I have been doing some audio advertisements on the radio lately, and given the number of questions that I field about penalties.

Here is the audio file for your listening pleasure, and a copy of the script I used to record it:

AUDIO BLOG – How Are Penalties Calculated

HERE IS THE SCRIPT

Many clients have been calling me looking to sell in this market and upgrade their home find themselves faced with massive mortgage penalties. In many cases, the penalty may have risen in the past month by over 100% from a prior quote from their lender.

Most fixed rate mortgages have two types of penalties that can be invoked by the banks. Penalties on fixed rate mortgages are generally the GREATER OF a three month interest penalty or the Interest Rate Differential. The interest rate differential penalty is only invoked when interest rates fall by a significant amount putting the bank in a position to lose a lot of profit. Remember, you got a guarantee from the bank that you would not face an interest rate increase regardless of what the market does. In exchange for that promise, the bank has the right to charge you for their lost profit in the event you break the contract.

At the Mortgage Centre, we have lots of options to help reduce the effects of your bank’s penalties. Some of those methods include blended rates, cash back mortgages, and even porting your existing mortgage to your new home… penalty free.

If you face a large penalty to get out of your mortgage, and you want to look at your options, contact me at the Mortgage Centre.

This is Rowan Smith for Radio Real Estate.

This is a complaint that I hear from people from time to time. They pull their own credit score, see a number over 700 and assume that they have good credit. Then, when they talk to me, I tell them they likely won’t qualify for a mortgage due to credit history and they nearly fall off their chair.

The media has done a good job of getting out there what a good credit score is. 700 as a “beacon score” is, by all accounts, a very good score. However, there are two other elements to credit that need to be looked at other than the score:

1. Credit Depth

2. Credit Breadth

CREDIT DEPTH:
This is where a lender looks at an account and sees how long you have had a credit record. If you only have 4 months history with your only credit card, your score may be 750 but that is meaningless. We call this a “forced beacon,” and lenders want to see a long track record of good payment, not just a high number.

CREDIT BREADTH:
This refers to the number of credit accounts you actively hold. Having multiple accounts doesn’t hurt you! In fact, look at it this way: if you have 1 visa account, and you go on vacation and miss a payment, you are delinquent on 100% of your available credit facilities. However, if you have a visa, mastercard, and car loan, and you slip up on one payment, you still have other unblemished accounts to bolster your score. So, having multiple types of credit is also helpful: car loan, visa, mastercard, etc… Now, there is a limit here: too many, and you may screw up as management of the accounts becomes difficult, but too few, and one slip up will have that 700 score down to 530 before you even realize you are late.

Just having a high score isn’t enough, and people often get hung up on the number rather than the underlying credit, and you can be sure, the lenders look at more than just the number.

A lot of people operate on the assumption that real estate loans are like car loans: if you walk away, and the lender takes the car (or house), then you are clear.

In real estate, this is WRONG!

Case in point: a former client of mine bought a place and subsequently lost his job and fell deathly ill. He owed around $275,000 on a property worth around $300,000. However, he was many months in arrears, and there was over $20,000 of legal bills mounting for foreclosure.

He wanted to know what would happen if he walked away? The bank had required him to have CMHC Mortgage Default Insurance when he bought the place so if the foreclosed, and took a loss, CMHC would cover the bank’s loss. He felt that his bank would not sue him for the shortfall as they wouldn’t have one!

However, I explained to him that if he walks away, yes, the bank takes no loss due to the CMHC insurance, but CMHC takes a loss, and they have the right to sue him for the difference. He felt this was very unlikely given that the shortfall was only going to be $20,000 when the dust cleared and CMHC was a government backed organization whose mandate was to put Canadians in homes, not sue them.

I wasn’t so sure. I counseled him NOT to walk away, and try and rent the unit out and take care of a small amount of the negative cashflow. I called CMHC and the confirmed that yes, they retained the right to pursue him, but didn’t always do it depending on the situation.

Well, he didn’t like my advice. He opted to walk away, and end the phone call, and our business relationship quickly after I told him to try and tuff it out.

I heard updates through the lender that they DID foreclose, and CMHC DID pay them out the loss.

So… the question becomes… will CMHC pursue him?

The answer after 9 months, is “Yes.”

The client called me up and gave me a copy of his letter he received from CMHC’s National Recovery Agency. The shortfall was around $25,000 and they are putting a hold on all future Revenue Canada tax returns as well as likely going after any wages he receives.

As proof of this, I’ve attached a copy of the letter he received (I’ve blanked out all identifying information to preserve his confidentiality).

So, will the lender, or CMHC come to get you if you walk away. The answer is “yes.” Just handing them the keys, and walking away does NOT guarantee you are off the hook.

Until next time, happy house hunting!

Here is a copy of the letter…

I read an article today that really made my blood boil. It was an article that talked about the difference between buying a home through your bank, and buying a home through a mortgage broker.

If you want the direct link it is:

http://homebuying.about.com/cs/mortgagearticles/a/home_lenders.htm

Here is the quote that upset me as it talks about Mortgage Broker Compensation:

Mortgage brokers are professionals who are paid a fee to bring together lenders and borrowers. They usually work with dozens or even hundreds of lenders, not as employees, but as freelance agents.

Think of mortgage brokers as scouts. They find and evaluate home buyers, analyzing each person’s credit situation to determine which lender is the best fit for that person’s needs. The broker submits the home buyer’s application to one or more lenders in order to sell it, and works with the chosen lender until the loan closes. A good mortgage broker can find a lender for just about any type of credit.

The mortgage broker working to secure your loan is earning a fee for the transaction and the better deal they achieve for a lender, the more they are paid. Don’t be too anxious to disclose to a broker the interest rate you are willing to accept–let them tell you what terms they can secure. Shop around to make sure the terms are reasonable.

It’s the line that I have highlighted, bolded, and underlined that has me upset. It says, “the better deal they achieve for a lender, the more they are paid.”

This is completely FALSE!

In Canada, if a mortgage broker is working with a client, they have a fiduciary duty (duty to protect the financial best interests) to their client. Offering a higher rate, and getting paid more, would be a direct contravention of this rule.

In fact, the banks don’t allow it! If you are paying a higher rate, we don’t get paid more, as a general rule.

As a mortgage broker, I try to find the best mortgage rate for my clients. There are four reasons for this:

1. The lower the rate, the more affordable the payments, the better it is for the clients
2. I have a fiduciary duty to protect the financial interests of my client
3. If I don’t get them a great rate, they won’t be happy and refer future clients to me
4. I am paid the SAME at most financial institutions!!!!

As a Canadian mortgage broker, I am paid almost the exact amount from lender to lender regardless of the terms my clients accept. If they get a deal for 4.09% at one bank, I am likely getting paid the same (or damned close to it) at most other lenders for a similar rate and product. The difference isn’t substantial enough for us, as brokers, to go running around for an extra $50 here or there. In fact, we are more “service” driven that compensation driven. It profits a mortgage broker nothing to get 20% higher commission at lender A over lender B if lender A is unable to deliver fast approval and fast review of documents.

I am very open with my clients. If you want to know how I’m paid on a mortgage deal, I’m happy to tell you, and compare that to what I’d get paid at other institutions so you can rest assured you are getting a fair deal.

Until next time, happy house hunting!