January 15 2005
Broker may find a better mortgage deal
One of my clients learned that the best way to finance a
residential purchase is not necessarily with one of the big banks.
Irene had signed an agreement to purchase her dream downtown Toronto
condominium unit. The original buyers had defaulted on the mortgage, and
their bank was selling it under power of sale in the mortgage.
With its mortgage in default, the bank wanted a two-week closing. The
paperwork was put together on a rush basis by the lawyers and real estate
Irene agreed to pay $145,000 for her cozy condominium with a great view of
the lake and the Toronto skyline. She went to her bank coincidentally the
same bank selling the unit under power of sale and was offered a
high-ratio mortgage for roughly 95 per cent of the purchase price. The
mortgage officer at her local bank branch arranged for a four-year mortgage
at a rate of 4.69 per cent.
The Canada Mortgage and Housing Corp. (CMHC) insurance premium for the
mortgage, and tax on the premium, came to more than $5,000.
Irene came into my office on the day of closing to sign all the papers and
was looking forward to moving into her new condominium. As I was saying
goodbye to her at the elevator, she mentioned that she would be seeing me
again soon when she sold her current condominium.
In the rush to close the transaction, we had never discussed her current
living arrangements. I couldn't have been more shocked when told me she had
no mortgage on her existing unit and intended to pay off the mortgage on the
new condo when she sold the old one. She had just listed it that day.
"But you just signed a four-year closed mortgage that cost you $5,000 to
arrange!" I blurted out. "In addition, you are going to get zapped with a
huge penalty in just a few weeks when you want to pay it off."
As we marched back into my office to discuss the "new" development, I told
her that the mortgage loan her bank had saddled her with would probably cost
her more than $8,000 by the time she sold her old condo $5,000 in up-front
CMHC fees and at least $3,000 in penalties to get rid of the closed
mortgage. All this on a $145,000 condominium unit.
I called the mortgage officer at her bank who had arranged the financing for
Irene without explaining it to her. In fact, the first she heard of the
terms was when I reviewed the mortgage with her in my office.
When I challenged him on the outrageous costs for what amounted to a
temporary mortgage, the so-called mortgage "specialist" told me that Irene
did not have enough income to qualify for a line of credit that would avoid
the hefty CMHC fee, and he couldn't arrange a "bridge" loan to carry the new
unit because she hadn't yet sold the existing one.
He had no explanation for failing to explain the $8,000 cost to his client.
After arranging a two-day extension of closing with a lawyer acting for the
seller, I gave Irene the names of some mortgage brokers. Irene called one of
Over the phone, he arranged a three-month open first mortgage for Irene
through a private lender. Although the rate, at 8.5 per cent, was somewhat
higher than the bank's, Irene will only be paying it for a short time. And
there will be no penalty when she pays it off.
Total brokerage and lender fee, plus legals for an additional lawyer for the
lender were under $2,500 much lower than the $5,000 CMHC premium.
The broker later told me that if he had had another day or two to scout around
for funds, the fees would have been considerably less than what Irene had
As it is, even considering she will be paying about $1,300 more in interest
over a three-month period than she would be paying to the bank, I calculate
Irene's total net savings at more than $4,000.
When I called the banker back to explain why Irene wouldn't be needing his
mortgage, he blurted out that his bank would certainly have waived the
prepayment penalty. Frankly, I can't see one of the "big five" banks waiving
a prepayment penalty. Not in this lifetime, anyway.
Arranging a residential mortgage through a licensed, independent mortgage
broker often costs the borrower nothing, and in cases like Irene's, can
actually save big money. Brokers also offer flexibility where the lending
criteria of the big lenders are rigid and unbending.
Where did you get your mortgage financing? Have you had an interesting
experience with a bank or mortgage broker? Write me by fax or email.