This story goes as follows. Parents co-sign for a $5,000 credit card for their college bound daughter. The daughter parties hard like so many first year college students do, maxes out the card and makes no payments without her parents knowledge.
One fine day, the parents receive a power of sale notice from their bank. They are in shock wondering how this can happen (especially without any warning) when they never missed a payment on their mortgage or line of credit. Turns out that the bank applied the mortgage payment to the ‘highest interest’ credit card debt which technically put the mortgage into arrears and eventually into ‘default’. With three months payments behind the bank issued the power of sale notice and stopped accepting any further payments.
It gets worse. The parents owned a home valued at $425,000 that had a mortgage of approximately $225,000. The problem was that they got a new ‘Collateral Mortgage’ which the bank registered at over 100 per cent of the value. So despite having over $200,000 equity they could not refinance or raise any new money because it appeared like they had no equity. 
Unfortunately when they took out the new purchase mortgage, the bank did not disclose the fact that any unsecured credit cards ‘effectively’ become secured credit cards. All the bank told them was that the $225,000 mortgage was going to be registered at or slightly above the property value so that in future, they could access their new ‘global’ credit limit easily and cheaply without even the need or expense of a lawyer. 
The way in which collateral mortgages are presented by the banks makes them look attractive on the surface. Unfortunately, and we have written about this many times, below the surface is a minefield and in this case a nightmare. 
Folks in the past year, we have seen people receive power of sale notices (with their mortgage payments up to date) for having realty tax arrears, for letting their properly insurance policies expire or get cancelled, and for having repeat late payments and despite always coming up to date the banks called for the mortgage to be paid in full and went on the attack to legally force the sale of the real estate. 
The problem is, the fine print is never discussed. And the devil is truly in the details with collateral mortgages. What bank customers do not know is that in truth a collateral mortgage puts the bank in complete control over the client. Even if there never is a problem, in future if the customer needs a refinance, a new line of credit etc., the bank is less competitive on the interest rate they offer because they know it is very difficult if not impossible for the client to seek money elsewhere.  Remember there ‘effectively’ is no equity.
We view the new banks’ collateral mortgage product as undesirable, and we do our best to protect our clients by placing them in non-bank products with much better terms including early payout penalties.
Please call us first for independent expert advice before you consider any bank mortgage.

For those of you who read our articles regularly, you understand that we are Mortgage Consumer Advocates. If you are reading us for the first time, please allow us to explain that someone must be on the consumer’s side, looking out for your best interests. Someone must protect you, right?
We decided to take on this role about ten years ago, and this role is more important than ever. Yes we are biased, biased in your favour largely as a result of bank practices that not only can have a negative effect on you, but also since the big banks more than ever, are introducing clauses IN THE FINE PRINT that they do not disclose to you.
So when you go to a bank for your mortgage without any knowledge or expertise in what you are getting into and signing, well let’s put it this way, it can cost you, not just money but great heartache.
We speak often about the new collateral mortgage product all the banks are using. In our view, it is a mortgage product that is best avoided. We have written about the ‘fine print’ clauses that can be absolute killers, clauses that you are never told about like punitive bank penalties, fees and practices.
A more recent example is TD’s altering of a clause in their variable mortgage contracts that ‘triggers’ you to make a lump sum payment if your mortgage balance exceeds 80 per cent of fair market value. Previously any ‘trigger’ was set at 75 per cent, and it was at the ‘suggestion’ of the bank that the borrower pay a lump sum to bring the loan back in line, or have the property appraised at the client’s expense. Another option was to convert the mortgage to a fixed rate with equal payments.
The new clause now ‘requires’ the borrower at bank notice to obtain and pay for an appraisal within 30 days of notice to determine if a trigger point has been reached. If it has then you ‘must’ (it is no longer an ‘option’) make a lump sum payment, convert to a fixed rate mortgage or increase your payments to an amount sufficient to amortize the outstanding principal amount.  Now here’s the really bad part. If you do not do what is ‘required’ the bank can demand payment in full of the total outstanding principal plus costs. In other words THEY CAN GO ‘POWER OF SALE’ even if you have missed no payments.
This is but one of many many examples that people are unaware of that can be potentially devastating to you in future. As professional mortgage brokers we help you avoid institutional policies like this that are not in your best interests by recommending mortgage lenders who have much more favourable ‘terms’. This is why the ‘Terms’ are every bit as important as the ‘Rate’.

SHOULD WE WORRY ABOUT THE TORONTO HOUSING MARKET?

The Toronto housing market is the centre of our real estate universe. Everything gravitates from there. When it overheats we suffer. When it cools, we suffer more. So if you are worried about a potential housing ‘Bubble’ consider this.

The average Toronto house price 25 years ago was $230,000. Today it is $530,000. When we sell our homes we look at this number and say “We Made a gain of $300,000” but did we really? While we might receive a lawyer’s trust cheque for close to $230,000 we must also factor in the ‘costs’. Nevertheless, this represents an average appreciation of 3.4% per year which is well below the average annual rate of inflation.

Twenty five years ago the minimum down payment was 25% or $57,500 leaving a mortgage of $172,500. Mortgage rates were considerably higher way back then, so to estimate the typical interest paid, let’s assume an average rate of 5% and a 25 year amortization. The total interest cost is $128,500 which added to the purchase price yields a total cost of $358,500. The average “Net’ gain drops to 1.6% per year.  

Compared to the stock market 1.6% a year is clearly a paltry return. But hold on, there’s more. We must also upgrade kitchens and bathrooms, replace windows and doors and paint every 7 to 8 years, oh and course the roof was probably replaced twice as well.  And on and on it goes. So our real return ends up being quite negligible. So does it make any sense that house prices are out of control?

Housing (values) prices today are actually more affordable than 25 years ago. The affordability factor is all important for real estate markets to be balanced and healthy. Historically when they are, there is little pressure in the market and housing bubbles just don’t happen.

Look at the following example. The best 5 year fixed mortgage rate today is 3.39% meaning a mortgage payment of $1,961 per month. Mortgage rates in 1988 were around 12 per cent and the mortgage payment on the above example was $1,780 or just $181.00 more for a $530,000 purchase today. And of course incomes back then were significantly lower than they are today. So at today’s prices, housing is almost as affordable as it was 25 years ago.

Is there any logical reason why there could be another housing bubble in the next five years? The media thinks so. But don’t be fooled. The negative hype is as misleading as it can be.

The big difference today is that households carry considerably more high interest consumer debt than ever and herein lies ‘The Problem’.

It is most unfortunate that the federal government somehow blames house prices as ‘The Problem’ and continues to tighten up the mortgage market (to cool prices) while ignoring the fact that sinister credit card debt is the culprit.  The housing numbers by themselves do not lie. Forget the media hype breathe easier knowing that current house prices are entirely sustainable.