Well said Jon.. Time to educate clients on what that bank mortgage really entails
Posted on Jun 18, 2013 in Mortgage Market Updates and News
I couldn't have put it better myself..
In a recent MortgageBrokerNews article, an Ontario Mortgage Broker outlines an all to common situation his client is currently facing. The broker tells the story of a deal he lost a couple years ago when the clients bank matched his rate. This happens often. A client is shopping for a mortgage with their bank and a broker. The broker gets them a better rate so they decide to go with them, and then at the last minute the bank swoops in to match the rate. The client then stays with their bank out of loyalty.
This practice has always boggled my mind personally. I don't understand the loyalty to a bank that wasn't willing to give you their best rate upfront.. But that's a different story, back to my point. Flash forward to the present day, and that same Ontario Mortgage Broker is working on a refinance for the client out of the bank mortgage. This happens often, for whatever reason, people need to pay out their 5 year mortgages a couple years early.
Well.. nearing completion of his refinance the client gets a phone call from the bank saying he can move his mortgage, but he'll be subject to a $12,000 mortgage penalty to break out of his existing contract. Wow! $12,000! Don't get me wrong, I completely agree with the theory behind the rule of mortgage penalties. If you sign on for a 5 year contract and want to pay it out 3 years in, then you deserve to be charged a penalty. After all, you committed to 5 years. What I don't agree with is the lack of consistency lender to lender, and the extreme lack of explanation clients are given prior to signing.
Just to be clear, there are very limited rules and regulations as to how lenders are allowed to calculate early pay out penalties. The main rule, is that they need to disclose their calculation in their Standard Mortgage Terms. Well, some may think this is enough, but I certainly don't. How many people out there have read their standard mortgage terms? Or had their banker review it with them before signing? Not likely.. It's a pretty thick document. Even if the banks were reviewing this document, in my opinion it still wouldn't make a difference to clients. If your bank rep says to you, "This is how we calculate mortgage penalties, A multiplied by B divided by C," you wouldn't know that that's any different or more or less beneficial than the next lender. You wouldn't know for example, that their inclusion of the 'posted rate' in their calculation can add thousands of dollars extra to your penalty. What's even worse, is when an uneducated Bank Rep actually tells the client penalties are THE SAME no matter which lender you go with. I've personally had a client told this by a bank rep. It was a completely untrue statement that could have lured my client into a mortgage, that would have cost her thousands extra to break out of.
This is an issue in my opinion that deserves more media presence. Borrowers have the right to know that if they sign onto a mortgage with one lender their penalty could be 3x what it would be with another lender.
In the situation above with the Ontario Broker's client, if he'd gone with the Mortgage Broker's advise and taken the MCAP mortgage that was originally arranged for him before the bank matched the rate, his penalty would have been $3,500 vs the $12,000 his RBC mortgage charged him. In order to balance the difference in cost of this outrageous penalty, RBC would have had to offer a rate about 1.40% better than the Ontario Broker was offering.
I urge people to remember that mortgage brokers are trained on and know the products of 20+ lenders products, whereas most bank reps know nothing but their own, and are typically trained on only the positives of the product and not the negative. There's a lot more to a mortgage than rate, so make sure you get your advice from someone who truly understands the good and bad of each product and can properly advise you. Unfortunately this Ontario borrower learned the hard way that, "Not all mortgages are created equally."
Sharie Marie Minions
TMG The Mortgage Group Canada Inc