Saturday, October 23, 2010

Lenders Behaving Badly

Something to consider about fixed rate loans. Penalties.

The fact they exist isn't what is troubling. It is a problem when the penalty is arbitrary and unnecessarily complicated. The Globe and Mail discusses how lenders select an unrelated interest rate (the posted rate) when doing interest rate differential calculations, which end up favoring the lender.


Here comes the evil part.

At many big banks, they don’t use your existing 4.75-per-cent rate. What they do is take the posted rate at the time you took out your mortgage. This is a rate that has no relevance to you, as you never paid it. In fact, it likely isn’t listed anywhere on your mortgage contract. Remember the ridiculously high mortgage rate we talked about at the beginning of this article? Now you see what it can be used for.


Because of this sleight of hand, you would now owe the bank an additional $12,000!
The federal government was going to announce some regulation regarding mortgage penalties but has failed to do so. Reducing onerous mortgage penalties will reduce future foreclosures at the margin, which in addition to consumer protection should be the goal of regulation - not controlling asset prices.

The Canadian Mortgage Trends blog recently wrote about some lesser know potential costs of borrowing. I don't have comment for each individual item, but when compiled into a list it seems the industry benefits themselves through technicalities and obfuscation.
  • Restrictions on breaking your mortgage before the term is up
  • Restrictions on breaking your mortgage for the first 3 years
  • A penalty surcharge of 1% for mortgages broken within the first 12 or 36 months
  • “Reinvestment fees” (on top of mortgage penalties)
  • Interest rate differential (IRD) penalties based on an onerous bond yield calculation
  • IRD penalties on variable-rate mortgages (usually IRD penalties apply to fixed mortgages)
  • IRD penalties based on a costly posted vs. discounted rate formula
  • Inability to port unless the purchase and sale take place on the exact same day (which can be hard to arrange)
  • A poor conversion rate guarantee
  • No refinances during the first year
  • No free switches (for transfer-eligible mortgages)
  • Amortization limits of 25 years
  • Minimum amortizations of 15-18 years
  • Restrictions on converting from a variable rate to a fixed rate for the first six months
  • No ability to break your “open” HELOC without a penalty
  • No pre-payments within 30 days of discharge
  • Inability to port across provincial lines
  • High administrative fees when porting
  • 100% clawback of cash-back if the mortgage is broken before maturity
  • Requirement for a full banking relationship with the lender
  • No lump-sum pre-payment privileges
  • No annual payment increase allowance
  • Pre-payments restricted to one specific day a year (instead of any payment date)
A lot of the fees are related to breaking the mortgage, which can occur simply by selling the house. With this in mind some thing that can mitigate these risks.

  • Borrow below your limit which reduces the chance of a forced sale during financial stress.
  • Keep amortization periods as short as possible to avoid dealing with these fees for 25-40 years!
  • Only buy if you seriously plan to stay in the house for awhile (5+ years)
  • Avoid gimmick mortgages like the so-called "cash back"


squidly77 said...

Great post as always Bear.

SBL said...

Squidly you say many confusing things. You say one thing today, then you contradict it a few days later. Unfotunately, this can lead to questioning the validity of other comments.

For example, you say on your blog that "realtors are abandoning their blogs."

Can you give us some evidence? I have evidence that you have abandoned two blogs:


You started a third blog under the name Zoogle and denied it was you.

To further damage your credibility, you said on your blogin July:

"this blog will end shortly as it was only meant to warn people away from the housing hype, theres no sense to continue blogging now that the market is about to crash"

then again

"the blog will end when its obvious that prices wont be going up again for a long long time and theres been a fairly substantial price drop, should be about six weeks i figure
at that point, it will no longer make sense continuing to blog, i mean what would i blog about ?" anyhow we have a month or two left to go, then itll squid out.

You say that you are abandoning your blog. Then you don't keep your word. Then you criticize a mystery person for abandoning their blog.

The words that come to mind are "disingenuous, hypocritical, and dishonest."

Carioca Canuck said...

Seems that the lenders aren't acting in your best interests.......heh.....who would have thought, eh ?

Now that the RE cartel on the MLS has been cracked it is time for the government to go after the banking cartel.

That is going to be tough. if not impossible. should things continue to meander along the way they are right now with the current managed RE decline of "death by 1,000 cuts" that i soccuring.....

If this becomes a full scale meltdown with foreclosures of mass proportions as in the US, it will happen though, because it will become an enormous political issue..........

SBL said...

Gloria has abandoned her blog:

This guy's abandoned his blog:
The few comments he had were in this language 出遊不拘名勝,有景就是好的

Counting two corpses from Squid, that makes four abandoned bubble blogs. Now which realtor blogs have been abandoned?

Squidly, are you just an internet blowhard?

Come to think of it, squid has three corpses.

Radley77 said...

Latest average weekly earnings came out for Alberta. Up over 7%. Some of the return to mean affordability is being eaten up by other agents besides low interest rates and falling house prices.