20 Feb

The Devil In The Fine Print


Posted by: Nick Kaaki


September 29, 2010

The Devil In The Fine Print

Mortgages sometimes have costly or irritating restrictions that you won’t know about unless you read the fine print or ask a mortgage professional.

Some examples:

    * 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
    * 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)

And the list could go on…

Keep a lookout for restrictions like this when comparing different mortgages.

It’s even more important when sizing up cut-rate mortgages because the lower the rate, the greater the likelihood that a mortgage will be somehow restricted.

13 Feb

Collateral Mortgages


Posted by: Nick Kaaki

According to CAAMP, the Canadian Association of Accredited Mortgage Professionals, defines a collateral Mortgage as ”The mortgage registered to document collateral security.”.  Collateral Security is defined as ”Security given in addition to the direct security and subordinate to it.”

By carefully reading this definition, here are the 3 Things To Be Aware Of With Collateral Mortgages:

– Firstly, by registering a collateral mortgage at 100% or high of the fair value of your property against your property, any future borrowings that you may want to leverage from your home will likely have to come from the collateral mortgage holder. For instance, if you wanted to secure a second mortgage where the total loans outstanding would be less than 80% of the value of the property, no second mortgage could be arranged from a different lender because they would have to register behind the collateral mortgage which may be listed at 125% of the property value, even though only a fraction of that amount may be outstanding.

This could also impact your ability to qualify for any type of lending program outside of what your primary mortgage lender is offering due to the fact that other lenders will likely consider the full amount of the mortgage registered in their debt service calculations. So even though you have good income and credit, you could still be viewed to have an excessive debt load, causing otherwise straight forward credit applications to be declined.

– Secondly, the nature of the way the collateral mortgage will likely be written, will allow the lender to utilize it as security for any other loans, credit cards, and lines of credit you may have with them. Effectively, they may be able to become fully secured by real estate for any and all borrowings made to you once the collateral mortgage is put into place.

– Lastly, if you do fall behind on your mortgage payments, the collateral mortgage provides the right for the lender to potentially start charging a higher rate of interest if a higher rate is written in compared to what you are initially paying. Because the lender has such a strong securing position, they can justify the increase to cover a higher risk of repayment default while not really having any real risk of potential loss.

The end result is even if you get back on track, you now have a higher interest rate to pay, which can lead to higher prepayment penalties if you try to move your mortgage to another lender.

If you have any questions regarding a collateral mortgage, please do not hesitate to contact me as this is a very serious issue.

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