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CategoryMortgage Products

Major lender cuts out self-employed and new immigrant lending programs

THE SKY IS FALLING AT CIBC?

On Tuesday, CIBC’s wholesale lending arm, Firstline Mortgages, announced drastic changes to their lending policies.   They will no longer participate in self-employment and new-immigrant lending programs.  These programs made it possible for Canada’s growing self-employed and new-immigrants to get a mortgage at discounted interest rates.

click here for The Star’s report featuring some of own personal comments.

HERE’S WHAT REALLY HAPPENED

The move by Firstline seems to have come immediately after 2 recent reports…  First, CMHC said they are reaching their $600billion cap limit on the amount of mortgages CMHC can insure.   Currently sitting at $541billion, as of the end of 2001.  (I think this is the real reason for Firstline’s lending changes.. a more thorough explanation is below).   But next, a Bloomberg news report was released, earlier this week quoting a 152 page OSFI report (by the way, I searched OSFI and couldn’t find that report).   The article drew comparisons between the US sub-prime mortgage lending and Canada’s self-employed and new immigrant lending programs.

Let’s get something straight… Canadian lending policies are NOT like the US sub-prime policies.  Not even close!  The US sub-prime mortgages were granted to people with poor credit history, they lent up to 125% of the value of the home, amortizations went up to 50 years, they offered interest only payments, appraisals were not always required, they offered low interest teaser rates for 1 to 2 years, they offered Variable rate mortgages with no payment adjustment even if rates went up….  We don’t have theses features or options in Canada…. To suggest that our lending practices are similar is not accurate and has to be corrected…or proven… (there was time when similar mortgages were made available to Canadians this only lasted a few years from 2006-08 and this only accounted for less 5% of all mortgages during these years)

In Canada, we have much stricter lending policies that is in keeping with our conservative reputation….. And let’s not forget, the Fed govt has made 3 major changes in the past 3 yrs… making it tougher to qualify for a mortgage.

-maximum amortization reduced to 30 years maximum.  -refinances were cut to 85%  loan to value.  -business for self without traditional income confirmation will need to put 10% down payment, instead of 5%.

We really don’t need any more tightening.  The record low interest rates are helping to drive the real estate market.  Once rates go up, the values will level off and maybe even drop.

And by the way, if you think this is a small segment of the population, guess again.   The Canadians Association of Accredited Mortgage Professionals (CAAMP), estimates that 13% of the country is self-employed.    (to further clarify, a self-employed person is anyone that is paid in full and then must deduct and pay their own income taxes.)   Being able to reduce your taxable income is part of the benefit of being self-employed…Remember, these people don’t have pension plans and usually don’t qualify for Unemployment insurance…  

New immigrants are a big part of what has made our country the best place in the world, to live in.   In 2010, there were over 250,000 new immigrants that came to Canada.   These are people, anxious to work, wanting a better life…..wanting to spend and borrow…helping our economy grow.   And as a former Senior Lending Manager with a major bank, I can attest to the fact that granting new immigrants a mortgage has always been considered a low risk loan.   Most new immigrants would give up their right arm, before not paying their mortgage.

BANKS HAVE TAPPED INTO CMCH PORTFOLIO INSURANCE FOR YEARS

You bought a house, you put down 20% or 25% and you didn’t have to pay CMHC or Genworth hi-ratio mortgage insurance.  Congrats…!  But did you know that your mortgage might still be CMHC or Genworth insured?   That’s right.  Banks and other financial institutions have been buying and paying for CMHC insurance through portfolio insurance.  This makes the mortgage a secure investment for the Banks.  If you default, the loan is guaranteed by CMHC, a Crown corporation.  Soveriegn debt.  You can’t get any more secure than than.   It also takes the mortgage off the Bank’s books and frees up more capital for other investments.

Here’s a thought… CMHC is a Crown corp that is there to help Canadians own a home… well, maybe they should take a look at the % of mortgages that are 85% loan to value or higher…this number isn’t as high as you might think.

Remember these stats from January 2011?

-there are 12.5million households in Canada…31% rent, 69% own..

-of the 69% that own, 39.9% have a mortgage and 28.9% have no mortgage.

-69% of homeowners with a mortgage have more than 20% equity in their homes… only 30% have less than 20% equity in their homes.

And we also know that last year, the total outstanding mortgage balance in Canada topped $1trillion for the first time in history….. You could say that CMHC has a very well secured book of business….

Come on CMHC, let’s make insurance available for those Canadians that need it…  it seems the Banks have found a way to eliminate all their risk when it comes to lending money…but we know they keep all the rewards and profits (how else do you explain $billion profits through the 2008-09 recession and beyond)   Maybe it’s time to increase that $600billion limit… There doesn’t appear to be any arrears problem with mortgages either… last I heard, we were at around 0.43% for mortgages in arrears more than 90 days.

BMO 2.99% No Frills mortgage needs another look.

It’s January 25, 2012… that’s the original deadline date issued by BMO for their NO FRILLs 2.99% 5 year fixed rate mortgage.   Since announcing that 2.99% rate, BMO has reportedly been flooded with calls and applications.  And rightfully so.  That’s the lowest advertised 5 yr fixed rate in history.  (we need to say thank you to BMO… they woke up the competition and the competition answered.. we have seen competitive offers from the non-bank lenders… no restrictions or limitations…   This is great news for the consumer.)

This product has also drawn some criticism…There was an interesting articles asking if this product was too good to be true….  click here to see what The Toronto Star thinks.

Let’s look at the restrictions and limitations more closely…    If you are 100% certain about the next 5 years in your life, your job, your health, your family’s health, then this may be a great product for you…. But if you look at the stats, we, as Canadians, on average refinance or change mortgages every 3 years…  With that in mind, the product can be very costly for the unsuspecting borrower….read on and I’ll explain…

I’m not too concerned with the limited prepayment privileges.   The biggest potential risk to borrowers is the inability to refinance outside BMO should they experience some financial problems in the next 5 years.   If a borrower runs into financial problems and needs to take the mortgage elsewhere, because they won’t qualify for a BMO refinance,  they can’t do it.  The mortgage can only be paid out if the house is sold…

An an even bigger problem is the BIG SIX penalty calculation…. let’s say you can somehow refinance in 2 or 3 years with BMO, or you do sell the house and are not porting the mortgage… well, now you must deal with a penalty calculation that makes you pay for the original discount you received at the time of the original mortgage….   And LOOK OUT…This is where we have seen penalties of 6, 9, 12, 14 and even 16 months worth of interest being charged by the Banks to get out of a mortgage..(click here to see how banks calculate their penalties).  (hey, Federal Government, didn’t you promise to standardize mortgage penalty calculation 2 years ago??… when is that going to happen?))

And if you need more money added to your mortgage, what assurance will you have that BMO or any other BIG SIX bank, will give you a good rate or a discount on those new monies?   None… they certainly won’t have to, given your penalty to exit would be higher than other non-bank lenders…    This subject is not talked about very much by the media or by the banks… We will be commenting on this further in future posts….  (hey, how about CIBC and that class action lawsuit over mortgage penalty charges??… I’ll be making some comments on this soon).

Here’s some advice… seek out Lenders that have better penalty calculations... they are out there… they just aren’t as obvious as the Big Six Banks… talk to a mortgage broker and get some comparisons…  you might be surprised to know that competitive rates exist without having to give up your future options…

BMO’s No-Frills 2.99% mortgage offer is not ground breaking…just another trap by the Big Banks..

EXTRA, EXTRA, READ ALL ABOUT IT…. 5 years fixed No-Frills mortgage for 2.99% by BMO….wow, can you believe it?    Well, don’t get too excited…  At CanadaMortgageNews.ca we  give you the straight talk…  and guess what, No-Frills mortgages aren’t anything new…

I’m giving a BIG THUMBS DOWNS to this product… and you should too…

I’ve had access to these products in the past and we still have access to them….  but I have NEVER recommended it to any of my clients….  the limitations can be too costly and any potential savings can easily be eaten away with prepayment penalties, fees and the inability to even exit the mortgage…. That’s right, you can’t exit the mortgage in many cases…  read on, I’ll explain more..

Make sure you understand how the rates are calculated

Before you start thanking BMO and putting your arm around the banker’s back, you should understand that rates have been inflated for several months… they should actually be much lower…..

Fixed mortgage rates are closely priced to the Govt of Cda bond yields.   5 year Bond yields have been below 1.50% since Nov 1….and have been hovering at around 1.30% since Dec 1.   Historically, the best discounted rates are between 1.25% and 1.50% above the bond yields….  That means fixed rates should be at around 2.80%…. Okay, let’s add in a premium for some market uncertainty….  That doesn’t explain why 5 yr Fixed mortgage rates have not been below 3.29%?

Well, I think Canadians are smart enough to know why the savings hasn’t been passed down to them….  yup, Banks are just maximizing their profits…  And now, this past week, we saw an announcement that BMO was announcing a special low rate…  5 years fixed for 2.99% …  WOW, that does sound great…doesn’t it?    Well, maybe not… let’s take a closer look before giving this product the ‘thumbs up’.

A closer look at BMO’s NO-Frills 2.99% special

There are too many limitations to this product…

-maximum amortization is 25 years.   your prepayment privileges is reduced to and annual lump sum payment of 10% of the original principal balance and you can only increase your payment by 10%.

-90 day rate hold instead of the usual 120 day rate hold.

-you cannot payout this mortgage prior to maturity unless through a bona fide sale…

-you can only refinance the mortgage with BMO and not with any other lender before maturity…. this will all but eliminate your ability to negotiate the rate… a huge loss for borrowers….  ( you can take your mortgage with you if you move to another house but if you need more money, you will have to negotiate the rate… do you really think BMO will give you the best rate at that time???).

-BMO’s penalty calculation… the BIG SIX banks have the worst penalty calculation formula in Canada.   This is one of the biggest kept secrets in the industry… If you had to pay your mortgage early, for any reason.. or if you had to refinance, you would be hit with a penalty calculation that could break your savings account…  That’s because the BIG SIX banks use a formula that makes you pay for your mortgage discount, for the entire term of the mortgage… read this article on how they do it…. don’t get caught having to pay a 10, 12, 14 month interest penalty….  (just worked out a mortgage penalty for a client.. if they stayed with RBC, they would have to pay a penalty of $7,000, if they went with one of our wholesale lenders, they would only pay $2,000.  this penalty calculating formula is similar to BMO).

By the way, the competition has responded and bettered BMO’s offer

There is some good news to BMO coming out with this product…  just as we are writing this, we see that a big lender has come out with a 4 year fixed rate of 2.99% with NO restrictions or limitations…  For us, that eliminates BMO’s Low rate special as a serious competitor in the mortgage market.  But thank you, BMO, for pushing the Lenders…

My advice, stay away from these No Frills mortgage…   speak with your mortgage broker and get full disclosure on this and other products before making any decisions that could end up costing you dearly…

ING collateral mortgage began December 10, 2011..but no media coverage?

ING made it official and announced that all new mortgage applications submitted on or after December 10 2011, will be registered as a Collateral Charge.   Here’s a copy of the circular that was released….click here.

They join TD Canada Trust as just the second major lender to take this step and put the hand-cuffs on unsuspecting borrowers.   What’s different about ING’s move is that at renewal time, unlike TD, they will re-register a new collateral mortgage charge, at ING’s expense.    Strangely, I haven’t seen any major media coverage on this subject.  hmm, does this have anything to do with ING being the largest bank in the world??

SAY GOOD-BYE TO THE ‘UNMORTGAGE’ HELLO ‘MORTGAGE FOR LIFE’

But why should you care?  And what does it matter?  Well, this is about a few things.  CHOICE… they aren’t giving you one.  A collateral charge is normally used for loans and lines of credit.   There is no amortization.  And while that might be good for some, it’s not always good for all.  ING says you can refinance without having to incur new legal fees… yes, that’s true..however, you still have to be re-approved for any increase and negotiate your rate.   And the truth is, ING, just like all banks, doesn’t always have the lowest mortgage rates….don’t get fooled by their slick marketing ads…

FUTURE OPTIONS. It’s also about your future options… when it comes time to renew, and you want to switch your mortgage to another lender, you can’t… Collateral mortgages are NOT transferable.. you will have to deal with new legal fees… and ING knows this… so do you think they have to offer you the best rate at renewal time?

And speaking of the future, let’s look at a real possible scenario…suppose you need some money in a few years..   You have a great mortgage rate with ING.. it’s 3.64%… or it’s Variable Prime less 0.75%….  and now you don’t qualify for a mortgage increase.   With a conventional mortgage, you could always seek out a 2nd mortgage, but now you can’t… No 2nd mortgage lender will register behind a collateral charge.  You’re stuck with having to refinance the entire mortgage.   You lose, The Bank wins.

For me, ING and TD Canada Trust are not the first choice for mortgage lenders…

ING collateral charge in 2012.. hand-cuffs included

You’ve seen the ads…  That fellow with the Dutch accent and the orange background, telling us to ‘save your money’.  Since 1997, when they first entered Canada, they have grown to 1.7 million clients and $37billion in assets.  ING spends millions in marketing… They’ve created a brand that is synonymous with saving or discounts.

Today, I just heard they will be counting on that trust.  It is rumoured ING Direct will begin registering ALL mortgages as collateral charges.   They join TD Bank as the second major lender to make this bold change.    A move that has great implications for the Canadian consumer.

It was almost one year ago when TD Bank announced they would register all their mortgages as a collateral charge.  (click here for the details of what a collateral mortgage is and some reactions).   Consumer advocates spoke up and warned against getting a mortgage like this…. Strangely, the media was silent.  (hmm, I wonder how much TD spends in media advertising???).

In short, the benefit is that you will be able to increase your mortgage without having to spend money on new legal fees….ok, that saves you around $800 to $1,000.  That’s your benefit.  (but even this has changed as there are some programs that will offer a discounted legal fee).

Here’s what you lose….you give up your leverage to negotiate the best rate… and that’s because if you want to leave ING, you cannot simply transfer your mortgage… Collateral mortgages cannot be transferred.     You still have to qualify for any increase… you must trust that the Bank has your best interest at heart….   Hey, remember when all the banks raised their lines of credit rates in 2008-09 without warning?

ING has been a great Lender, but this new move will drive away most advisors, mortgage brokers and clients that want options and flexibility..

I’ll continue to report more as this story breaks..

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