Finding the right mortgage
by Michael Kane - The Vancouver Sun - Friday, June 30, 2000

The lenders offer so many possibilities and permutations that homebuyers can be baffled. Time to call in a broker.

How do you like your mortgage? With groceries or frequent flyer points? Open, so that you can sell your home at any time without penalties, or locked in for five years with a floating interest rate that's always below prime?

Perhaps a cash account on the side? Or an automatic contribution to your favorite non-profit cause when you sign on the dotted line?

As lenders vie for a share of Canada's 4.3 million mortgages, the possibilities and permutations are so vast that a diligent homebuyer could spend weeks seeking out the right deal.

Many prefer to rely on their "relationship" with a bank or credit union to get a break on posted interest rates, often up to one full percentage point. The price they pay is having their credit card, credit line, RRSP and mutual funds all under the same roof instead of shopping the market. They are left on the sidelines as online banks and category killer credit card companies shake up the financial services industry.

Others, like busy customer service manager Tammy Weirda and carpenter Gerald Vantriet, rely on a mortgage broker to do the legwork. They are the proud first-time buyers of a $217,500, two-bedroom house in New Westminster.Thanks to Rob Regan-Pollock, a provincially licensed broker with Vancouver's MPMC Mortgage Corp., the two 30-year-olds obtained a two-year mortgage at one percentage below posted rates without leaving home.

There were no fees because lenders, including the banks, are happy to pay the broker a finder's fee for bringing in customers. Where mortgage brokers do charge client fees, provincial regulations require they be disclosed up front.

"My job as a broker is really to look out for the interests of the clients and that's where, in researching all the information out there, you can find a lot of apples and oranges comparisons," Regan-Pollock says.

"People have to be careful because each lender has a series of products that may meet their needs to a certain point but it may not best meet their needs."

For example, even if you qualify for a big mortgage, you shouldn't borrow beyond your comfort level if it will severely crimp your lifestyle.

All buyers should be aware of closing costs, including British Columbia's property transfer tax of one per cent on the first $200,000 and two per cent on the balance. On a $300,000 home, that can be a nasty $4,000 surprise for someone who thought they had sufficient down payment.

You can escape the tax if you are a first-time buyer and the purchase price is less than $275,000. The conditions are that you have to take a mortgage term of one year or longer and you have to finance 70 per cent or more of the purchase price.

If you are a first-time buyer and the home is $250,000 or less, you can purchase for as little as five per cent down, but you will have to pay 3.75 per cent of mortgage amount (usually added to the mortgage) to Canada Mortgage and Housing Corp., or megabank GE Capital, to insure the lender against default.

If you can scrape together a deposit of 10 per cent, the insurance premium drops to 2.5 per cent.

"If you are looking at a smaller purchase, say an entry-level condo at $120,000 or $130,000, the difference between putting five per cent down and 10 per cent down may not be that great, but you will save a lot of money where the fee is amortized aver the life of the mortgage," Regan-Pollock says.

GE Capital, which purchased the assets of the former Mortgage Insurance Corp. of Canada, boasts some competitive advantages over the federal agency. For example, CMHC will not take into account unauthorized income from a revenue suite while GE Capital will count half the income in determining qualifying income for a mortgage.

Other closing costs to remember include home inspection fees, legal charges, moving costs, insurance, and adjustments for property taxes and utilities. When it comes to negotiating mortgage rates and terms, Regan-Pollock says risk tolerance can vary as much with homebuyers as it does with investors.

"Some people really like the variable below-prime products where you have an introductory or teaser rate for the first three months to a year, depending on the institution, and then they float at a certain amount below prime, typically one quarter of a per cent.

"Some people prefer to stay open with a six-month or one year term. They know we had rates as low as 4.75 per cent three years ago and they say today's rates have come down in a U.S. election year.

"And then there are the conservative people who say that historically rates are really good right now and they want a 10 year term, especially when we can get for them right now at 7.55 per cent."

Regan-Pollock avoids rate predictions, preferring to help clients compare costs and options. He notes that borrowers pay for cash-backs or airline points when they get the posted rates without a discount, although cash-backs can make sense for buyers who are strapped for cash, even if they would save more over time with a better rate.

Borrowers who pass on the gimmicks and dicker on rates can typically get a one-percentage point reduction, sometimes more.

Karl Madsen, a senior broker at MPMC Mortgage Corp., says mortgage brokers shop the field and know when one lender is more willing to discount than another. That can change from month to month depending on an institution's
lending experience and movements in the capital markets.

"Unfortunately, if you go into your corner bank and they are restricting their discounts, it is not the bank employee's job to send you across the street where you can get a better deal. That's our job."

Often, mortgage brokers can access lenders who are not household names, but that shouldn't concern the borrowers because all lenders are subject to the same rules, whether it is disclosure or foreclosure.

"Remember, they are lending you money, it's not the other way round." Madsen says. "In your dreams, these people will disappear and you don't have to pay your mortgage back."

On that score, Regan-Pollock counsels borrowers to opt for a weekly or bi-weekly mortgage that will give them an extra month's payment over the course of a year.

"At current rates that will take five years of payments off the mortgage. That alone might be a saving of $40,000."

He also tells borrowers to choose a full 25-year term, in case they get into financial trouble and need the lowest possible payment. Most institutions will allow borrowers to accelerate payments when they have the money but if you opt for a shorter term and then fall sick or become disabled, you may not qualify to extend the amortization.

"You might as well go for the full 25 years and then accelerate the payments," Regan-Pollock says. "Then you are in the driving seat."

Michael Kane
The Vancouver Sun
Friday, June 30, 2000

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