Home Buyer Beware

EXPERT MORTGAGE STRONGLY RECOMMENDS that anyone interested in buying a home read this entire guide before beginning the process. Feel free to print it out and distribute it to your friends and loved ones. For ease of use, it is organized into a question and answer format. If there are other questions you need answered, then please click on the "Questions? Click Here" button at any time.

Does it cost anything for EXPERT MORTGAGE to arrange my mortgage?

There are no fees paid by borrowers on qualified residential first mortgages. Lenders pay EXPERT MORTGAGE a "finder’s fee" for us to direct you to them. For example, if you take a $200,000 residential first mortgage for a 5 year fixed term, most lenders will pay us about $1,500. So unlike bank employees who get paid their hourly wage whether or not you take their mortgage offer, we as brokers have strong financial incentive to do everything in our power to keep you satisfied.

Would I get a better deal if I shop around myself?

Absolutely not ... and for several reasons:

1. When a deal comes through a mortgage broker, the lender knows that the broker is aware of the rates offered by other institutions and will take the deal elsewhere if they don't at least match those rates.
2. Every time your credit bureau is pulled by a lender your credit score drops. By applying at multiple institutions your credit score will slowly deteriorate. At EXPERT MORTGAGE we pull your credit bureau only ONCE and send the same bureau off to multiple institutions on your behalf.
3. Rates published in newspapers are never the best rate a lender offers to mortgage brokers. Also, they are often not updated and therefore innacurate.
4. Since shopping through EXPERT MORTGAGE is free for qualified residential first mortgages, there is no advantage to spending hours of your time shopping around and getting into aggressive confrontations with lenders.
5. If there are some minor credit or income issues on your application, you may say something to the lender that you'll regret later. By speaking through us, the same way an accused person speaks through his lawyer, you can never put your foot in your mouth.

My bank gives "no haggle" discounted mortgage rates ... is it still worth shopping around?

Banks like PC Financial are great for no-fee chequing accounts, but we have consistently blown them away on mortgage rates.

How do lenders decide what interest rates to charge borrowers?

Lenders base fixed mortgage rates on bond yields. The most recent bond yields can be found on the Bank of Canada website at www.bankofcanada.ca. This site is really cool because you can track where interest rates have been for the last decade. You will notice that bond yields are far lower than the rates consumers are charged. That is because lenders add what is called a "spread" to these yields, which is essentially their gross profit margin.

For residential mortgages the "spread" is incorporated into the rate when it is quoted to the borrower. The only way for a residential mortgage borrower to know the "spread" is to check the bond yields himself. For commercial mortgages the rate is quoted in the form of "bond yield plus spread" and is therefore transparent. For example, a lender may offer you a commercial mortgage at "bond plus 175 basis points" which translates into "bond yield plus 1.75%" (every .01% is one basis point). When we negotiate with a lender for a better interest rate we are effectively asking them to "tighten the spread". For example, on commercial mortgages we can negotiate spreads as low as 50 basis points over bond!

Bond yields have been pretty low lately because over the last 3 years people dumped stocks to buy bonds, thereby driving down bond yields. Many analysts believe that as stock market conditions improve, people will dump bonds to buy stocks. Subsequently, yields will rise and so will fixed mortgage rates.

Here’s a trick: you can usually predict if fixed interest rates will change ahead of time by watching bond yields each day (like we do). It takes lenders anywhere from 1-5 days to react to changes in bond market conditions, giving you an opportunity to either "lock in" a variable mortgage if you think rates are heading up, or sit on the fence a while longer if you think rates are heading down.

Lenders base variable mortgage rates on the prime rate, which is also set by the Bank of Canada. Now things are a bit more complicated here: lenders borrow money from the Bank of Canada at this really low prime rate, then set their own really high prime rate, then subtract from their really high prime rate to set a borrower’s rate.

The prime rate has been pretty low recently because the government is concerned about weakness in the economy. Since most businesses borrow money from lines of credit based on prime, lowering the prime rate puts more money in their pockets and effectively stimulates the economy. Credit card borrowing is also closely linked to prime (although you wouldn’t know it the way credit card companies keep gouging consumers), so a lower prime should also put more money into consumers’ hands by lowering credit card payments, effectively offering economic stimulus. Keeping the prime rate very low for an extended period of time can overheat the economy and lead to inflation. However, many analysts believe that prime will remain low for quite some time because of recessionary fears and very little evidence of inflation on the horizon.

When should I apply for a mortgage?

IMMEDIATELY! Even if your mortgage is not coming due for quite some time, or your home purchase is closing well into the future, having your information in our system allows us to act as soon as the rate hold period begins without having to find you. EXPERT MORTGAGE offers a 120 day rate hold for most mortgage terms and you will get the lowest rate that occurs throughout the period, even if it occurs for just one day.

My mortgage agent creates fake documents, i.e. job letters … do you do that?

Absolutely NOT! Up until a couple of years ago dishonest mortgage agents were committing fraud without fear of being caught because the industry turned a blind eye to it. Now there are several mortgage agents under investigation by the Financial Services Commission for this type of conduct. EXPERT MORTGAGE has assisted in some of these investigations. Banks fire employees every day for forging documents, but keep it quiet to avoid negative publicity.

If a mortgage broker is forging documents for you, then he is doing it for everyone else, and will eventually get caught. All his past mortgage files will be audited and there is a good chance that someone will knock on your door months after you’ve closed your mortgage deal to confront you about submitting fake paperwork. They have the right to call the mortgage and report you to law enforcement. Fraud is a very serious crime.

I hear that EXPERT MORTGAGE has a "don’t ask, don’t tell program" … how does it work?

If you are buying a property in an urban area and have at least 15% downpayment, EXPERT MORTGAGE can arrange mortgage financing even with NO PROOF OF INCOME and HORRIBLE CREDIT. You don’t have to lie or fabricate paperwork. Because we are both a mortgage broker AND a private lender, we will lend up to 85% of the value of a home knowing that in the event you don’t pay, we have ample security to cover our mortgage. Our only criteria under the "don’t ask, don’t tell program" are:

1. Palpable Pulse
2. Opposable Thumb
3. Conscious State

My bank is offering me a "cashback" ... can you?

Sure we can... but nobody gives you something for nothing! Most "cashback" deals are big rip-offs. Not only do lenders incorporate the cost of the "cashback" into your mortgage rate but they juice up the rate even further because they figure that you’ll be so glad to get a "cashback" that you won’t care. So unless you are desperate for the money, try to avoid going for a "cashback".

However, there are some variable rate mortgage products on the market with "cashbacks" that are actually quite reasonable. Contact EXPERT MORTGAGE for details.

My bank is offering me a "fully open" mortgage … can you?

Sure we can … but "fully open" mortgages are only a good deal if you are planning on paying them completely off within three years. EXPERT MORTGAGE offers variable mortgage products at rates far lower than "fully open" mortgages. These products allow up to 20% pre-payment per year beginning with the first payment. On a $250,000 mortgage, that’s $50,000 of pre-payments per year! So unless you are planning on going over the 20% pre-payment, "fully open" is pretty useless, and is going to cost you extra in interest.

I heard that I can buy property with "no money down" … is that true?

Sure it is... and it can be done in many ways. Here are the three most common:

1. Oklahoma Mortgage:
   Named after its place of origin, this technique is illegal in Canada. Basically, you find a seller willing to artificially inflate the sale price of a home above fair market value, then kick you back the difference. For example, say the fair market value of a home is $270,000 and you have no downpayment. You enter into a written agreement with the seller to buy the home for $300,000 with either a secret side agreement that when the deal closes he’ll kick you back $30,000, or a fake $30,000 deposit shown on the Offer to Purchase. Either way, the phantom $30,000 in essence becomes your downpayment, so it appears that you have put 10% down. The lender thinks he is financing $270,000/$300,000 or 90%, but in essence he is financing 100% of fair market value! Lenders try to prevent such fraud in two ways. Firstly, they ask for confirmation of downpayment by both checking your bank account balance and obtaining a copy of the deposit cheque. Secondly, they obtain an appraisal to assess market value, though most appraisers, usually out of apathy, will just fudge their numbers to make it appear that the home is actually worth what the Offer to Purchase reads.
2. Vendor Takeback:
   Some sellers will lend you the money you need for the downpayment by registering a second mortgage on the house at closing. For example, say George wants to buy Saddam’s palace for $1,000,000. George has $100,000 down, but George’s bank will only lend him $850,000, leaving him short $50,000. So Saddam, wanting to sell the damn palace, lends George the $50,000 he is short by registering a second mortgage for this amount on closing. However, one has to wonder why a vendor would be willing to lend his own money to liquidate a property, unless there is something suspect going on.
3. 100% Equity Financing:
   Some lenders offer 100% financing programs but charge you high interest rates and add exhorbitant fees to the mortgage for the privilege. EXPERT MORTGAGE can offer you this type of financing if you really need it, but you are best off begging, borrowing, or stealing the money and coming up with at least 5% down.

What are mortgage insurance fees?

A conventional mortgage is up to 80% of the value of the home. This type of mortgage needs not be insured. So one way to avoid paying mortgage insurance premiums is to put 20% down.

A high-ratio mortgage s greater than 80% of home value. Most high-ratio mortgages are insured by either the government through the crown corporation CMHC (Canada Mortgage and Housing Corporation) or by private insurers such as Genworth. However, you will be charged high insurance premiums which will be added onto the mortgage. For example:

0% down ... 3.10% insurance fee plus 8% sales tax

5% down ... 2.75% insurance fee plus 8% sales tax.

10% down ... 2% insurance fee plus 8% sales tax.

15% down ... 1.75% insurance fee plus 8% sales tax.

As you can see, insurance fees drop dramatically the more money you put down. The unfair thing about Canada’s mortgage insurance scheme is that you are charged the entire insurance premium up front, even if you plan on paying off the mortgage within a few years.

Interesting Fact: In the United States you are charged mortgage insurance in the form of small monthly premiums rather than all up front. As you pay down your mortgage and it falls below 80% loan to value, you no longer have to pay the premium. Also, if your home rises in value so that the mortgage falls below 80% of value, as proven by appraisal, the premiums also cease. The U.S. also allows you to write off all interest, including that for mortgages and credit cards. Oh, to live under a Canadian socialist regime!

I don’t have 20% down but I don’t want to pay insurance... is there an alternative??

Luckily for you, there is! Since EXPERT MORTGAGE is both a broker and a lender, we can lend you the difference between your downpayment and 20% down in the form of a second mortgage. Most of the money for second mortgages comes from private investors. The rates for second mortgages are higher than those for first mortgages. However, if you compare the higher interest to how much you save on insurance premiums, a second mortgage makes sense, but only if you pay it off completely within 2-3 years. In other words, if you are making really good money and don’t have 20% down immediately, a second mortgage can act as a temporary bridge loan for avoiding insurance fees all together.

How much of my RRSP can I use towards my downpayment?

Every first-time home buyer can borrow up to $20,000 from their RRSP for their downpayment. A couple buying a house can put $20,000 each toward the purchase. However, there are some catches:

1. The money has to be paid back to the RRSP over a 15 year period. If the amount is not repaid in a year, that year’s repayment amount will be added to your income and taxed.
2. The money has to be sitting in the RRSP for at least 3 months before you are allowed to pull it out.
3. Stocks and mutual funds are at historic lows right now, but should do quite well over the coming years. By pulling money out of your RRSP now, you are losing potential tax-sheltered profits over the coming years.

Even if you have no money, you could get an RRSP loan for your contribution. The contribution would result in a tax deduction. The deduction could then be used to pay down the loan, thus magically creating downpayment that wasn’t there before!

Important Fact: RRSP loan interest is not tax deductible.

What are the "closing costs" that I have to pay when I purchase a home?

It is best to speak with your lawyer for exact figures, but the largest expenses are the land transfer tax and the legal fees. Make sure that when your lawyer quotes his legal fees, he quotes both his professional fees AND all "disbursements", such as the fees charged by the government to register title, mortgages, etc. We’ve seen sleazy lawyers pad their professional fees by inflating disbursements, such as the cost of sending their clerk to the registry office or charges for "photocopying" and "postage". Tell the lawyer that you want to know ALL CHARGES UP FRONT IN WRITING. Make sure to ask him if the quote includes GST.

If I switch my mortgage from my bank to another lender to get a better rate, are there any fees?

Neither we nor the new lender will charge you any fees. All legal fees and appraisal costs are absorbed by the new lender. However, your present lender may charge what is called a "discharge fee" for paying off your mortgage. This fee can fall anywhere from $75 to $125, but can sometimes be negotiated down to zero if you raise a real fuss. Saving .10% interest on a $150,000 mortgage saves you roughly $750 over 5 years, so the "discharge fee" is really negligible.

My mortgage isn’t due yet, but I want to take advantage of a lower interest rate being offered me today... what can I do?

Ask your bank to provide you with a written breakdown of the interest penalty you will be charged if you discharge the mortgage prematurely … then give EXPERT MORTGAGE a call. We will do a quick calculation to make sure that your bank is not ripping you off and we will figure out whether it is worth paying the penalty to take advantage of a lower rate.

Important Fact: If you are going to be paying a penalty to get out of a mortgage, ensure that the bank only charges you a penalty on the amount not covered by your annual pre-payments. For example, let’s say that your original mortgage size was $110,000 and is now paid down to $100,000. Let’s also assume that you are allowed to make annual pre-payments of 20% of the original mortgage size. If you have not yet taken advantage of the pre-payment in this year, then you should only be charged a penalty on $78,000 by declaring that the other $22,000 effectively becomes your pre-payment for this year.

I have a pre-approval … do I still need to put financing conditions on my purchase?

Most pre-approvals are only useful in holding an institution to an interest rate. There are so many ways for an institution to wriggle out of one, that they provide a false sense of security to a borrower. We suggest that you put financing conditions on your purchase even if you have a pre-approval.

My realtor says I should get into a "bidding war" for the home I want... what should I do?

A few years ago my stockbroker told me to bid up the price of GetRichQuick.com to $300 a share. He said that the stock market would go up "for many years to come" due to a strong economy. He promised that I would easily double my money within a year. I am now wiping my ass with my stock certificate.

"Bidding wars" were all the rage during the last real estate bubble of the late 80’s. Shortly after that time things started to get really crazy, then the bubble burst. Then, like now, realtors convinced clients that property values would just keep rising to the stars. They used all sorts of rationales, like "look at all the new immigrants coming to Canada" or "when you buy location you never lose". EXPERT MORTGAGE was founded in June of 1989, and we’ve been through it before!

Just recently a modest home listed in Riverdale for $599,000 sold for a whopping $725,000! How did the seller pull this coupe off?

1. The first trick is to underlist the price of the home. The Riverdale house was worth more than $599,000, so there was automatic pressure placed on prospective buyers to bid up the price.
2. The second trick is not to accept offers until a certain date. The realtor will claim that they are only being fair by giving everyone interested in buying the home a chance to see it before beginning the purchase process. But what they are really doing is creating suspense -- kind of like going out for dinner but having to wait a week for the sex.
3. The owners of the Riverdale house moved all of their average furniture out and put it into storage. They rented chic designer stuff and furnished the home like a palace. Prospective buyers felt like they had entered into a dream world and succumbed to its powers. They wanted to live the dream!
4. Another good psychological tool used by many realtors is to get a prospective buyer to permanently commit some of his money to a purchase by way of a home inspection before putting in an offer. Once a person throws money into something there is psychological pressure to follow through. For example, the realtor may say something like "we are expecting a bidding war … I heard there are 8 other buyers interested in the home … it is really underpriced … this one’s going to go quick … I want you to put in a ‘clean’ offer, otherwise we don’t stand a chance … let’s get a ‘pre-offer home inspection’ … I’m your friend and I want you to have this house". Suddenly, even though you have no guarantee that the house is yours, you are dishing out a couple of hundred bucks for an inspection. The realtor keeps the pressure on. There is a psychological need not to have "wasted" your hard earned money, so you’ve got to ensure that it is not forsaken and the house becomes yours. You put good money after bad and just keep on bidding!

These real estate "bidding wars" remind me of how the underwriters of IPO’s (Initial Public Offerings) of stock would use publicity to hype up the first day of trading by saying that there was only a "limited" amount of stock available. They would often set the issue date weeks into the future. The hype just keeps on building until the issue opens for trading and starts zooming in price. An IPO would sometimes rise 20 fold the first day of trading, up to hundreds of dollars a share! Needless to say that most of these stock certificates are now worthless.

OK, I won’t get into a "bidding war"... but a house is a good investment, right?

If you are looking at a property purchase as an investment instead of just a place to live, then give it the care you would give any investment and do a proper analysis. Everything goes in cycles. Stocks were a great investment up until 1999 due to the strong economy, but as soon as corporate profits started to dwindle, so did the stock market. By mid to late 2002 corporate profits had regained their footing due to cost controls through layoffs and decreased capital spending. As such, we expect the stock market to do well into the future after 3 down years.

Homes WERE a good investment from 1994 up until 2002 for several reasons. As Professor Foote predicted in his 1996 book Boom, Bust, and Echo, there would be one last mini-boom in housing in the late 90’s. This boom would take place because there was pent up demand from people in their 30’s and 40’s who could not buy houses previously due to crazy prices and mortgage rates close to 20%. He predicted that interest rates would drop in the late 90’s (which they did) and there would be one last buying frenzy (which now appears to be ending). He predicted that based on demographics, once this buying frenzy ended house prices would not begin to rise again until 2010.

Furthermore, the housing market is full of speculators who were burnt on the stock market (you know: those guys buying wipemyass.com at $300 a share). Some of these guys are now buying 3 or 4 condos at a time "on spec". In other words, they are putting up just deposits, hoping to "flip" them at a profit before closing. Condo prices have softened considerably throughout 2002, and there is now a glut of condos on the market. More condos will come on stream throughout 2003. Eventually, the softness in the condo market will spill over into houses.

Some speculators think that if they can’t flip their condos for profit, they can rent them for profit... but they are in for a rude awakening. For example, in Toronto most rental condos fall in the $1,200-$1,400/month range. That segment of the market is very soft because anyone previously renting in that range could afford to buy their own home... and many did. In Toronto overall residential vacancy rates have jumped from 1 to 3% over a period of months because speculators’ new purchases are coming on stream... and its only going to get worse for landlords.

Also, as the stock market gets its footing many of these "speculators" will sell their gains in housing and buy back into stocks. These "speculators" understand that everything works in cycles, and the housing market has probably hit a peak. In past history every time a stock market began recovering due to improved corporate earnings from layoffs, unemployment rose and the housing market cooled.

Still not convinced? Let’s do some more comparisons:

I can’t afford the house I want... should I buy a condo instead?

On the surface condos appear to be much cheaper than houses. Sure, the purchase price is lower because you are not purchasing a large parcel of land with it. However, condo fees do add up. For example, compare paying $350 per month of condo fees to paying $350 per month of mortgage payments. That payment allows you to finance about $50,000 of mortgage. In other words, you can pay $50,000 more for a house and still qualify for the same loan and have the same monthly payments as for a condo.

When you buy a condo there is also the risk that at some point in the future you could face a "re-assessment", and be slapped with a huge one-time charge. There are several old condo buildings in Toronto with leaky roofs and substandard garages that have hit their owners with such "re-assessments". EXPERT MORTGAGE has provided many of these condo owners with second mortgages to cover the re-assessments. A condition of your condo purchase should be examination of what is called the "status certificate" or "estoppel certificate", including the condo’s financial statements. Your lawyer can review these documents to ensure that the condo corporation has sufficient money in trust to meet its day to day needs.

Also, there are some condominiums that neither CMHC nor GE Capital will insure due to many varied reasons. Before putting in an offer, call or write us to confirm that your condo has not been "blacklisted".

My realtor recommended that I get a home inspection... do I really need one?

That’s up to you. However, if you are going to get a home inspection, DO NOT TRUST THE HOME INSPECTOR YOUR REAL ESTATE AGENT RECOMMENDS. Any home inspector that your realtor recommends will NEVER trash your purchase. If he ever dared to, do you think that he would get any more referrals from this realtor? Also, home inspectors are often pressured by realtors to kick them back a portion of their fees, which will ultimately be worked into the price you pay for the inspection.

Your best bet is to open up the yellow pages, shop around and find an independent home inspector. There are some inspectors out there that derive almost no business from realtors because they can’t be bought. If you’re still not sure, test the guy out... have a friend call the inspector and pretend he’s a realtor. Have him say that he needs the inspector to give a clean report on a house with a few "problems". If the home inspector’s willing to play ball, then he’s not the guy for you!

My real estate agent recommended a good lawyer... that’s OK, right?

In the opinion of EXPERT MORTGAGE, this referral is a terrible conflict of interest. The job of your lawyer in a real estate transaction is to protect your interests. You would think that because the lawyer gets paid whether or not a real estate deal closes, he would not be under any undue influence from the realtor. However, if your realtor is providing him with a steady stream of business the lawyer may think twice before he kills a deal due to some serious issue, such as a problem with title.

For example, EXPERT MORTGAGE recently had first hand experience on two deals where realtors and sellers colluded to rip off unsuspecting buyers:

1. In Riverdale a realtor clearly stated that there were 3 parking spots on his feature sheet, where there were actually NONE on the survey. The lawyer somehow missed this glaring inconsistency, and the deal closed. When our borrower tried to park tenants’ vehicles on his property, he was confronted by a gang of irate neighbours. They pointed out that the so-called "parking spots" were actually part of a "right of way". It turns out that the neighbours had an extortion-style deal with the previous owner to allow them to park their two vehicles in his right of way in exchange for them not reporting him parking his one vehicle there! On our recommendation the buyer is suing all parties involved.

2. The second case involved a realtor giving outrageously exaggerated lot size measurements on his feature sheet, and verbally misrepresenting the square footage of a home in Mississauga. Luckily the buyer picked up on these inconsistencies just before closing after examining the appraisal. The buyer's lawyer, which was recommended by the realtor, tried to convince the buyer that it was not a big deal because measurements on a feature sheet are just "approximate". On our recommendation the buyer sought a second opinion, and learned that according to case law the term "approximately" means "within 10%". The buyer is suing the realtor to get his $20,000 deposit back.

One more reason why a realtor referral to a lawyer may be suspect is that many lawyers pay kickbacks to realtors. These kickbacks must somehow be recovered to cover their overhead, and are often worked into the legal fees that you pay.

My real estate agent recommended a good mortgage broker... is that OK?

It matters whether or not the real estate agent expects a kickback from the mortgage broker and how high the mortgage broker’s overhead is. Unlike EXPERT MORTGAGE, which does a fair bit of mortgage refinancing and private lending, most mortgage brokers rely heavily on home purchase referrals from realtors. Many mortgage brokers are so desperate for business, that they pay realtors kickbacks of approximately 25% of their finder’s fees. These mortgage brokers in turn may need to recover this money by taking a borrower to a lender that may not have the lowest rate, but pays the highest commission, or a lender that has such streamlined paperwork, the broker can input many files within a short period of time.

Unlike many other brokers, EXPERT MORTGAGE will review your Offer to Purchase, Listing, and other documents to look for any signs that you are being screwed. Since we do not rely on Realtor referrals for the majority of our business, we are not concerned about killing a bad deal... you’ll come back to us with the next good one in due course!