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The Basics of Mortgages Rules, Changes and More

There is more to mortgages than you think.

Everyone’s circumstances are unique.  Their incomes, spending habits, comfort levels with money and risk, goals, relationships, savings and wants are all part of who they are and what they need.  These things also factor into what type of mortgage best suits their individual situation.

While talking to one bank may make people feel the bank has it all covered, there are nuances in the mortgage products, terms, and conditions across a wide range of lenders that mean this is probably not true.  So being open to learning a little bit about the options available in the market can make sure each person gets the right mortgage.

The other element that comes into choosing a mortgage, and figuring out what each person might qualify for, is the set of regulations laid down by the government.  Not only do these rules and regulations help protect the consumer and lead to tons of paperwork, but they also help shape, or control what people can do, and borrow, to mitigate social and financial concerns the government might have at any given time.

In the past, the requirement was to have 25% down. Then, the rules loosened to allow a 100% mortgage towards the purchase. Now, there is a minimum 5% down for homes under $500,000, or the portion thereof, and the necessity of a minimum 20% down on homes $1million and over. The amortization, the time set to pay back the loan, has also fluctuated; at one point, they allowed 40 years, but now we are back down to 25 years for most loans.  The longer payback period meant people could borrow more because the monthly payments would be smaller and the shorter time frame means the same amount does not go as far.

Despite these changes housing prices continue to climb in most markets in Canada. The low interest rates mean that many people are carrying higher dollar values of debt that are a 165.4% relative to disposable incomes, most of it attributable to mortgages.  This is why the government continues to “tweak” the mortgage rules affecting how much people can borrow.

Aside from some of the above changes, it was decided one area of risk was the growing self-employed sector; self-declared income, as long as it was reasonable, used to qualify this sector with the same access to loans as people collecting a paycheque.  The self-employed can still get great mortgages, it just takes a few more documents to get all the same deals.  Now, the income has to be verified by a third party, one version of which might be to write off fewer things and have a higher reported income to the CRA, not ideal for the self-employed, but great for the government. This has encouraged more self-employed people to incorporate, thus letting the corporation pay them and still managing the write-offs in a tax efficient way.  There is more to this story, but each situation will vary and needs to be looked at on an individual basis.

Another thing that has crept into the market is the growing tendency of most banks to sign people up for a collateral charge loan when they thought they were asking for a mortgage.  The immediate result is the same, people get a loan secured on the property at a low rate, which is shy they often do not ask for or completely understand the difference.  It gets sold to the client as an opportunity to get a future line of credit (LOC) with less hassle when the equity in their house grows.  It sounds like a great deal and, for some people, it is fantastic.  The sneaky part is, most of the time, the difference between a mortgage and a collateral charge is not fully explained.  I am all for people making choices and getting a collateral charge when the circumstances warrant, but I am a strong believer that people should know what they are getting upfront.

While there are many similarities, and the deals are very competitive to get people into the golden handcuffs, I am not convinced they ever get a good deal again when the loans come up for renewal.  Why?  Well, one of the key differences between a mortgage and a collateral charge is that a mortgage can be moved, with the amount unchanged, to another mortgage lender, with some minor fees but without legal costs.  When trying to move a collateral charge, it is not really a move but a cancellation of the loan, getting a new loan and registering the mortgage among other things, all requiring the use of legal services which adds to the cost of the new mortgage and can eat into the possible savings going for that better rate.  That loss of savings tends to be the profit margin the bank has made by not having to drop the rate too far too keep the customer.

The other small part that might not affect most people is that the collateral charge is often registered at 100% or more of the property’s value, which means the equity in the house cannot be used as security other than through the bank with whom the collateral charge is registered. This only matters if people want to use that equity as security for other purposes, such as buying other properties or other types of loans when the home’s equity could act as security for another lender.  There can be no other lender, further tying the business to the bank, hence my reference to golden handcuffs.

While rules have tightened, the hot real estate market shows that getting the money and the mortgages is still a possibility for many borrowers. It is just good sense to make sure that getting a great rate also needs to come with getting the right mortgage to meet individual needs and circumstances. A mortgage is a big commitment and making the right choice can save thousands, caveat emptor.

Andrea Meynell was born and raised in Toronto.  She spent a year backpacking around the world before cellphones were ubiquitous. She has a son, and enjoys sailing and travel. She uses her MBA and business experience to help clients by listening, and by understanding their financial situation, needs and comfort levels with debt and risk.  By understanding her clients wants and needs, she uses this information to match them with the Right mortgage at a Great rate. She treats every client’s mortgage like it was her own, is diligent and provides honest advice to ensure the client understands the process and the terms so that they are happy with the results. You can reach Andrea through 416.486.1113 or Andrea@great-mortgage-rates.ca.