Buying your first home: Three steps to successful mortgage shopping

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Step 3: Make the right decision for your needs

Your rights and responsibilities

Your rights

Federally regulated financial institutions (such as all banks, as well as some insurance companies and trust and loan companies) must provide you with certain important information about your mortgage, in clear language, in or with your mortgage agreement. Depending on what type of mortgage you get, the information required can vary. The most important information will be summarized in a box like the examples below.

Your responsibilities

Before signing, you have a responsibility to read and understand the terms and conditions of your mortgage agreement. Ask questions about anything that is not clear.

For many people, a mortgage is the most significant financial decision they will make in their lives. It’s important to understand a commitment that can last this long.

Information box: Fixed interest rate mortgage

This is a sample of the information box that must be at the beginning of a fixed interest mortgage agreement.

Principal amount $255,000.00
Annual interest rate 4.00%
Fixed rate per year. This interest is compounded twice per year but charged on each regular payment date.
Annual percentage rate 4.00%
The interest rate for a whole year (annualized) including applicable fees such as service charge, loan origination fees or administrative fees when applicable.
Term 5 years
The term of the loan is closed for the whole five years, which means that you cannot pay down more than your prepayment privilege without paying a charge.
Date of advance May 1, 2013
This is the date your funds will be advanced. Interest will be calculated and charged from this date on.
Payments $870.41 every two weeks
Your accelerated biweekly payment is payable every two weeks. It includes payment toward the principal amount, the accumulated interest and your biweekly property tax portion.
Amortization period 20 years
Based on the current terms and conditions, your mortgage will take 20 years to pay in full.
Prepayment privilege “20+20”
Without paying a charge, you may once per year:
  • increase your monthly payment by 20% of the original payment
  • pay a lump sum of 20% of the original mortgage amount toward your outstanding balance.
Prepayment charges

You will be required to pay a charge if you pay more of your mortgage than the prepayment privilege allows. If you want to pay out all or part of your mortgage before the end of your term, you will also pay a charge.

Your charge will be the greater of:

  • three months interest, or
  • the interest rate differential: the difference between your mortgage rate and the rate of a mortgage that is closest to the remainder of your term, multiplied by the outstanding balance of your mortgage for the time that is left on your term. It is calculated on the amount being prepaid.
Default insurance $5,450.00 ($5,000.00 is included in your principal amount)
Insurance premium $5,000.00
Tax (9%) $450.00
Total $5,450.00
Other fees Discharge fee: $200.00
Default charge: $50.00
Returned or refused payment due to insufficient funds: $40.00

Additional information for fixed interest rate mortgages

When you sign a fixed rate mortgage agreement, the mortgage lender must provide you with additional information, including but not limited to the following:

  • the total amount that you will have paid at the end of the term
  • of that total, how much you will have paid in interest charges at the end of the term
  • the fact that your payments will be applied first to cover interest and other charges, and then to the outstanding principal
  • the optional services (such as mortgage disability or mortgage life insurance) you accepted, how much they cost, and what will happen, in terms of rebates, charges and penalties, if you decide to cancel these services
  • a description of the property being provided as a security for the loan
  • whether any fees paid by the financial institution to a broker were included in the amount lent to you.

Information box: Variable interest rate mortgage

Below is a sample of the information box that must be at the beginning of a variable interest mortgage agreement.

Principal amount $255,000.00
Annual interest rate 3.50%
Variable rate per year. This interest is compounded twice per year but charged monthly.
Determination of interest

Your interest rate is expressed as today’s (name of bank) prime rate* plus an adjustment factor.

Your interest rate is the prime rate + 0.50%.

As of April 15, 2013, the prime rate is 3.00%.

Your interest rate will vary automatically if and when the (name of bank’s) prime rate varies.

*The prime rate means the variable annual interest rate that (name of bank) publishes from time to time as a point of reference.

Annual percentage rate 3.50%
The interest rate for a whole year (annualized), including applicable fees such as service charges, loan origination fees or administrative fees when applicable.
Term 5 years
The term of the loan is closed for the whole five years, which means that you cannot pay down more than your prepayment privilege without paying a charge.
Date of advance May 1, 2013
This is the date your funds will be advanced. Interest will be calculated and charged from this date on.
Payments $837.80 every two weeks
Your accelerated biweekly payment is payable every two weeks. It includes payment toward the principal amount, the accumulated interest and your biweekly property tax portion.
Amortization period 20 years
Based on the current terms and conditions, your mortgage will take 20 years to pay in full.
Prepayment privilege “20+20”
Without paying a charge, you may once per year:
  • increase your monthly payment by 20% of the original payment
  • pay a lump sum of 20% of the original mortgage amount toward your outstanding balance.
Prepayment charges

You will be required to pay a charge if you pay more of your mortgage than the prepayment privilege allows. If you want to pay out all or part of your mortgage before the end of your term, you will also pay a charge.

Your charge will be the greater of:

  • three months interest, or
  • the interest rate differential: the difference between your mortgage rate and the rate of a mortgage that is closest to the remainder of your term, multiplied by the outstanding balance of your mortgage for the time that is left on your term. It is calculated on the amount being prepaid.
Default insurance $5,450.00 ($5,000.00 is included in your principal amount)
Insurance premium $5,000.00
Tax (9%) $450.00
Total $5,450.00
Other fees Discharge fee: $200.00
Default charge: $50.00
Returned or refused payment due to insufficient funds: $40.00

Additional information for variable interest rate mortgages

When you sign a variable rate mortgage agreement, the lender must provide you with additional information, including but not limited to the following:

  • based on that interest rate, an estimate of the total amount you will pay by the end of your term
  • an estimate of the total amount of interest you will pay during the term
  • if interest rate variations are linked to another rate, such as the prime rate, the financial institution must provide you, at least once a year, with a disclosure statement containing the following information:
    • the interest rate and outstanding balance at the beginning and end of the period covered by the statement
    • the amount of each instalment payment for the upcoming period, based on a forecast using the interest rate in effect as of the date of the disclosure statement.

For variable rate mortgages with fixed payments, the lender must also include the following details in the agreement or disclosure document:

  • the annual interest rate that would result in your mortgage payment not covering the interest due for the period (sometimes called the “trigger rate”), and
  • the fact that if the interest rate increases during your term, your amortization period will be longer.

    Notes:
    • If the interest rate reaches the “trigger rate,” your lender may require you to increase your payments. Check the terms of your agreement.
    • If your amortization period has become longer, your mortgage lender may require you to increase your payments at the next renewal period to get your amortization back in line with the original amortization period.

Voluntary Code of Conduct on prepayment

Federally regulated financial institutions, such as banks, must outline mortgage prepayment privileges and charges in an information box at the beginning of your mortgage agreement.

Some financial institutions have also agreed to provide additional information on prepayments under a Voluntary Code of Conduct. As of May 2013, banks that are members of the Canadian Bankers Association have agreed to comply with this Code.

Lenders following the Code have agreed to provide information that includes (but is not limited to):

  • information to help you understand the factors that can affect a prepayment charge so that you can make informed decisions. It should cover the following topics: Lenders may make this information available to you online or upon request at their places of business in Canada.
  • online financial calculators to help you estimate a prepayment charge that could apply if you pay off your mortgage in full or prepay more than your prepayment privileges allow
  • toll-free telephone access to knowledgeable staff who can tell you the actual prepayment charge that would apply at the time of your call. You can also ask for a written statement with the amount of the charge.
  • an annual statement that sets out your prepayment privileges and how the lender would calculate a charge, as well as information about your mortgage that you can use to estimate a charge, among other details
  • a written statement if you confirm you will be making a prepayment that will result in a prepayment charge. Among other details, it must include the actual prepayment charge amount.

For full details on the information to be provided under the Voluntary Code of Conduct, see Mortgage prepayment: Your rights and responsibilities.

Voluntary commitment on mortgage security

As of September 1, 2014, banks that offer residential mortgage loans and that are me​mbers of the Canadian Bankers Association​ have agreed to adopt a voluntary Commitment to Provide Information on Mortgage Security.

The information can help you understand the differences between the types of mortgage security used for mortgage loans – standard charges and collateral charges. This can help you make an informed decision when choosing your mortgage lender and mortgage product.

For full details on the information to be provided under the voluntary Commitment, see Mortgage security: Your rights and responsibilities.

Coercive tied selling

Coercive tied selling happens when a mortgage lender pressures or forces you to buy another of its products as a condition for approving your mortgage loan. For federally regulated financial institutions (such as banks), this is against the law. For example, the lender may not require you to purchase mutual funds through them to get a mortgage.

If this happens to you, contact FCAC so that FCAC can investigate your complaint.

What is not coercive tied selling

The following situations are not considered coercive tied selling:

  • when a lender offers you other products and services (for example, home insurance, life or disability insurance, or a line of credit) in addition to your mortgage but not as a condition for getting it
  • when a lender offers you better conditions on your mortgage if you take mortgage life insurance through them, instead of through another insurer, or if you transfer your investment portfolio to them. Although such offers may seem interesting, it is a good idea to get quotations from other providers of these services and products to make sure you get the best deal.

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