Overlooking the closing costs

General Konstantin Seroshtan 29 Jun

Understanding closing costs with Konstantin Seroshtan - your Mortgage Broker

One common mistake is overlooking the closing costs that need to be paid at the end of the buying process. While budgeting for your home purchase, you’ll want to have an accurate picture of the additional costs you’ll need to pay. Some of these costs may include land transfer taxes, title insurance, property appraisal fees, home inspection fees, and legal fees.

Before closing day

Home inspection (optional)

Property appraisal

Property survey

Title insurance

Property insurance

Mortgage life, critical illness, disability or job loss insurance (optional)

Closing day

Applicable fees, taxes and remaining costs

  • Land transfer taxThe property transfer tax rate is:
    • 1% on the first $200,000,
    • 2% on the portion of the fair market value greater than $200,000 and up to and including $2,000,000,
    • 3% on the portion of the fair market value greater than $2,000,000, and
    • If the property is residential, a further 2% on the portion of the fair market value greater than $3,000,000 (effective February 21, 2018).
  • GST. 
  • Property taxes, utilities and condo fees

Mortgage default insurance

After closing day

 

What is a high-ratio mortgage?

General Konstantin Seroshtan 22 Jun

by Tim Bennett

In Canada, mortgages can be either high-ratio or low-ratio, and the difference matters. Having a high-ratio mortgage can make a significant impact on the overall amount of interest you’ll pay, and can cost you tens of thousands of dollars extra over the life of your mortgage. This article has everything you need to know about high-ratio mortgages in Canada.

What is a high-ratio mortgage?

A high-ratio mortgage is one with a down payment of less than 20% of the purchase price of the home you’re buying. The ‘high-ratio’ part of the name refers to the ratio between the mortgage amount (the loan) and the total purchase price (the value), also known as the loan-to-value ratio. The opposite of a high-ratio mortgage is a low-ratio mortgage, which has a down payment of more than 20% of the property purchase price. By increasing your down payment the ‘loan’ portion of the ratio will decrease, thus decreasing your loan-to-value ratio.

The best way to understand the difference between high-ratio and low-ratio mortgages is with a couple of examples.

High-ratio mortgage example

Let’s say you’re buying a $500,000 home. With a down payment of 10%, here are the numbers that matter:

  • Property Price (value): $500,000
  • Down payment: $50,000
  • Mortgage amount (loan): $450,000

In this example, your loan to value ratio is 9 to 10 (90%) which is considered a high-ratio mortgage.

Low-ratio mortgage example

Let’s take the same example, but with a larger down payment of 25%.

  • Property Price (value): $500,000
  • Down payment: $125,000
  • Mortgage amount (loan): $375,000

Our new loan-to-value ratio is 3 to 4 (75%) which is considered a low-ratio mortgage.

Implications of a high-ratio mortgage

The most important upshot of having a high-ratio mortgage is that you’ll need to pay for mortgage default insurance, also known as CMHC insurance. This is a federal requirement to ensure that higher-risk mortgages are properly insured. Here are the main implications of having an insured mortgage.

Cost of premiums: While the mortgage default insurance policy is taken out by your lender, you’ll be required to pay the premiums upfront, at the beginning of your mortgage. The cost of premiums will be added to your overall mortgage amount, and are generally between 2% and 4% of the mortgage amount. The actual rate depends on your loan-to-value ratio, with higher ratios attracting a higher premium. For a mortgage amount of $500,000, your CMHC premiums could be anywhere between $10,000 and $20,000. You can use our mortgage payment calculator to estimate the cost of CMHC insurance on a particular mortgage.

Amortization period: For an insured mortgage, your maximum amortization period will be 25 years. Non-insured mortgages can have amortization periods of up to 35 years. The amortization period is the total amount of time you have to pay off your mortgage. A shorter amortization period will result in you paying a higher regular mortgage payment, which may be harder to budget for.

Interest rate: There’s a difference between the mortgage rates of insured vs. uninsured mortgages. Insured mortgages are inherently less risky because your lender would receive a payout if you were to default. That means your lender can afford to offer a lower interest rate on insured mortgages. However, the cost of CMHC insurance would almost always be more than the savings you could make from a slightly lower interest rate.

Tips for getting a high-ratio mortgage

If you find yourself in the position of considering a high-ratio mortgage, here are a few tips to consider.

  • Save a bigger downpayment: Waiting to get a mortgage later gives you more time to save for your down payment, which could bring you over the 20% threshold for CMHC insurance. This would see you avoid paying CMHC premiums together.
  • Buy a cheaper home: By purchasing a cheaper property, your down payment will represent a larger percentage of the overall price, which could bring you over the 20% threshold.
  • Increase your down payment: If you have to buy now and you can’t buy a cheaper home, try to increase your down payment with a loan or gift from a family member, or by participating in the RRSP home buyers plan, if you’re eligible.
  • Compare mortgages rates: Just because you take out a high-ratio mortgage, it doesn’t mean you won’t be able to get a great mortgage rate. Comparing rates from multiple lenders is one of the best ways to save money on your mortgage.

Compare today’s top mortgage rates

Looking for a great mortgage rate? Check out the lowest mortgage rates available

The bottom line

High-ratio mortgages are not uncommon in Canada, and you shouldn’t worry too much if you end up taking one out. You have a long time to pay it off, after all. The whole point of high-ratio mortgages is to allow people with fewer assets to get a start on the property ladder.

However, avoiding a high-ratio mortgage in the first place is the best way to save money, and can make buying a home in Canada more manageable. Learning as much as you can about mortgages, comparing rates, and speaking to a mortgage broker are all steps worth taking.

Beware the Siren Call of HSBC’s 1.99% Five-Year Fixed-Rate Mortgage

General Konstantin Seroshtan 17 Jun

The spring real estate market is showing signs of life – and the usual big bank low rate teaser.

There is an annual tradition in the Canadian mortgage market whereby a large bank grabs the headlines with an eye-catching rate as soon as our spring real-estate markets kick into high gear.

True to form, now that our regional real-estate markets appear to be emerging from their extended COVID-induced slumbers, HSBC is offering a five-year fixed rate mortgage at 1.99% to borrowers who are putting down less than 20% of the purchase price of a property (commonly referred to as high-ratio borrowers).

Side note: If you’re wondering why smaller down payments come with lower mortgage rates, it’s because they also include borrower-paid default insurance premiums.

In today’s post, I will use HSBC’s offer to illustrate why the terms and conditions in your mortgage contract can end up costing you much more than a small difference in rate over time.

HSBC’s rate is noteworthy because it is the lowest advertised five-year fixed rate ever offered by a bank in Canada, but any responsible purveyor of mortgage advice should always take care to remind you that your overall borrowing cost often comprises a lot more than just the rate.

Your terms and conditions dictate how much flexibility you have over the length of your contract. Most Canadian borrowers opt for five-year terms, and a lot can change over that length of time. I have been a mortgage broker for the past ten years, and in my experience, the changes are rarely foreseen at the outset. Examples include job transfers, career changes, job losses, changes in family structure, or the simple desire to trade up.

Many borrowers, when they are at their most vulnerable, are shocked to learn that there are huge differences in the fixed-rate mortgage penalties charged by different lenders. In the example I provide below using today’s rates, HSBC would charge you a $23,000 penalty to break your mortgage while a competing lender with a rate that is only slightly higher today would charge $2,000.

Let’s start by using a $400,000 mortgage to compare the difference in interest cost between HSBC’s 1.99% offer and a rate of 2.13% from a lender with better terms and conditions (Ts and Cs):

HSBC Chart #1 (Interest Rate Comparison)

HSBC’s rate would save $2,612 over the next five years. The question that follows is: How much flexibility are you willing to give up for that saving?

To estimate what it might be worth to you, let’s look at the difference in cost if you want (or need) to break your mortgage contract early. For ease of comparison, we’ll assume that this happens within two years, with mortgage rates the same as they are today.

If you want to break a fixed-rate mortgage, lenders will charge you a prepayment penalty that is the greater of three months’ interest or a formula called Interest Rate Differential (IRD). While every lender uses the same basic wording, the devil lies in the differences in their detailed calculations.

Simply put, the inputs that lenders use to calculate their IRD penalties can vary significantly.

In the example above, HSBC would charge $23,049 whereas the other lender would charge $1,998.

If you want to review a detailed breakdown of the inputs that I used to come up with the penalty amounts, I have provided them in the charts at the bottom of this post.

With that difference now highlighted, if you needed a mortgage for $400,000, would you choose to save $2,612 in interest in exchange for a break penalty that is about $21,000 higher? Or would you trade that $2,612 saving for a far lower penalty instead?

To help you further evaluate that trade-off, let’s look at two examples of when you might want to break your mortgage.

Scenario #1 – Mortgage Rates Fall

The most common reason for breaking a mortgage is to take advantage of lower rates. Borrowers can often realize a substantial saving if they refinance to a lower rate – but this only works if the cost of the break penalty is reasonable.

Interestingly, despite the fact that rates have been trending lower for decades, borrowers continue to assume they can’t go much lower.

While nobody can know with certainty what will happen next, consider the following points:

HSBC Chart #6

  • Five-year fixed mortgage rates are effectively priced on the Government of Canada (GoC) five-year bond yield.
  • High-ratio fixed mortgage rates, which are always the lowest offered, have historically been priced at about 1.25% over the GoC bond yield.
  • Today the GoC bond yield stands at 0.37%. There are COVID-related risk premiums included in our mortgage rates at the moment, but if those eventually melt away, 0.37% + 1.25% = 1.62%.
  • Throw in another 0.12% drop in the GoC bond yield over the next 2 years, and it doesn’t seem impossible that high-ratio five-year fixed rates could hit 1.50%.
  • If that sounds crazy, because it would put us at a new low, consider where the five-year GoC bond yield sits compared to its G10 peers (see chart).
  • In Europe mortgage rates have actually gone negative.

If our high-ratio five-year fixed rates were to hit 1.50%, the borrower with the penalty in the $2,000 range could take advantage. Refinancing down to 1.5% would produce a net saving of $4,575 over the three years they had left on their initial contract, in addition to adding two more years at the new, lower rate on the back end.

(For comparison, that borrower would also save $2,000 more than the borrower who took HSBC’s rate of 1.99%.)

Scenario #2 – You Need to Sell

While this scenario would be less likely, a borrower who is forced to sell their property (without buying another one) because of job/income loss, a job transfer, or a change in any other life circumstances would have no choice but to pay whatever penalty their lender charges. And people are regularly paying those huge penalties, as any Google search on the topic will readily reveal.

In uncertain times like these, having a mortgage contract with a penalty that will result in one less zero after the dollar sign might be worth paying a little more interest to secure.

I am picking on HSBC in this post only because of their recent high profile offering, but to be clear, there are plenty of other lenders who use similar penalty calculation methods. Even lenders who do offer fairer penalty calculations have specific products that come with a slightly lower headline rate and much more onerous penalties.

My advice, after more than a decade of watching the rate/penalty trade-off play out across thousands of real mortgages, is that the terms and conditions will likely matter a lot more than you might think on first pass.

Forewarned is forearmed.

The Bottom Line: Both five-year fixed and variable rates continued their slow decline last week as COVID-related risk premiums continued to shrink. This is now a well-established trend that should continue in the weeks ahead.

Detailed Breakdown of Penalty Calculations

To summarize, here are two charts showing how the lender offering a five-year fixed rate at 2.13% today would calculate your penalty using the Standard Method if you have three years left on your term and if their three-year fixed rate (which is known as the Comparison Rate) is 2.39% (where it stands today):

The lender’s current three-year fixed rate (2.39%) is actually lower than your contract rate (2.13%), as has been the case for some time now, so the Standard IRD penalty calculation in the chart above produces a negative number. Given that, the three months’ interest penalty of $1,998 is the one this lender will charge.

HSBC Chart (Three months interest - Standard)

HSBC Chart #3

Now let’s compare that amount to the penalty HSBC would charge under the same scenario:

HSBC Chart (Three months interest - Discounted)

HSBC uses the Discounted IRD method I outline in the post I link to above, and its three-year posted rate is currently 2.89%.

HSBC is discounting its five-year posted rate of 4.94% by 2.95% to get it down to 1.99% and when that same discount is applied to its three-year posted rate of 2.89%, the comparison rate becomes -0.06%.

HSBC uses the greater of three months’ interest ($1,864) or IRD ($23,049), so your penalty would work out to $23,049.

Construction Mortgage Loans

General Konstantin Seroshtan 15 Jun

On several occasions I have had people ask me about construction mortgages. Every lender has their own guidelines and rules when it comes to construction mortgages. That’s because there are many details involved in the process of construction, let alone the mortgage that actually funds it!

Construction Mortgages almost always start with raw land

Raw land usually comes in 2 forms: service lots and un-serviced lots*

Serviced Lots are defined as having:

  • Portable water-water that is safe enough for drinking and food preparation
  • Septic/sewer services-city connected sewers or a septic field
  • Access-a driveway, as rough or refined as it is
  • Hydro-connected to power
  • Natural gas (if applicable)
  • Need 25% to 35% down

Un-serviced Lots are defined as having:

  • Portable water-needs to be available
  • Septic/sewer services-not applicable
  • Access-(other) or not typical such as water access
  • Hydro-not applicable
  • Natural Gas-not applicable
  • No Agricultural Land Reserve**
  • Need 35% to 50% down

*guidelines depend on the lender
**land that is reserved for agricultural activity (ie. Farms)

Rates and terms of purchasing raw land

Serviced Lots usually have:

  • Maximum Mortgage Amount, depending on the lender
  • Maximum Mortgage Amortization, depending on the lender
  • Rates are usually a little higher than discounted rates (ie best discounted fixed rate plus 1%), but not always
  • Fees – usually a lender/broker fee, but not always
  • Terms – usually 1 thru 5 years

Un-Serviced Lots are defined as having

  • Maximum Mortgage Amount, depending on the lender
  • Maximum Mortgage Amortization, lesser maximum amortization compared to serviced lots
  • Rates are usually a little higher than discounted rates and higher than serviced lots (ie best discounted fixed rate plus 2%), but not always
  • Fees – usually a lender/broker fee and usually higher than serviced lots, but not always
  • Terms – usually 1 thru 5 years

How do you qualify?

  • You need to complete a mortgage application
  • You need to provide credit bureaus and income documents showing that you qualify for the amount of money you wish to borrow.
  • You need to provide a detailed construction budget.
  • You need to provide a title search (through your mortgage broker or lawyer)
  • You need to submit a copy of the purchase agreement, including all addendums and amendments.
  • Builder information and resume (if requested) and project contract
  • Full set of legible construction drawings scaled to legal size paper or smaller
  • HPO registration (Home Owner Protection forms or registration of new home)
  • You base the amount to be borrowed on the appraisal based on a completed project

You may need to also provide….

  • Copy of all construction contracts
  • Corporate financial statements (if applicable)
  • You need to submit a detailed summary of the deal, including how you are expecting to move out of the higher interest rate construction mortgage into a “normal” mortgage, depending on the lender
  • Copy of purchase agreement for the land purchase

These are the first steps to setting up and understanding a construction mortgage. There are unique traits to this type of mortgage as with any other mortgage. Remember, you should always consider calling a mortgage broker to help walk you through this complex process!

Three Key Areas:

1. The Budget

The budget is the most important piece of information that the lender wants to see. It should include “hard” and “soft” costs. There is usually “reserve” money set aside to ensure there is enough money in the anticipated event of over budget costs. The “reserve” money is usually 10%-25% cash flow based on the budget for the project. This is on top of the down payment.

This table denotes common soft and hard costs that should be included in the budget:

table01

2. The Loan

How the loan is Calculated

Lenders will lend up to a maximum amount determined by the guidelines of the individual lender. For example, based on the lender loaning up to 75% of the total cost (with 25% down):

Land purchase price (as is) Total soft and hard costs Total Cost (as complete)

$200,000 $400,000 $600,000 x 75% = $450,000 available to loan

Keep in mind, the lender will also consider the appraised value of the finished product. In this example, the completed appraised value of the home would have to be at least $600,000 to qualify for the amount available to loan. The appraised value is determined before the project begins.

As well, the client will have to come up with the initial $150,000 to be able to finance the total cost of $600,000. A down payment of $150,000 plus the loan amount of $450,000 = the total cost of $600,000.

Construction loans are released in draws (guidelines are based on the lender). NOTE – between Draws, there is an appraisal/progress report that is ordered by the lender. This is at the client’s cost. These reports are usually around $200 per report, depending on the appraiser.

Draw 1 – Foundation Draw The initial draw is usually based on the preliminary fees. Remember from the example in the previous page that the loan amount is $450,000. Foundation Draw – building the foundation Land purchase ($200,000 – down payment of $150,000) = $50,000 Interest Reserve ($30,000 or 9 months’ interest of the loan) = $30,000 Lender Fee (usually 1% plus any broker fees) = $15,000 Legal Fees = $3,000 Total first draw is $95,000 which leaves $355,000 for construction costs.

Draw 2 – Construction begins! Lock Up Draw – Framing is done and doors and windows can be “locked up”. Whatever amount of money was budgeted for the initial framing component of the project.

Draw 3 – Drywall Draw – You get your drywall up. Whatever amount of money was budgeted for the initial framing component of the project.

Draw 4 – Completion Draw: The Lender sends in an Appraiser to do a progress report to verify that the budget has been followed and build is complete. At this point, the lender will contact you to finalize a new mortgage (a “normal” mortgage) that will be based on the appraised value of the home. Once your building project is completed, we will be able to assist you in moving your construction mortgage to a traditional mortgage, utilizing the discounted rates that we have access to.

The lender may also require a project timeline. Typically, the lender allows a timeline of 6 – 12 months, depending on the lender.

3. What you should know?

  • Construction loans are usually fully opened and can be repaid at any time.
  • Interest is charged only on amounts drawn. There are no “unused funds”
  • Once construction is complete and project completion has been verified by the lender, the construction mortgage is “moved over” to a normal mortgage.
  • A lender will always take into consideration the marketability of a property. They will look at not only the location based on demographic but also the location based on geography. For instance, a lot that is in a secluded area where no sales of lots have occurred in the last five years and mostly consisting of rock face may not be a property that they are willing to lend on.
  • Depending on the lender, you may have a time-frame within which you need to complete construction (typically between 6 and 12 months).
  • Although we’ve described 4 draws, the lender can advance additional draws if needed (i.e. there is a time crunch to pay a vendor and you don’t have enough cash to cover the cost. Or there is unexpected expenses that have come up and you have to dip into your contingency fund (usually a 10% reserve determined by the cost to build).

Problems you can Encounter

  • You may go over budget and have to dip into the “reserve” fund as needed
  • You may have issues with project management not going smoothly. For instance, trades not showing up to do scheduled work.
  • Liens can be put on title throughout the construction project timeline which will delay funding for the next draw. Liens will have to be removed before new draws are released.

Delays in construction and depleted funds can wreak create havoc in a project. Make sure you are working with professionals that have experience and know how to troubleshoot when needed

Final Thoughts…

Construction mortgages are complicated. It is in your best interest to have a mortgage professional guide you in the step by step process of a construction mortgage. At Dominion Lending Centres, we have the expertise to show you how to set up your construction mortgage to fit your needs. I make sure that the costs that will cross your path will be taken into account and that you will borrow the required funds to build your dream home. Give me a call to discuss your options in building the house of your dreams!

📲250.826.7626

📩konstantins@dominionlending.ca

New CMHC rules will affect your buying power

General Konstantin Seroshtan 8 Jun

The Canadian Mortgage and Housing Corporation (CMHC) has announced changes to its coverage criteria for insured mortgages. The changes could make it more difficult to qualify for a mortgage in Canada.

CMHC is the largest issuer of mortgage default insurance, which protects lenders if a borrower cannot make their payments. Mortgage default insurance (often called CMHC insurance) is required on any mortgages with a down payment of less than 20%.

The changes are likely to make it harder for aspiring home buyers with down payments of less than 20%.

The main changes to CMHC lending rules

The main changes that CMHC has announced have to do with debt service ratios and credit score requirements for CMHC-insured mortgages. The new requirements are:

  • Gross debt service (GDS) ratios must be under 35, down from 39
  • Total debt service (TDS) ratios must be under 42, down from 44
  • Borrower’s credit score must be at least 680, up from 620
  • Borrowed down payments will no longer be allowed

The changes will go into effect from July 1st, 2020. The impacts of each of these points are discussed further below.

The reason for the changes

The changes should limit the growth of high-risk mortgages during the COVID-19 crisis. On May 19th, CMHC President Evan Siddall made a speech outlining grim projections for Canadian mortgages, saying up to 20% could fall into arrears due to the crisis, and that house prices could decrease between 9% and 18% over the next 12 months.

In today’s announcement, Siddall says the changes to coverage eligibility protect CMHC and Canadian taxpayers (CMHC is a Crown-owned corporation) from further losses due to the ongoing pandemic.

James Laird, co-founder of Ratehub.ca and President of CanWise Financial mortgage brokerage, said the most interesting part of the announcement was what was not changed:

“The biggest news coming out of the announcement from the CMHC is that they did not increase the minimum down payment from 5 percent to 10 percent,” James said. An increase to minimum down payments had been predicted after Siddall’s May 19th speech.

Debt service ratio changes

Debt service ratios are calculations lenders use to determine how much an applicant can afford to borrow. The calculation compares an applicant’s income to the amount they are paying to service their current debt, along with some other cost of living expenses. The higher the number, the more income is being used to pay your debts.

By lowering the threshold for the two debt service ratios, borrowers will need to have more room in their budget to make their mortgage payments in order to qualify for CMHC coverage on their mortgage.

To decrease your debt service ratios, you must either increase your income or pay off your existing debts.

Credit score changes

The minimum 680 credit score requirement simply means that for a borrower to qualify for CMHC coverage on an insured mortgage, they must have a credit score of at least 680, which is higher than the previous score of 620.

If a borrower does not have a high enough credit score, it could mean that they are unable to take out an insured mortgage.

Changes to down payments

Previously, mortgage applicants were able to borrow money for a mortgage down payment, subject to certain rules. Under today’s changes, doing so will disqualify borrowers from CMHC coverage.

James Laird says this will not be as significant a change as the other measures announced today:

“Most Canadians source their down payment from their own savings and investments, along with gifts from family, and those sources remain unchanged. The change to down payment will not be as impactful as the changes to the GDS limit and credit score.”

Impact on consumers

The upshot for would-be borrowers is that they will now need a higher credit rating and lower debt service ratios to qualify for a high-ratio mortgage (ie, a mortgage with a less than 20% down payment). Consumers can avoid this by having a down payment of more than 20%, as these are not dependent on eligibility for CMHC coverage.

However, if an applicant is unable to save a 20% down payment, today’s changes could significantly reduce buying power. According to the Ratehub.ca mortgage calculator, using the current mortgage qualifying rate of 4.94% and GDS limit of 39, a family with an annual income of $100,000 and a 10% down payment would have qualified for a home valued at $524,980*.

Under the new GDS limit of 35, the same household can now only afford a home of $462,860. This is a decrease in buying power of almost 12%, all due to the change in the GDS limit.

Private insurance providers

It’s worth noting that CMHC is not the only issuer of mortgage default insurance, and private insurance companies do offer it. Private insurers are under no obligation to hold borrowers to the same requirements as CMHC.

If other providers do not change their eligibility criteria, borrowers may still be able to take out insured mortgages with coverage provided by a private provider. It is possible that the mortgage default premiums from a private provider may be higher than they would be from CMHC.

The bottom line

As with any changes to the mortgage application process, the best thing for you to do is understand the impact on your personal situation. For assistance, the best person to speak to is a mortgage professional, such as a mortgage broker. Brokers are independent experts and can assess your situation to give you personalized, up to date advice.

TD Bank charges $30,000 mortgage penalty to woman forced to sell home due to pandemic

General Konstantin Seroshtan 1 Jun

When the pandemic hit Ontario, Kristina Barybina’s income as a real estate agent dried up and she knew the writing was on the wall — she’d have to sell her own house.

She also knew there’d be a penalty for getting out of her five-year mortgage with TD Bank early — she just wasn’t expecting it to be almost $30,000.

I thought my eyes were going to pop out,” said Barybina. “It’s insane.”

A mortgage expert says people who have to sell their homes and have fixed-rate mortgages are being hit particularly hard right now, because of how financial institutions calculate penalties — and he’s calling on the banks to have some leniency.

“When you lose your income from a financial crisis like we’re facing now and you have to fork over tens of thousands more to your lender, it’s heartbreaking,” said mortgage planner Rob McLister, founder of RateSpy.com, a mortgage rate comparison website, and mortgage editor of rates.ca, an insurance comparison website.

“Ideally banks would show some compassion,” he said.

Barybina says she had considered selling her home before. She put it on the market in November, then took it off when no buyers expressed interest.

But by mid-March, she says, selling her house became a necessity, not a choice.

Almost overnight, the real estate agent based in East Gwillimbury — 50 kilometres north of Toronto — lost all her clients. “People are not listing,” she said. “And nobody knows when the end of it is coming.”

Compounding her problems, two tenants who had been renting rooms in her house moved home to be with their families. Income from a mortgage-helper Airbnb suite also dried up.

Scrambling to look after her elderly mother, who lives with her, and a 12-year-old son, the single mother says she started taking medication for anxiety.

“They’re perfectly within their rights under the agreement, but we’re in a pandemic,” she said. “I’m not selling this house because I love to move.”

Barybina requested a one-month deferral on her mortgage, but says she quickly realized that deferring it any longer would just be pushing debt she couldn’t pay further down the road. She says she was fortunate to sell in April, just as the housing market started to plunge.

She was only 19 months into a five-year mortgage, with a fixed-rate of 3.71 per cent, and still owed $591,000. TD used a controversial calculation to arrive at the penalty for breaking the terms. She owed another $29,530.

All of Canada’s big banks use similar methods for calculating what penalty people owe if they end a fixed-rate mortgage early.

They can either charge three months’ interest or what’s called the interest rate differential (IRD) — whichever is higher.

The IRD is a calculation involving the difference between the interest rate on the negotiated mortgage, the bank’s current posted fixed interest rate and the length of time remaining on the contract. Banks argue they lose anticipated revenue from their client if they end the mortgage prematurely.

When the Bank of Canada lowers interest rates, the banks’ posted fixed rates also drop, increasing the penalties for people breaking fixed-rate mortgages.

“TD is profiting by collecting this ridiculous amount of penalty, which is only based on the fact that the interest rate posted by Bank of Canada is so low — which was done to help people,” said Barybina. “It’s heartless.”

Had the bank used the option of charging three months’ interest, Barybina says she would only have owed $3,000.

Penalties exceed losses

McLister says banks incur costs and risk when borrowing money to cover a customer’s mortgage so they need to recover that lost income. But he says mortgage penalties often exceed their losses.

“Most of the time bank mortgage penalties are bigger than they need to be,” he said.

According to Mortgage Professionals Canada, 74% of all mortgages have fixed rates.

TD Bank declined an interview request. In a statement to Go Public a spokesperson said the bank takes care to make sure customers understand mortgage penalties and that Barybina was offered an additional five-month mortgage deferral.

The statement did not address why — after Barybina filed a complaint — the bank didn’t negotiate reducing the $30,000 penalty, but did say the bank had “discussed options that were available to reduce the charge.”

Barybina denies she was offered any helpful options.

The bank also cited options — for example, deferrals and financial advice — it is offering to customers hurt by the pandemic.

Penalty shoots up

Flora Kenari and her husband Mohammad Mehdiour say they, too, are paying an unfair mortgage penalty because of the pandemic.

The couple found a house in Gloucester, east of Ottawa, and 15 months ago obtained a five-year fixed mortgage with a rate of 3.56%.

But when they returned to the bank in January to discuss moving their mortgage to a new house, they were told they’d have to break the mortgage and pay a penalty — of $8,000.

In the weeks to follow, the Bank of Canada kept dropping the interest rate, driving up their penalty.

“Every time that we heard that the prime is going down there was more and more stress,” said Kenari.

By March, the penalty had climbed to $12,000.

“The money didn’t return to our pocket, it went to the bank’s pocket. It reminds me of the Sheriff of Nottingham,” she said, referring to the villain in the legend of Robin Hood, who mistreats people and subjects them to unaffordable taxes.

After they complained to the office of the bank’s president, Scotiabank offered to reduce the penalty to the original $8,000. But the couple feels that fee shouldn’t exist at all, as they say they were told the mortgage could be transferred to another property.

In a statement, a Scotiabank spokesperson said customers are offered “various resources” to better understand mortgage penalties, that it takes “the concerns of our customers very seriously” and is working on a resolution with Kenari and Mehdiour.

Scotiabank did not address the allegation that they were misled about transferring the mortgage.

Longtime controversy

Penalties for ending a fixed mortgage have long been unpopular. A decade ago, growing calls to cap mortgage penalties and make them easier to understand prompted the federal government to require more transparency about mortgage penalty regulation.

A 2010 study by the Quebec Federation of Real Estate Boards found that the IRD penalty for breaking a fixed-rate mortgage was often 200 per cent higher than the actual loss incurred by the bank. The author of the study says since the report, there’ve been no significant changes.

McLister predicts the coming months will see a spike in the number of people “blindsided” by penalties as they’re forced to sell their homes.

“We’re already seeing a big jump in refinance requests as people try to restructure their debt ahead of potential income loss,” he said.

It’s hard to know how many Canadians will face hefty mortgage penalties due to the COVID-19 crisis, but Canada Mortgage and Housing Corporation (CMHC) CEO Evan Siddall expressed concern before the federal finance committee two weeks ago.

Siddall said thousands of Canadians who have deferred their mortgage payments during the pandemic will face a “debt referral cliff” once the payments come due this fall.

The CMHC estimates that as many as one-fifth of all mortgages will be in arrears at that time — and a large percentage of those homeowners will be faced with stiff mortgage penalties.

‘Government must act’

Such extreme penalties generally don’t exist in the U.S., which frustrates homeowners like Barybina.

“The government must act,” she said. “It cannot force banks [to end mortgage penalties] unless it has a legislative framework. So go ahead and pass a law.”

Go Public requested an interview with Finance Minister Bill Morneau, which was declined.

In a statement, a spokesperson said banks are required to be transparent about mortgage penalties and that Canadians facing financial difficulties should contact their lender “to learn what options are available.”

Prime Minister Justin Trudeau has called on the banks to “do more” to help customers during the pandemic, but when Go Public asked whether that included easing hefty mortgage penalties, he did not offer specifics.

“There’s always more to do and we’re going to make sure our financial partners are part of the solution to making sure Canadians get through this,” Trudeau said Friday.

But without more specific direction from Ottawa, the banks seem mainly to be offering only deferrals and financial advice.

McLister says calls to scrap mortgage penalties could have unintended consequences.

“There is no free lunch,” he said. “You could have the government mandate a $1 penalty for all the banks and all that would do is encourage banks to increase interest rates, increase fees and make back that profit another way.”

He says dozens of lenders, including many credit unions, don’t require “horrendous penalty calculations” — so people should shop around, bearing in mind that the big banks can often offer lower interest rates on a mortgage.

Barybina says she’s resigned to paying the $30,000 penalty, but wants to call out her bank’s behaviour during a time when she says everyone is being asked to support and accommodate one another.

“That’s why I think it’s unconscionable and unethical to proceed this way.”

 

Original story

Condo strata fees: What do they cover?

General Konstantin Seroshtan 1 Jun

Condo strata (or maintenance) fees are a monthly expense which all condo unit owners pay. It’s a shared pool of money that helps the building pay for expenses throughout the year.

When you’re renting a condo, you don’t need to consider this monthly fee separately from, or in addition to, your monthly rent because your landlord is paying this condo fee. However, when you’re purchasing a condo, maintenance fees should be an essential part of your decision-making process. This recurring cost is in addition to your mortgage. It’s one of the factors that’ll determine how much home you can afford. Keep in mind that fees can also change each year, usually increasing as the building ages due to the additional upkeep needed to maintain the structure.

How much are condo maintenance fees?

While typically condo fees relate directly to the square footage of your unit, but the cost per square foot can range between buildings. Depending on the building’s amenities, age and other factors, the price per sq. foot could be as low as $0.30 per sq. ft. or as high as $1.00 per sq. ft. For example, the monthly maintenance fee for most Toronto condo apartments is generally in the range of $0.60 to $0.75 per sq. ft.; thus, for a 600-square foot condo, maintenance fees could range from $360 to $450 per month.

This mandatory monthly fee is for utilities (such as water and garbage collection), building insurance, maintenance of common areas (such as the gym, pool, front desk, hallways, landscaping) and the building’s reserve fund.

Here are further encompassing details for each category.

Utilities

The type of utilities covered by the monthly condo fee varies from building to building. Most fees include water and trash; however, heat and electricity may also be covered in other buildings.

If, for instance, water is covered, this would mean that running a tap, having a shower, filling a glass, would all be “free” each month. However, don’t see this as a sign to run rampant with your water usage. You may not be getting a water bill every month, but your condo building is. If utility usage gets higher than expected, you may see a rise in condo fees to compensate.

Remember that the more utilities covered, the higher your condo fees will probably be. When buying a condo, always double-check with your real estate agent and the property listing to confirm what utilities are covered by your condo fees. Other utilities that may or may not be covered are hydro (electricity), heating, and cable TV. If you or your agent are ever unsure or want to validate a listing’s information, you can contact the condo board or property management company to be sure.

Building insurance

Condo maintenance fees also cover your building’s insurance. This protects the building’s unit owners from liability from events like slips and falls on the building property, fire damage to the building, and other unexpected events.

The insurance paid for through condo fees doesn’t cover your personal property. It only covers common areas of the building, such as hallways, lobby, surrounding landscaping, elevators, etc. You still need your own condo insurance to protect your unit and its contents, such as the fixtures and personal belongings.

Common elements maintenance

Common elements in condo buildings generally refer to areas that all residents have access to, such as hallways, elevators, stairs, lobbies and building grounds. Condo buildings often have additional amenities such as a gym, pool, sauna, movie room/games room, and courtyards. One of the perks of living in a condo complex is that a lot of the day-to-day maintenance requirements for these common areas is  by the condo board and/or the building’s property management.  It allows the condo resident to enjoy the amenities without directly performing the cleaning and repairs associated with these areas.

Reserve fund

The reserve fund is a pool of money that the condo building sets aside for, or in anticipation of, major expenses beyond regular maintenance. This reserve is like a savings account that can be accessed for major repairs or for other large unexpected bills. For example, roofing, structural updates, hallway and lobby flooring and redesign, and more.

When buying a condo, your real estate lawyer will review the building’s “status certificate,” which, among other things, will include details on the reserve fund. A healthy reserve fund can signify that you won’t be hit by unexpected bills down the road.

The status certificate also indicates if there are “special assessments,” which are considerable expenses outside of the regular budget parameters. Special assessments are capital expenditures collectively paid for by the condo unit owners.  They can range from a few hundred dollars per unit to many thousands. Special assessments are required payments, so understanding the reserve fund health is critical in your purchasing process.

Why pay condo maintenance fees?

You might be asking yourself, “Why would I pay condo fees?” or “Why not just go buy a house?” These are good questions, especially because maintenance fees for condo units can add hundreds, even thousands, of dollars to your monthly expenses. Also, maintenance fees are paid on top of your mortgage financing.

However, condo fees often cover many expenses that freehold house owners typically pay, either directly or indirectly. For example, depending on the condo corporation, home maintenance and repairs (such as roofing and windows), utilities (such as water and garbage pickup), and upkeep (such as lawn mowing and snow removal) may be covered.

Having an extra monthly expense costing hundreds of dollars may initially seem high, depending on your lifestyle preferences. But, paying a monthly fee to have access to building amenities and having maintenance managed for you could be a worthwhile trade-off. For additional resources on whether buying a condo is right for you, the Canada Mortgage and Housing Corporation has a checklist of pros and cons of condominium ownership.