Mortgage miscellany

Multiple-term mortgages

Several major lenders offer mortgages that contain up to five different parts or chunks, under the name "multiple-rate mortgage" or "split-level mortgage." Borrowers divide the principal owing among these different components, each having a different maturity date and therefore, a different rate. For example, borrower could allocate $100,000 mortgage into three chunks -Part A: $20,000 for one year at 6.5%; Part B: $30,000 for three years at 7.25%; and Part C: $50,000 for five years at 8%. This way, as the advertising slogans emphasize, he "doesn't put all her eggs in one basket." He gets the best of both worlds, security for half of his money (a fixed rate of 8% for five years), while saving money on the balance, all at the same time.

Multi-term mortgages aren't offered just to help borrowers. Lenders benefit greatly from the product too. Until the last component matures, borrower won't be able to switch lenders without incurring a prepayment penalty, if he can break the mortgage at all. And if he leap-frogs his renewals beyond that last-maturing chunk, the day when he can transfer his mortgage to another lender is postponed. In fact, borrower can only refinance his mortgage elsewhere when all the components mature at the same time, which defeats the reason for having the multiple-term arrangement. But from a lender's point of view, multi-term mortgages guarantee customer loyalty and retention -at least until the last segment matures.

There is another potential problem. With chunks of borrower mortgage maturing each year or so, he will face a lot more renewal fees than if he opted for a long-term mortgage. Obviously that will make a significant dent in the money saved going multi-term. Borrower would be better off if his lender clearly stated in the mortgage that no renewal fees would be payable each time part of the mortgage matured. If not, he will have to ask his lender to eliminate the renewal fee each time a chunk of his mortgage matures, and hope for mercy.

Post-dated cheques / pre-authorized chequing

Most lenders insist that post-dated cheques be delivered to them annually. As an alternative, they may require that the borrower participate in the lender's pre-authorized chequing plan. Not everyone likes letting lenders dip into their bank account without a signed cheque being issued. The possibility for error is too great.

Some lenders also insist that bank accounts be maintained with them, from which the mortgage payments are processed, especially for fast-pay mortgages -weekly, bi-weekly, or semi-monthly.

Find out what a potential lender will require before signing a mortgage commitment. Non-compliance with this clause constitutes default under the mortgage, and a possible "call-in" of the loan.

Co-signers

Legally known as guarantors, co-signers offer additional security to a lender. In situations where borrowers are borderline in meeting the income requirements, a guarantor might help in getting approval for the loan. Guarantors aren't just obligated to make all payments due to the lender, if the primary borrower defaults. They also agree to perform all other obligations of the borrower (i.e., insuring the mortgaged property).

As beneficial as it may seem, the need for a guarantor is usually a sign of financial fragility (an exception being one spouse guaranteeing a loan to the other spouse on the matrimonial home). Try to avoid a guarantor unless it is absolutely necessary.

Avoid interest-only loans

Some lenders offer "interest-only loans," arguing they are cheaper for borrowers in the long run. Stay away from interest-only loans. They can do you more harm than good.

Interest on these loans is generally calculated monthly, in addition to being payable monthly. Lenders do this because it's the easiest way to calculate interest. To see how much is payable each month, just divide the quoted interest rate by 12, and multiply it by the outstanding principal. So on borrower's $100,000 mortgage at 8% calculated monthly and payable interest-only monthly, the payment is $666.67. But interest calculated monthly is more expensive for borrowers than a rate calculated semi-annually. And being payable "interest-only" means nothing is contributed each month towards reducing the outstanding principal. Combined, it means double trouble for borrowers.

Avoid interest-only loans like the plague. Take a blended payment mortgage instead.

Mortgage Commitments

Like unsigned offers to purchase, lawyers are being asked more and more often to review draft mortgage commitments. This helps ensure that the mortgage application, mortgage approval say what they are supposed to say, with no hidden zingers and nothing omitted, before borrowers sign them.

Since most residential mortgage commitments can be assessed quickly, the cost to the borrower is nominal; but it's money well spent. And it provides borrowers with peace of mind, too. Imagine getting a lawyer's comments on an unsigned $150,000 Agreement of Purchase and Sale, but not on the financing of $100,000 of that purchase price. No home buyer or home owner when refinancing can afford to be that penny-wise and pound-foolish.

Lenders may be understandably reluctant to have the mortgage commitment faxed to a lawyer, fearful that the lawyer will be a "deal breaker." It's a concern that real estate agents also regularly express, when lawyers are asked to review a draft offer to purchase. But be persistent. And if the lender doesn't want to co-operate, take your business elsewhere. Any lender who won't take the time to fax a few pieces of paper to your lawyer, so he or she can examine the mortgage commitment before you sign on the dotted line, isn't worthy of your business.

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