Mortgage application

Banks Operate Under the Scrutiny of Government Watchdogs. But When It Comes To Mortgages, Those Watchdogs Don’t Watch Everything They Could.

By: Rob Mclister / Speacial Report to the Globe and Mail
If you feel that your bank or broker is not acting in your best interest, use your own judgment and use the services of a bank or broker that meets your needs, not theirs. “Individual (bank) mortgage reps operate outside of regulatory boundaries which commonly govern licensed professionals,” says Samantha Gale, a former mortgage regulator with B.C.’s Financial Institutions Commission and chief executive officer of the Mortgage Brokers Association of British Columbia. Rules pertaining to mortgage rep competency, the suitability of mortgage recommendations and compensation disclosure are largely left to the banks themselves. That raises certain questions, like the procedure banks use when sending a mortgage applicant to another lender. At Royal Bank of Canada (RBC), for example, mortgage reps route applicants that don’t meet normal guidelines to their Alternate Mortgage Solutions (AMS) team. RBC’s AMS employees then farm those customers out to other lenders and the bank’s mortgage rep gets paid when the mortgages close. Some might easily mistake this practice for “dealing in mortgages,” an activity that normally requires a brokering license. But, because bank employees are the ones recommending the alternative lenders, and because banks are federally regulated, they aren’t bound by tough provincial rules that make it an offence to broker without a license.

mortgage 

This post covers standard mortgage types and associated terms. Each bank, credit union and private lender may also offer their own specialized mortgages and terms.

 Brought to you by: Kristen White
 

Term

The period of time your mortgage agreement will be in effect, including your interest rate and terms and conditions. At the end of the term, you either pay off the mortgage in full, renew it or possibly renegotiate your mortgage agreement (for example, decrease your amortization period). Terms are generally for six months to 10 years.

Prepayment Charge / Penalty

Your lender may require you to pay a charge if you want to make a prepayment greater than the amount allowed in your mortgage agreement, or pay off or break a closed mortgage before the end of the term. Sometimes also called a penalty. Prepayment Privilege Terms of your mortgage contract that allow you to pay an amount toward a closed mortgage on top of your regular payments, without triggering a prepayment charge. For example, you may be allowed to make lump-sum payments up to a certain amount or increase the amount of your regular mortgage payments.

Prepayment Penalty

A fee charged to you by the lender for making a prepayment greater than the amount allowed in your mortgage agreement, or for paying off a closed mortgage before the end of the term.

Open Mortgage

A mortgage that can be prepaid at any time during the term, without paying a prepayment charge. The interest rate on an open mortgage may be higher than on a closed mortgage with a similar term.

Closed Mortgage

A mortgage agreement that cannot be changed before the end of the term. Your lender may let you make certain prepayments without paying a charge, but you will usually have to pay a charge to break or change your mortgage agreement.

We buy homes in British Columbia

 Should You Break Your Current Mortgage Contract to Take  Advantage of a Lower Interest Rate?

 By: RBC Advisory Services
With rates these days at historical lows, you may be wondering if it is  the right time to break your current mortgage and lock into a new term to take advantage of these low interest rates. Remember that if you have a closed mortgage, you will incur what is called a pre-payment charge.

Why do banks charge a penalty to do this?

Lenders incur significant sales, underwriting and funding costs to issue and renew mortgages.  Mortgage rates are designed to recoup these costs over the contractual mortgage term. Most of today's mortgages are 'closed' which, for similar terms, tend to have lower rates than open mortgages.  The lower rates are in large part due to the fact that there are prepayment charges which are designed to compensate the lender for the economic costs it incurs when a prepayment amount exceeds the prepayment privileges permitted under the mortgage.  These costs include prepayment transaction costs, plus the fact the lender will not receive the full term amount of interest that was designed, in part, to recover the lender’s costs to acquire the mortgage. In contrast, you can pay off an open mortgage at any time without penalty. However, rates tend to be higher than for closed mortgages with similar terms.