quickly without incurring penalties. The IRD is based on (1) the amount you are prepaying and (2) An interest rate that equals the difference between your original mortgage rate and the rate that the lender can charge today when relending the funds for the remaining term of the mortgage. Robert McLister, a mortgage planner, has a mortgage penalty calculator at his website that gives you a rough estimate of what you may be charged. “Some lenders don’t use the discount you received in your calculation, which decreases the IRD and can lower your penalty considerably,” he says. “Some lenders round up your remaining months to the next longest term. Some round down.” Suppose you have 18 months left on your mortgage term. Lenders can use the posted rate of their two-year term as the comparison rate. But they can also use the one-year posted rate. Lenders may not advise you to use your existing prepayment privileges. Most mortgages let you prepay 10 to 20 per cent of the balance each year without incurring a penalty. By making a prepayment, you can reduce the outstanding balance subject to the IRD when you’re refinancing. Vanessa wasn’t offered a chance to make a lump-sum payment before discharging her mortgage. She was reimbursed for $2,500 of the penalty when she appealed to the bank’s ombudsman. Here’s another case of a borrower not being given the right information. Sarah Rigley MacDonald decided to break her existing mortgage, which had a 10-year term, when buying a new property. Her mortgage broker said her prepayment penalty would be $10,000 — but didn’t say the penalty would go down to $1,600 after the five-year point of her 10-year term. The federal Interest Act prohibits IRD penalties on terms over five years, after five years have elapsed. In such cases, a maximum three months’ interest penalty may apply. “Now we’ll sit tight until our five-year anniversary, just 16 months away, and look at our options,” she said. (The Interest Act information, which she found at my blog, saved her thousands of dollars.) In a previous federal budget, Finance Minister Jim Flaherty promised to give more clarity about mortgage penalties. He also suggested the calculations would be standardized. Standardization was not part of the reform package that Ted Menzies, minister of state for finance, unveiled last month. Instead, the focus was on providing more information to borrowers. “Disclosure must be made in language, and presented in a manner, that is clear, simple and not misleading,” the code of conduct specifies. Federally regulated financial institutions must start to address the guidelines by May 7. They must be in full compliance by Nov. 5 of this year. Lenders will provide prepayment advice on annual mortgage statements. They’ll supply website calculators to help you estimate the mortgage penalty you may be charged. They’ll set up toll-free lines to reach staff members who can give you a written statement of prepayment charges if you ask for it. Finally, lenders won’t take steps to pay out your mortgage until you assent to the penalty that will be charged. I still wish there were guidelines on how penalties are calculated. But I know the Harper government believes in letting market forces prevail and giving consumers an informed choice. Now it’s up to borrowers to manage their prepayments in a way that reduces the penalty shocks that can arise when refinancing. (factbox) Tips on reducing the mortgage penalty sting: Use your line of credit to pay down your mortgage before discharge, thus lowering the balance on which the penalty is calculated. Ask the lender to apply your unused prepayment privileges to reducing the penalty. Transfer (or port) the mortgage to a new property if you’re moving. Ask your lender about “blend and extend,” a strategy in which you add more money without breaking the mortgage and paying a penalty.