When it comes to complaints about banking products, mortgages are second only to credit cards.
That’s according to the banking Ombudsman’s (OBSI’s) recently released annual report, which lists three of the most common grievances from mortgage customers.
“We are seeing a lot of complaints related to mortgages…” Brigitte Boutin, Deputy Ombudsman, Banking Services said in the report. Those complaints revolve mainly around mortgages prepayment penalties and pre-approvals, but it seems that mortgage portability has also “become a bigger issue.”
The Big One: Penalties
The Ombudsman sees a constant stream of borrowers protesting their bank’s prepayment charges. Those complaints are usually dismissed after an appropriate investigation, with a finding that the bank did nothing wrong.
“When investigating mortgage prepayment penalty cases, we examine the signed agreements between the client and the bank and review the accuracy of the penalty calculation.
We also look at the manner in which the client was informed of the penalty before they proceeded with the mortgage transfer.”
A common claim by customers is that they were not told how the bank calculates its mortgage prepayment charges. Frequently the problem stems from the comparison rate changing before the borrower can pay off the mortgage.
The comparison rate is the rate the bank compares to your rate, to judge the interest rate differential, or IRD (i.e., determine the difference between your rate and the rate the bank can supposedly lend at today, for your remaining term).
Timing is key. If you’re 2.5 years from maturity, for example, the comparison rate might be the three-year fixed rate (say 3.04%). If you’re 2.49 years from maturity—one day closer—the comparison rate might be the two-year fixed rate (say 2.59%). The actual comparison rate used can increase the IRD and lead to unexpectedly high penalties.
In any case, with all the prepayment regulations nowadays, lack of disclosure is getting harder to argue. In one case on its website, OBSI found that “the fact that the client was not told all the specifics of the calculation did not change the fact that he had the necessary information to make an informed decision.” OBSI ruled in favour of the bank in that instance.
“People sometimes take for granted that their mortgage is portable before selling their home,” Boutin said in the report. “It’s interesting – we’ve seen cases where the bank refused portability because the borrower’s financial situation no longer met the bank’s lending criteria. However, the client was able to get approved somewhere else right away.”
She raises a key point that all borrowers should be aware of. Given that the property is the lender’s security, you can’t move your mortgage to a different home without the lender’s consent.
Porting requires a whole new application process, documentation and approval. Failing that approval, people with closed mortgages have little choice. They can either not move or they can pay the lender’s penalty (potentially thousands of dollars) to discharge the mortgage and find other financing.
Boutin adds: “A bank can refuse to transfer a mortgage from one property to another because the client’s situation has changed and we can’t force a bank to lend money when its lending criteria is not met.”
She advises: “…Read the terms in your mortgage agreement carefully. Check if there are certain criteria related to portability and check if you meet your lender’s criteria before deciding what to do.”
Common portability considerations include:
- the amount of time the lender gives you to port
- the rate the lender gives you if you “port and increase” (add more money to the mortgage)
- the lender’s policy on bridge loans (commonly needed when your new purchase closes before your sale)
- the type and location of property the lender will lend on, and
- the types of income the lender allows (e.g., key, for example, if you become self-employed and can’t prove income in the traditional manner)
“…We’ve seen an increased number of files relating to mortgage pre-approval,” Boutin notes. “Banks may not verify everything in detail when they pre-approve a mortgage. Then, when people go to finalize a mortgage, the bank will ask for more information and for supporting evidence of what was previously disclosed.”
“Sometimes that new information will lead the bank to change financing terms or refuse financing altogether. People can then get caught, especially if they removed the condition for financing on their offer to purchase a home.”
I’ve written about pre-approvals many times and continually hear cases where people thought they were unconditionally approved, but hadn’t even provided income and down payment documentation. Often it’s a matter of the mortgage adviser not clearly explaining that pre-approvals are rarely fully underwritten (including by the default insurer, when the down payment is less than 20%).
“A pre-approval document indicates certain conditions that need to be met,” adds Boutin. “Be careful that you’ve given the right information to your bank and that your documents match (emphasis ours) what you provided at the beginning of the mortgage process.”