Questions to ask your lender before signing onto a mortgage.

Posted on Jul 19, 2012 in Mortgage Market Updates and News

It’s comments like these, “He also reduced the amount consumers can borrow against their house to 80 per cent, down from 85 per cent,” that have really confused many borrowers.

Since the new mortgage qualification guidelines were announced and came into effect July 9th, 2012, I’ve had many people call me and ask if they now need 20% down to purchase a home. I can see how this rule change could be misconstrued but to clarify, no, this is not the change that was made.

Although the wording of the rule change says ‘the amount a consumer can borrow against their home’ they’re not speaking about the initial purchase, and that’s where the confusion is coming in.

When purchasing a home, the initial mortgage can still go to 95% loan to value, and therefore a down payment of 5%, this hasn’t changed. What the rule change refers to is the amount you can re-mortgage to later on in your mortgage life.

You’ll still be able to renew with your current lender even if your equity is less than 20%, you simply won’t be able to pull any extra cash out of your home or change lenders until you get to that 20% mark. If you’re buying with 5% down (adding CMHC or Genworth Insurance to that as well), it will likely take you quite a while to get to 20% equity, starting at less than 5%.

So now more than ever, it’s important to begin your initial mortgage with a quality lender.

What makes a good lender? There are a few things to consider and Sharie Marie Francoeur, Mortgage Professional with TMG The Mortgage Group Canada Inc, can help you find the best lender for you. Consider this:

• Initial rate – this one’s obvious, you want the best initial rate available when you sign on with a lender. It’s easy to see what rates are, look online every lender, bank, broker, etc displays their rates online. That being said, please do be aware that different rates have different requirements, and you may not always qualify for the best rate.
  
• Renewal rate – not all lenders offer their best rate at renewal. If you’re going to be unable to change lenders at renewal due to not having 20% equity in your home, you want to ensure you’re with a lender who will give you their best discounted rate, and or rate special upon renewal and not their posted rate. A lot of lenders unfortunately know that they have the client stuck and therefore don’t offer their best rates at renewal
  
• Prepayment privileges – most lenders offer something, but it’s important to understand what the terms of the prepayment rights are. Is there a certain day of the year you have to make your prepayments on or can you do it any time? Is there a minimum amount? Can you make multiple prepayments in a year? If you think about the likelihood of you actually making prepayments on your mortgage if you can do it any time, minimum $100 payment, and multiple times per year. Vs if you can make one payment per year, minimum $1000, and if you miss that date you have to wait until the next year. The easier it is to do, and the more flexible, the more likely you are to actually make prepayments.
  
• Early Payout Penalties – This is a huge one. Does your lender calculate prepayment penalties based on their POSTED RATE? Lenders that have high ‘posted rates’ and much lower discounted rates, have much higher penalties if you need to pay your mortgage out early. I recently had a client who was charged a penalty with her lender of $13,473 to pay out her mortgage 2 years into her 5 year term. If she had been with a lender who doesn’t use posted rates, Merix Financial for instance, her penalty on the exact same mortgage, would have been $2981. This is an insane difference. Now of course it’s best to not pay your mortgage out early, transfer it if you can, have someone assume it, etc. But sometimes you need to pay out your mortgage, and it’s best to know when you get into a mortgage if you could be stuck with a huge penalty or not. Ask your lender if they use posted rates and what their current posted rate is compared to their discounted rate. If it’s more than half a percent difference (sometimes up to 2%!!!), you’ll be looking at a much larger penalty with that lender.

These are the questions I reccommend asking before signing onto a mortgage agreement. Most lenders won’t volunteer the information if it’s not positive, so you have to ask to protect yourself.