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KNOW YOUR

MORTGAGE RISKS & RESPONSIBILITIES

Getting a mortgage is often the largest financial commitment Canadians make. Mortgages can come with many benefits. Mortgages will help you own your own home. And owning a home can be a good asset over time.

But, since mortgages are financial products and large financial commitments, there will always be risks. This is true whether you work with a mortgage broker or deal with the lender directly. But, if you do use a mortgage broker, he or she can help you better understand these risks and how they may relate to you personally.

This webpage will help identify some of the possible risks and how to manage them. For more information, you can speak to a licensed mortgage broker. Depending on the type of licence and the province in which it was issued, the licensed professional you deal with may be a mortgage broker, submortgage broker, associate mortgage broker or mortgage agent. Here, “mortgage broker” is used broadly to refer to all of these individuals. You can also connect with a brokerage or the regulatory authority in your province. The regulatory authority may also be able to provide you with information on laws and regulations that are specific to your province.  Links to the provincial regulators can be found here.

Information on a number of key concerns and possible risks involved in getting a mortgage can also be found here under the follow categories:

                Working with a Mortgage Broker
                Being a Responsible Borrower
                Understanding Your Mortgage Contract
                Being Aware of Other Risks
                Further Reading

 

 

WORKING WITH A MORTGAGE BROKER

There are many benefits to using a mortgage broker. Mortgage brokers provide options and information to guide consumers through the mortgage application process.

Mortgage brokers are licensed professionals who can identify a large number of lenders and options for you. They do not just work with one lender, which is why they can provide you with a variety of options.  In fact, some lenders will only work through brokers.  Mortgage brokers assess and compare the proposed mortgages and determine if you meet the lender’s criteria. Mortgage brokers gather whatever information and documents are needed, and make sure all the paperwork is complete and submitted for the lender to approve. They can also explain the application and approval process and answer any questions you may have, and review the rate, terms and conditions of the mortgage.

If your mortgage broker has a service agreement, be sure to read it and discuss the terms and conditions with him or her. It will help you understand the services the mortgage broker will provide and well as any fees, payments or possible reimbursements.

Before agreeing to work with a mortgage broker, you should ask these questions:

  • Are you a licensed mortgage broker?
    Do you represent the borrower, the lender or both?
    Do I need to sign a contract?
    What services do you provide and how will you help me?
    Do you charge a fee? How will you be compensated?
    How many lenders do you work with? Was most of your business done through one lender last year?

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BEING A RESPONSIBLE BORROWER

Getting a mortgage is your decision. It is important to know how a mortgage will affect your finances and possibly your lifestyle. Understanding the risks will help you decide if it is the right choice for you. To begin, you need to know how much it will cost, if you can afford it and how it will affect you.

Will you be able to afford the mortgage?

Consider not just how much money you have today, but your financial position for the length of the mortgage. Ask yourself if you will be able to continue to make the full payments on time. Even if you can, consider how the payments will affect your spending money and your ability to deal with sudden or unexpected financial needs. Will you have difficulties making sure you have enough left for other things you need?

Do you have a good credit history?

Your credit history determines your credit worthiness and your ability to get a mortgage. Lenders will ask to check your credit history to decide if they want to offer you a mortgage. But be careful not to agree to too many credit checks over a prolonged period of time– that could have a negative effect on your credit score.

How stable is your income and employment?

This is especially important for seasonal and contract workers. A decrease in pay or losing your job could seriously change what you can afford and your ability to pay back the mortgage.

How much does owning a home cost?

Owning a home costs more than the amount of the mortgage. When you purchase a home, there are closing costs, including legal and other fees, along with appraisals and land transfer taxes to be paid. Once the home is yours, there are moving expenses, property taxes, insurance, condo fees, home repairs, and so on. Make sure to include all of these expenses as part of the total cost when you are considering if you can afford a mortgage.

Will owning a home affect your other financial and life decisions?

Mortgage payments could limit your ability to manage other expenses. After making your mortgage payments, would you have enough money to also pay for the things you might need in the years ahead? You might need a vehicle, wish to travel, have children or add to your family in the future.  Consider if a mortgage could prevent you from being able to manage other commitments or goals.

What happens if you can't pay for the mortgage?

Not paying your mortgage on time and in full can lead to penalty fees, default and even foreclosure. That means, if you default, the lender has the right to take possession of the property to recover the money still owed on the mortgage. Depending on the circumstances, you may never get the home back and the lender may sell the home.

If this happens, all of the previous mortgage payments you have already made, all the money you have invested into the home and any equity (value beyond what is owed on the mortgage) in the home could be lost. If the lender sells the home for a price that is less than what was left on the mortgage when it went into default, you might even have to pay the difference. Also, it will be harder in the future to find a lender that will offer you another mortgage.

Will your property value increase or decrease? 

A home is often a good asset. But not always. The value of a home can go up or down. Decreases in value can result in losses of equity.

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UNDERSTANDING YOUR MORTGAGE CONTRACT

Like most legal contracts, a mortgage can be very complicated. It is important to know and understand what you are committing to and if it’s right for you. Before signing a mortgage contract, you need to be sure that you understand all of the terms and conditions.

Preapproval vs. Mortgage contract

When a lender preapproves you for a mortgage, it is not a guarantee that they will enter into a mortgage contract with you. A preapproval means the lenders is interested in offering you a mortgage. A lender might choose not to offer you the mortgage after closely assessing you and/or the property.

Total cost of the mortgage

The total cost of the mortgage depends on the terms and conditions for paying it back, such as the interest rate and the amount of time it takes to pay off the entire mortgage or “amortization period”. The total cost can be much more than the amount you are borrowing. You need to determine if the rate, amortization period and total cost of the mortgage are right for you.  

An estimate of the total cost of borrowing for the term must be provided to you. In most provinces this information will be provided by the person who takes the credit application, such as a mortgage broker. In Quebec, or if you are not using a mortgage broker, this information must be provided by the lender.

Finding payment options that work for you

Mortgages can be paid every week, every two weeks, once a month or twice a month. Make sure that you can handle the frequency, timing and amount of the mortgage payments. Can you afford them and do you understand how they will affect the total cost of the mortgage? Having larger payments will let you pay off the mortgage faster and reduce the total cost of the mortgage. But make sure you can afford the payments, plus all of your other expenses.

Interest rate

The interest rate will also affect the total cost of the mortgage. Choosing a variable, fixed or convertible rate will have an impact. Ask yourself if the interest rate is reasonable for you and if you can afford it.

If the interest rate is variable, there is the risk that it might go up. Even if the rate is fixed, the interest rate can still increase when you renew the mortgage. Increasing interest rates can raise your payment amounts and can make the total cost of the mortgage much higher in the long run.

Watch out for fees and penalties

Not all mortgages are the same. There are often fees and chargeable penalties included in a mortgage contract. Be sure to understand not only which fees and penalties may apply and when, but also how the amounts are calculated. Lenders have to provide you with information on fees and penalties.

Pre-payment Penalty - A pre-payment is when you pay more than the scheduled payment amount or pay off the entire mortgage ahead of schedule. Pre-payments can help you pay your mortgage back faster, but most mortgages have rules and restrictions. Some don’t allow pre-payments at all. Depending on the mortgage, pre-payments can come with costly penalties. Make sure you understand the pre-payment privileges, rules and penalties included in your mortgage and whether they are suitable for you.

Early Exit - With some mortgages, the borrower agrees to continue to make payments for a specific period of time (“term”). Leaving a mortgage before the term has finished can lead to penalties and fees. The amount of penalties and fees depends on the lender and the mortgage contract.

Services - Review the services that might be included in the mortgage agreement. Services usually come at a cost. It’s possible that you may not want all of them. Find out what the costs are, if some of the services are optional, and if you can cancel the ones you don’t want.

Administration & Discharge Fees - If you decide to exit a mortgage agreement, renew the mortgage with another lender or pay the entire mortgage amount early, you may have to pay for the administrative work needed to make the change. Make sure you understand these fees if you are considering changing lenders or exiting the mortgage.

Late Payment Penalties - Your lender may charge you fees and penalties if you are late making a mortgage payment. When these penalties apply and the amount charged depends on the lender. You should understand both the triggers and the amount of these penalties. Also, if you continue to make late payments, your lender may not want to renew the mortgage with you at the end of term. It’s always best to make your payments on time and in full.

Portable Mortgages - Most mortgages allow home owners to keep the same mortgage contract and have it transferred to a new home if they move. This is called mortgage portability. But, if your mortgage does not have a portability feature, your lender could charge a fee if you want your mortgage transferred to a new property.

Change in Use - Your mortgage might include an agreement on how the property can be used. There can be penalties or you might not be allowed to change how the property is used (e.g., changing your property from a residence to a place of business or a rental property).

Be prepared for renewal

The agreement with the lender is usually for a limited term (often five years) and not for the entire length of the mortgage (i.e., the amortization period). At the end of the term, your mortgage will have to be renewed. There are no guarantees that the lender will renew your mortgage. And, the terms and conditions could change.

It is a good idea to contact your mortgage broker well before you have to renew. If you do not use a mortgage broker, be prepared to look elsewhere to negotiate the interest rate and other terms and conditions.

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BEING AWARE OF OTHER RISKS

Be cautious when you agree to a mortgage. 

Be completely honest

It is important you are honest when you are applying for a mortgage. All of the information you give to a broker or a lender, including information on the mortgage application documents, must be accurate, complete and truthful. Errors in your application can easily lead to a mortgage that is not right for you. Misstating facts or providing false information in your mortgage application is illegal and can have serious consequences.

Don’t become a straw borrower

Never pose as the purchaser of a home or apply for a mortgage for someone else. Applying for a mortgage that is for someone else is called being a “straw borrower” and it is illegal. You will end up being responsible for the mortgage, in trouble with the law and possibly sued by the lender.  If someone asks or offers you money to apply for a mortgage for someone else, say “No”.

Say “no” to cash payments

Never make payments, especially cash payments, without receiving a receipt. All payments for mortgage broker services are to be made to the brokerage or company and not to an individual. There should not be any surprise fees.  You must be advised of these costs in advance.  If a mortgage broker, agent or sub-broker asks for cash or payment made directly to them, say no and contact the brokerage and the regulatory authority in your province.

Think before using a mortgage to invest in something else

If you are being encouraged to take out a mortgage in order to invest into something, be sure that you understand all of the risks of the investment.  Any investment involves a risk that you can lose some or all of your invested money.  However, your mortgage loan will remain no matter what happens with the investment.

Beware of offers that are too good to be true

You may be approached with offers and services to help you save money on your mortgage. Be careful before agreeing to any plan promising you mortgage savings, especially if it sounds too good to be true. These plans can come with fees and charges that cost more than the promised savings. Also, your mortgage broker might be able to provide the same advice for free and your lender might be able to offer you the same savings by increasing the amount of your payments.  When in doubt, ask another financial professional or mortgage broker for a second opinion.

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FURTHER READING

Other organizations have also developed materials to help with important considerations when buying a home or getting a mortgage.  If you are interested in reading more about mortgages, the MBRCC suggests visiting these websites:

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