If you are buying a house or refinancing your mortgage, the siren song emanating from your local bank branch can be mighty tempting. It’s just so darn convenient, and with all of those TV and radio ads featuring happy people reassuring you that your bank has only your best interests at heart - what’s not to like? Well…your available options for one…and certainly their terms and conditions…and maybe the rate – but hey, I hear that some branches are now giving away free donuts on Fridays, so at least there’s that.
All kidding aside, borrowers who partner with experienced independent mortgage planners gain access to a wide range of solutions that no single bank/lender will ever be able to offer. In today’s post, I’ll give you examples of mortgage options that you probably didn’t know you had, and that you aren’t likely to come across if your local branch teller doubles as your mortgage advisor.
Terms and Conditions
I have written extensively about the differences in the terms and conditions offered by the Big Five Banks versus those available at smaller lenders (see What`s in the Fine Print for a good summary). The bottom line is that Big Five mortgage contracts are full of little clauses and conditions that have the potential to pull significant amounts of money out of your wallet over time. Examples include: inflating your prepayment penalty charge by using posted rates instead of contract rates, registering your mortgage as a collateral charge and convincing you to register a charge for 100% of the value of your property on title (terrible idea!), compounding variable-interest rates monthly instead of semi-annually, and then offering you lousy rates at renewal and hoping you won`t notice. Only an independent mortgage planner with access to the broader market will help you steer clear of these tricks and traps.
If you are self-employed, there are reputable lenders who will loan you 80% of the value of a property with little or no formal confirmation of your reported income. You usually need to have been self-employed for a minimum period of time and your line of work has to pass the smell test (expect underwriter scepticism to take over in the $70 to $80k range). You also need to have a strong credit history. Furthermore, properties will always be subject to full appraisals, and mortgage rates will often be higher than the best available (but not unreasonably so).
As an aside, this type of lending is controversial and when done wrong, can lead to substantial lender losses. But it’s been available in the Canadian market for quite a long time and it’s about the closest thing we have to risk-based pricing. Done right, equity lending turns ‘no’ into ‘yes’ for borrowers who represent reasonable overall credit risks, and it rewards lenders handsomely for their marginally increased loan exposure.
Investment Property Financing
When CMHC stopped insuring high-ratio rental properties, it also opened up the conventional part of the market to more subjective underwriting (because the crown corporation’s guidelines no longer acted as an unofficial mainstay). Today, borrowers will find a significant variance in the way rental properties are underwritten, and partnering with the right mortgage planner can help you gain flexibility with income, expenses, vacancy rates, zoning, and more detailed aspects, like whether or not investment properties can be held in a corporation. Rental investors are well-advised to explore the wide range of mortgage options that are available to them across the lending spectrum (and experienced independent mortgage planners make great tour guides). As with most types of lending, slight changes in the circumstances from one case to the other can mean that one lender offers a much better deal - and it is by no means always the same lender.
Most people think that amortization periods are now limited to a maximum of thirty years, but if your down payment (or built-up equity) is greater than 20% of the value of your home, that’s not the case. Independent mortgage planners have access to lenders who still offer amortizations as long as forty years. For borrowers who want to free up cash flow, this added flexibility can make a world of difference. To put this increased flexibility in perspective, a $300,000 fixed-rate mortgage at 4% that is amortized over thirty years will require a monthly payment of $1,427, whereas that same mortgage amortized over forty years has a monthly payment of only $1,248.
Extended amortizations can also be used to help you qualify for a larger mortgage amount, and if you’re determined to pay off your mortgage faster, you can set your scheduled payment using a shorter amortization period once you have passed the qualification stage. In the example above, if all else is equal, that extra ten years of amortization will increase the maximum mortgage amount you can qualify for by $43,000 – and extended amortizations can be had in combination with some of the best rates in the market.
Relationship and Advice
Despite all of the advertising campaigns suggesting that your bank wants to be your buddy, you have a much better chance of forming a lasting relationship with an experienced independent mortgage planner. For starters, it takes time and sacrifice to build a successful independent practice and that means we’re in this for long haul, so if you need more advice a few years down the road, we’ll still be around to pick up the conversation where we left off. In contrast, you might have already noticed that the faces at your local bank branch change quite often.
Also, independent planners often have advanced training in financial planning or general finance, and we demonstrate our high level of commitment by working in the context of your long-term financial plan upfront, and by continuing to offer you an educated view of what’s happening in the interest-rate markets after your deal closes. Simply put: you are long term clients, not transactions.
The success of this approach has not gone unnoticed, and the Big Five have countered by dramatically increasing the size of their mortgage sales forces in a very short period of time, a strategic response that has focused on quantity - you will have to judge the quality for yourself. (Please note: I do not want to impugn all bank mortgage specialists; there are some good ones, but it’s no accident that the best among them usually convert to independent planners once they get established.)
The bottom line is that in the Canadian mortgage market, shopping around will usually save you money, increase your flexibility and get you better terms and conditions. The money saving point was recently confirmed by a Bank of Canada (BoC) report called “Discounting in Mortgage Markets”. Surprisingly, the BoC’s research showed that people with higher incomes and asset bases were more likely to pay higher rates if all is else was equal – and the main reason was that this group assumed that their bank would automatically provide the best offer and as such, they didn’t test the wider market. The report concluded that in the end “loyal customers pay more”. (Here is a post I wrote that summarizes their findings.)
None of this information will come as a surprise to the many first-time home buyers who are using independent mortgage brokers at a record rate (48%, according to the 2011 CMHC Mortgage Consumer Survey). Word has gotten around among that group. It is repeat buyers, refinancers and renewers who are lining the banks’ pockets and missing the many benefits that unbiased, independent advice can provide.
A final point to clarify: Even though I think there is a need for better disclosure, I’m not anti-bank. In some cases, borrowing from one may be your best option; but if you end up at a bank after partnering with an independent mortgage planner you’ll know it’s because they won your business fair and square, not because it was convenient or because you were lured there by their seductive advertising.
David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear weekly on this blog (movesmartly.com) and on his own blog integratedmortgageplanners.com/blog). Email Dave
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