Collateral mortgages a hot topic

There has been a lot of interest in collateral mortgages since CBC’s Marketplace took a stab at TD Canada Trust’s product on January 27, 2013.

Up until a few years ago, most mortgages were registered as a standard charge mortgage. The major decisions were to opt for a fixed or a variable-rate mortgage and what term to select.

In 2010 some banks switched to collateral charge mortgages. Traditionally, Home Equity Lines of Credit (HELOC) and revolving credit lines are considered collateral because they allow borrowers to readvance their loan, to access extra funds, without re-negotiating. Collateral mortgage charges register loans at a certain percentage of your property, up to 125%, regardless of the initial amount borrowed. If your home is valued at $250,000 and you borrowed $200,000, a mortgage could still be registered against your home for $312,500.

With a standard charge mortgage, you agree to how much you’re borrowing, the interest rate, and the term. So if your home is valued at $250,000 and you have $50,000 down, then your mortgage is $200,000. And with a standard charge your mortgage is registered at $200,000. If you wanted a line of credit, for example, you would have to reapply.

With collateral mortgages, the bank thinks you will likely want to borrow more money in the future so it is establishing a global limit. The reasoning is that it will cost consumers less because there are no additional legal fees if the customer needs to refinance. Another reason is that it keeps customers from moving their mortgage business elsewhere.

There are pros and cons to collateral mortgages with the banks having the advantage. It’s an okay product for homeowners who want extra borrowing ability along with their mortgage but it’s not for everyone.
“Yes, homeowners can refinance throughout the term without incurring legal costs as long as they’re not asking for a total loan greater than the collateral charge at the time of renewal or refinance, said Steve Nipius, TMG’s Deal Centre Manager. “However, if a homeowner only has a 5% or 10% down payment, then it’s pointless to have a collateral charge.”

The cons may outweigh the pros. First of all, if a homeowner wants to switch to another lender, they are forced to pay legal and registration fees. More importantly, most banks won’t allow transfers because of the other loans tied to the collateral charge. This makes it harder to leave the lender since all your debt, if any, is under one agreement.

“Banks know there are costs involved to the borrower if they decide to move, so there no need to offer the best rates, “Steve said.

Also, consider this scenario: Your mortgage is in good standing but you default under a credit line with the same bank. The bank could, in most cases, start default proceedings under your mortgage, meaning you could lose the house.

However, if you carry a lot of debt, require a readvanceable loan and frequently need access to cash, a collateral mortgage will save you money in the amount of legal fees you are paying.

But, if you want to the freedom to move your business elsewhere, it’s not likely the best option. Collateral mortgages mean less choice and flexibility for consumers. Most experts advise to shop around at the end of a mortgage term because you can save up to 0.5% on your interest rate, which can translate into substantial savings.

Getting a standard or collateral charge mortgage is just another complication for many homebuyers and owners. Get advice through your mortgage professional whose focus is on mortgages and who deals with a variety of lenders to get the best mortgage for your situation.

Canadian economy to spring back into life

Once again, Canada looks to the US for signs of life and after more than three years, the U.S. is poised for economic recovery.

 As dependent as the country is on the economic health of the United States, and indeed, the rest of the world, the government’s fiscal policy and the Bank of Canada’s astute predictions, have put us in a solid position for future growth, despite the slowdown in the real estate sector and manufacturing sectors.

On a positive note, U.S. housing starts surged 12.1 per cent in December, the fastest since June 2008.  Economic recoveries are usually led by a surge in home building. Banks offer low interest rates, and consumers take advantage to buy big items like houses. Then they buy furniture and other items to put into their homes. Construction companies start to hire, which bumps up consumer demand for goods and services, then economic growth bops along at a nice pace.

The U.S. Fed chairman Ben Bernanke said that 2013 could be a “very good” year. The early signals are good ones, which is also a good sign for the Canadian economy and the jobs market and the real estate market.

In Canadian real estate, there has been a slowdown in a few areas of the country -- Vancouver is one -- with prices and sales cooling, especially in the condo market.  However, the surrounding areas of Vancouver are already showing signs of activity.

Alberta is still expected to see strong growth despite a slight slowdown in major centres. Areas outside Edmonton and Calgary are active as well.

Sakatchewan and Manitoba have not really seen a slow down, but are experiencing a lack of inventory.
Ontario is a smorgasbord of activity – slow in some areas and strong in others. Reports have Toronto’s condo sales slowing, which Finance Minister Jim Flaherty was most concerned about in Toronto as well as in Vancouver.  Mid-month figures released by the Toronto real Estate Board show a 2.5 per cent rise in home sales compared to the year-ago period.

In the Atlantic Provinces Nova Scotia is still strong.  RBC Economics predicts that Newfoundland’s economy will swing from a bottom position in the 2012 provincial growth rankings to top spot in 2013. PEI is expected to remain the same.

It will be important to watch two things. The first is employment gains. More jobs mean an increase in economic growth. Second: real estate sales trends as we move through the first quarter. The stricter guidelines imposed by the government last year had home buyers move to the sidelines. Over the next few months, we’ll be able to see if they remain there or decide to move forward towards purchasing a home.

The U.S. Fiscal Cliff and Canada

The term “fiscal cliff” has conjuredup a powerful image of the U.S. economy falling into a pit so deep that there was no hope of climbing out. The ramifications of that mighty fall would be felt around the world, with the idea that without the U.S. world economies would stagger and fall into their own abyss.

Fortunately, the U.S. government came to an agreement last Tuesday – New Year’s Day -- that averted the downfall. Global markets responded positively to the news.  Stocks, commodities and some currencies like the Canadian dollar have rallyed in the wake of the agreement to deal with a combination of tax hikes and spending cuts that threatened to plunge the U.S. back into recession.

While the cliff has been avoided, there is still plenty of unresolved business to be completed over the next couple of months.

It was U.S. Federal Reserve chairman Ben Bernanke who coined the term “fiscal cliff” and wanted American politicians and their constituents to feel his alarm over this "cliff" and the economic danger it posed. Although aimed at a U.S. audience, the whole world was listening. The general consensus seemed to be that if the Americans couldn’t figure out a way of avoiding the cliff, the potential damage caused by that failure on the Canadian and the global economy could be huge.

What was the fiscal cliff?

The “cliff” referred to the more than $600 billion U.S. worth of spending cuts and tax hikes that were due to automatically take effect as of Jan. 1, 2013. Most of this $600 billion – about $500 billion – was in tax hikes that would have hit the vast majority of Americans. The spending cuts amount to about $110 billion. The term “cliff” was a bit of a misnomer since the full impact of those spending cuts and tax hikes would not takes place on January 1, but were spread out over the whole year. So, if an agreement took place over a few months, the economy would still have been okay.

Why would Canada care?

Bilateral trade between Canada and the U.S. amounts to more than $1.7 billion a day. It’s vital for Canadian exporters to have a financially healthy and confident U.S. consumer. TD deputy chief economist Derek Burleton noted that U.S. tax hikes have a bigger impact on Canadian exports than spending cuts, which tend to matter more domestically because Canadian trade with the U.S. is largely concentrated in consumer goods and business investment – items which will likely be hit harder by an increase in taxes.

What now?

Still a risk to the U.S. economy  is how $110 billion in spending cuts that have now been delayed for two months in this agreement will be tied to an increase in the debt ceiling that will be required by February or March. For now markets are surging and confidence is high.

Credit report errors costly to consumers

Mistakes on credit reports resulting in false credit scores can cost consumers thousands of dollars. A recent investigation by CBC News found that credit reporting errors have not only prevented consumers from getting loans, lines of credit and credit cards, but consumers are charged higher interest rates. In many cases, consumers are unaware of negative information on their reports.

It’s not surprising. The two credit reporting agencies – TransUnion Canada and Equifax – are inundated daily with hundreds of pieces of information with regard to consumer accounts and payment histories. That information comes from companies such as phone service providers and banks. These companies pay a fee for the bureaus to track clients and in return the credit bureaus provide the companies with access to consumer credit reports, which contains information from all the reporting agency’s client companies.

A national survey in 2005 conducted by the non-profit Public Interest Advocacy Centre found that 18 per cent of the people surveyed found mistakes in their credit report and 10 per cent of those believed they were denied financial services because of those errors.

One Toronto, Ontario paralegal who has represented clients in credit disputes, estimates the percentage of errors is higher than 18 per cent. Of his 3,000 clients, one-third of them have found inaccuracies in their credit reports. Inaccuracies can range from:

• Mistaken identity, whereby a collection gets registered against the wrong consumers – this usually happens when names are similar
• Numerous undischarged items under public records
• Unverifiable late payments
• Incorrect names, DOB, SIN 
• Statute of limitations with collections and other debts

The onus is on the member companies to provide accurate information to the two bureaus and it’s up to those companies to rectify any errors. When a consumer exposes an error, both Equifax and TransUnion require the creditors who supplied the information to sign off. Even that can take some time and isn’t always effective.

With so much emphasis on credit scores, it’s important that consumers are aware of what’s being reported in their individual files. Consumers can request to see their credit rating, however few do. Unknown errors can be there for months, sometimes years, and could potentially lead to extra interest costs or other issues.
At this time, there is no federal oversight however under provincial consumer protection legislation companies can face fines if misinformation is not amended.

Consumers can request their credit report information via mail or online. Credit reports via mail are free but do not include your credit score. Credit reports and scores area available online, for a small fee.  For more information visit Equifax at www.equifax.ca and TransUnion at www.transunion.ca.

You can also contact your mortgage professional who can help you access your report and offer advice on how to remove inaccuracies and how to improve your credit score.

What You Think About Mortgages

Whether you currently own your home or are a first time buyer, most of you consider home an investment rather than an expense.  A recent poll conducted by Scotiabank found that a 77% of
Canadians think that way. Here is what else we know:

•  For Canadians who see the home as an investment, not as expense - the differences between the regions are as follows: Quebec (79%), Manitoba/Saskatchewan (80%) and Alberta (69%).
• Women (80%) are more likely than men (73%) to agree that homes are an investment, not an expense.
•  Among Canadians who don't own a home, 12 % plan on purchasing a home within the next year.
• Women are more likely than men to be renting their home (30% of women vs. 24% of men).
•  Two-thirds (69 %) of Canadians report owning a home. For Canadian home owners, 40% are living mortgage-free.  
• Canadian homeowners over 55 are the most likely to currently be mortgage-free.
•  One-third of Canadians (34% say they will be relying on their home equity to support them in retirement.  
• Those who are between the ages of 35-54 are the most likely to say they are relying on their home equity to support their retirement (41%).
• The majority (81%) of Canadians agree it is important to become mortgage-free as soon as possible. 
• The most common step Canadians are taking to pay off their mortgage faster is to increase the frequency of their regular payments (29%).  
• Male mortgage holders are more likely to be able to make additional mortgage payments (70% vs. 51% of women).

Here are some ways to pay off your mortgage early:

1. Increase your regular payments
2.  Make lump sum payments whenever possible
3. Move to accelerated bi-weekly payments

How can you do this as pain-free as possible?

1. Pay off all your debts to avoid higher interest expenses
2. Refinance to pay off your debts and make the same payment  
3. Use any new found money such as pay raises to increase your regular mortgage payments.

For more ways to pay off your mortgage early, contact your mortgage broker.

How Much is Enough Mortgage Friction?

By Mark Kerzner, President, TMG The Mortgage Group Canada Inc.

A mortgage consumer recently described the cost and work involved to switch lenders, either at mid-term or at maturity, as "mortgage friction." This is an interesting comment. If there are savings to be had, how much “friction” would be acceptable? The old adage, "you can't get something for nothing" might apply here.

We hear countless stories of people willing to pay hundreds of dollars in cancellation fees to switch cell phone, cable or even home security providers yet when presented with an opportunity to save thousands of dollars, some mortgage holders don’t seem to want explore their options.

When you add in the fact that banks routinely charge higher interest rates to existing clients than they do to new ones, mortgage holders may be better served by shopping around at renewal time. Clearly, the best way to shop for rates is by using the services of a mortgage broker, yet 73% of Canadians choose not to, even though, on average, the ones who did, saved 19 basis points on their mortgages. Those who renewed or renegotiated with a mortgage broker reported an average rate decrease from posted  of 1.4 basis points, compared with 1.0 points among all renewers.

While 48% of first-time buyers used a mortgage broker only 27% of those refinancing and 21% of those renewing used one. At renewal, 88% of consumers remained loyal to their lender. So, with a discrepancy of up to 40 basis points at renewal, why are so many staying loyal to their existing lenders?

It might make sense to stay with your original lender, but not always. After all, your mortgage broker offered you the best mortgage and interest rate at the time of purchase. But some lenders such as FirstLine have now left the market, while others, including your existing lender may have changed their pricing strategies.

To know whether changing lenders is right for you it is vital to understand the process and the costs. The number one cost or "friction" is the need to re-qualify. Most lenders will automatically offer their good customers a renewal. If you need additional funds or plan on transferring or switching to another lender, that new lender will first have to re-qualify you.

When you switch lenders you or the new lender will request a payout statement -- in many cases your mortgage broker can assist you with this.  There may be a discharge fee, perhaps a penalty on your existing mortgage and an appraisal may be required. In some instances the new lender will pick up the cost of legal fees and appraisal costs.

There are no penalties when a mortgage reaches maturity, however, if you transfer or refinance your mortgage prior to maturity there may be contractual penalties. The most common are the Interest Rate Differential (IRD) for fixed rate terms and three months interest for adjustable/variable rate mortgages.

So let’s assume that financially it makes sense to switch –now let’s look at the numbers. Assuming a mortgage balance of $250,000 on a 5-year fixed rate and an amortization of 25 years, here is a comparison of three scenarios:

$250,000 mortgage, 5 year fixed, monthly payments, 25 year amortization
(numbers are used for illustrative purposes only)

     Rate        Payment          Int. cost (term)       Balance (end of term)           Increase cost over #1
1   3.19        $1,207.63       $36,918.05           $214,460.25
2   3.38        $1,232.40       $39,167.47           $215,223.47                         $2,249.42
3   3.59        $1,260.09       $41,658.85            $216,053.45                        $4,740.80


The savings identified above are after tax dollar savings, which can be significant.

It is worth it to consult with a mortgage broker. Reviewing options with a broker does not negate an offer to renew with your existing lender.  In the end the broker may advise you to stay where you.  However, it’s worth finding out whether or not you can financially benefit by switching.

Cost and rate aside, mortgage brokers can lessen the “friction” by facilitating the process on your behalf. With a single application and credit review they can navigate the market on your behalf, assessing options from multiple lenders. They will advise on product features including prepayment options and penalty calculations to match you with the right product for your unique circumstances. 

Call your local mortgage broker today.

Is household debt a threat to our economy?

Here are the facts:

1. Canadian household debt is indeed equal to 154% of disposable income
2.  The housing market is softening and prices are going down in many areas of the country
3. Canadians will be impacted by higher interest rates

Even given these facts; it’s unlikely that Canada will experience a financial crisis.

Household debt has been increasing steadily over that past 30 years as interest rates continue to decline but, for the most part, Canadians gear their borrowing to what they can afford.  Jobs are holding steady and business is confident about future prospects. So, lower interest rates mean less money goes to servicing debts.

In accumulating debt, Canadians also have a large asset, namely their homes. And although some in the financial community are concerned about the massive debt, Eric Lascelles, chief economist at RBC Global Asset Management recently said that assets outweigh debt by a factor of five.

It’s true that high household debt does put homeowners at risk but a closer look at the stats tells a better story. Overall Canadians exercise fairly good judgment when it comes to borrowing. The more vulnerable – seniors and low-income earners -- carry lower debt loads. It’s also true that the housing market carries a big part of household debt,  however the percentage of income earmarked for mortgage payments is not burdensome.

The new mortgage rules will certainly have an impact on the housing industry as will declining house prices; and interest rates will rise. Perhaps this will lead to some weakening of the economy. Delinquencies might increase a bit but the risk of the economy going into a recession is low. High-ratio mortgages are insured and our sub-prime market is small.

As for the weaker growth, Flaherty has said that the government could increase its deficit to shore up the economy. “If we ran into a serious world economic crisis arising out of the European situation, or something else, “he said, “Then of course we’d be responsive if we had to be to protect the Canadian economy and protect Canadian jobs as we have done in the past.”