When it comes to complaints about banking products, mortgages are second only to credit cards.
According to the banking Ombudsman’s (OBSI’s) recently released annual report, the three biggest complaints about mortgages, revolve mainly around mortgage prepayment penalties, pre-approvals, and recently portability has become an issue.
The Big One: Penalties
No Surprise, the biggest complaint is about Payout Penalties. But what might be surprising, is that even though payout penalties have the most complaints, they also have the most dismissed complaints! According to OBSI, after an appropriate investigation, they are finding that the bank did nothing wrong. It’s generally the mortgage consumer says that they weren’t aware or told.
As mentioned above, the most common claim by the mortgage customer is that they were not told about the penalties or how the penalties would be calculated. But OBSI frequently finds that that the client had all of the necessary information to make an informed decision, they just didn’t think it would apply to them, or were focused on something else (usually rate) as being the most important, or didn’t pay attention to what they were signing. Most lender commitments outline the prepayment privileges and penalties.
With the increase in disclosure regulations, to help protect the consumer, lack of disclosure or lack of being aware, is getting harder to argue.
When it comes to calculating an Interest Rate Differential (IRD) penalty , knowing how the lender will calculate it is very important, as not all IRD penalties are calculated the same. Some lenders will compare the best rate for the term remaining to your contract rate, PLUS any discount given from posted. This can grossly inflate your penalty, as in most cases you’ll be getting 2% added back. Today’s five year posted is 4.64%, but most five year rates can be found at 2.59% or better
Another factor can be timing; having between two and a half to three years remaining might mean your rate is compared to a three year rate, but having less than 2.5 years remaining, might mean your compared to a two year term. The difference can be significant, todays best two year rates are 2.14%, while todays best three year rates are 2.29%, that’s a 15 point difference. And that change can be from one day to the next, if you are looking right around the two and a half year mark.
This speaks to the importance of two things: one, you need to pay attention to what your mortgage has for penalties, and not just be solely focused on rate, and two, you need to work with a mortgage professional who can highlight differences in mortgages and help you weigh the pros and cons, and can help you decide what mortgage will be best for you and your family.
Portability
People sometimes take for granted that their mortgage is portable, but a lender is under no legal obligation to port a mortgage. When porting a mortgage, you will be required to re-qualify, so if your situation has changed you may no longer qualify. You may also be looking at a property that does not fit the lenders guidelines.
Things to consider when look to port are:
- Will you still qualify from the same lender (i.e. you’ve recently become self-employed and can’t prove income in the traditional manner)?
- What is the amount of time the lender gives you to port, some are same day, some allow up to 90 days?
- Can you ‘port and increase’ or must the mortgage amount remain the same (possibly meaning a more significant down payment than you were thinking of)?
- Can you ‘port and decrease’ or must the mortgage amount remain the same (possibly meaning payout penalties on the decreased amount)?
- What rate is the increase offered at, how are the rate, the term, and the amortization blended?
- What is the lender’s policy on bridge loans (commonly needed when your new purchase closes before your sale), does the lender even offer a bridge loan, or will you have to organize private financing?
- What type of property are you looking at? Does the property type and the location meet the lenders guidelines (i.e. ATB only lends in Alberta, so you can’t port out of province, maybe you’re looking at moving to an age restricted condo, which doesn’t meet some lenders lending guidelines)?
Again, OBSI generally finds that the lender has done nothing wrong, and is simply following its lending policies.
This again speaks to the importance of working with a mortgage professional who can help navigate the different mortgages out there, and help you weigh the pros and cons, and can help you decide what mortgage will be best for you and your family.
Pre-Approvals
OBSI has seen an increased number of complaints relating to mortgage pre-approvals. This is because lenders do not generally verify everything in detail when they pre-approve a mortgage, and then, when people go to finalize a mortgage, the bank will ask for the supporting documents and / or ask for more information, and sometimes that new information or lack of documentation will lead the lender to either changing the terms of the pre-approval or declining the mortgage application altogether.
The industry really needs to stop calling them pre-approvals. Rarely are they underwritten, and rarely is anything actually approved. During a pre-approval, it’s vital that the right information is provided and that the right questions are asked to determine what will likely be required for supporting documents. Supporting documents should also be provided. Again, we stress the importance of working with someone who can explain the difference, and spend the time underwriting the file themselves if not be a lender.
There may be complaints about mortgages, but working with a professional, like me, who can help explain the differences in mortgages, clarify the process, and help you make the right decision for you and your family.
Contact me.
Co-written with Martin Breeze, Mortgage Broker, TMG The Mortgage Group
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