Broker: 2.99 promotion lacks major feature

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That hotly-debated 2.99 per cent promotion from Industrial Alliance may, indeed, put standard commissions in the pockets of brokers using it to make waves in the market, but the absence of  one key feature takes it off the table for others concerned it will disadvantage clients.

“I have a problem with offering a product that isn’t what I consider a full service mortgage in the sense that it is missing things, for example bridge financing,” Dan Faubert of Ottawa-Carleton Mortgage told MortgageBrokerNews.ca. “Industrial Alliance doesn’t have that feature in any of their mortgages.”

Industrial Alliance, of course, made headlines earlier this week when it was reported that the lender is currently offering a sub-3 per cent fixed five-year mortgage. And although brokers have dispelled rumours that they’re buying down rates in order to secure 2.99 per cent for their clients, Faubert and several others aren’t sold on the offering.

“During that five year term if they ever go to sell that house and the dates don’t line up, meaning the purchase and sale aren’t on the same day, which never happens, you have a problem and you have to try to find that five per cent from an (alternative source),” Faubert said. “Full feature mortgages have that bridge financing with them.”

However, Faubert believes mortgages that lack bridge financing can be sufficient for the right client and the right broker. Even if it isn’t for him.

“As long as the customer is disclosed that these are the problems in the signing docs with the clients you have done your service; If they want to save the 10 or 20 basis points in rate to lose that feature, then you’ve done your job.,” he said. “But personally I avoid selling products that are missing (that) important feature.”
 
  • joewieman on 2014-02-05 11:22:40 AM

    Also make sure to disclose that Industrial Alliance calculate the Penalty based on 5-year Bond market rate which can add THOUSANDS of Dollars in Penalty.

  • Jim T Advent Mortgage on 2014-02-05 11:31:48 AM

    Let’s fully explore the implication of this no bridge financing via an example. Let’s say the client takes a $500,000 mortgage at 2.99% and sells the home in year 2 as they just bought a bigger home and they want to port the mortgage at 2.99% because rates have shot up to 4.50% in 2 years. Their purchase is on June 1st but their sale is on June 15th so they need bridge financing for 14 days. Well, if their lender does not have bridge financing, the client will have no choice but to break the current mortgage and take their mortgage to a lender that will give them bridge financing. So, what is the financial implication to the client??? Four costs: 1. Discharge fee of say $300; 2. Reinvestment fee of $400; 3. penalty of $3700 (assuming 3 months interest), and 4. Higher interest cost of 4.50% vs. 2.99% for 3.5 remaining years $26,400. Total cost to client: $30,800.
    If the client instead took a regular mortgage at say 3.19%, their incremental interest cost of 3.19% vs 2.99% is $5,000 over 5 years. This is far less than their exposure and risk of not buying and selling the same day.
    I realize my example is a bit extreme on future rate of 4.50% but you never know. At minimum, you need to explain this type of potential risk to the client and put a numerical example attached to it. Otherwise, you are not doing your job!

  • Mike Rice on 2014-02-05 11:34:54 AM

    2.99 is a great rate and far outweighs the bridge aspect (if it ever comes into play). You need to coach the applicant when it comes time to sell on the closing dates. With my clients the bridge is a nice to have to get into the home sooner not because the seller isn't flexable with the dates.

  • Ron Butler on 2014-02-05 11:36:03 AM

    Good Lord, can we please stop the bond yield penalty foolishness, that whole thing was discredited 2 articles ago.

    I respect Dan's opinion but I did a review of the 1600 purchase deals we did last year and we needed same lender bridge / ports 11 times. It is definitely important when it is needed BUT it is clearly not always needed.

  • Jim T Advent Mortgage on 2014-02-05 11:40:44 AM

    The same holds true to other lenders that have specials that do not allow blends/extends, the ability to increase the mortgage, or require the port to happen the same day. I don't want to mention the name of this other MAJOR lender with these 'specials but they also put your client in grave financial risk. Tread carefully.

  • Magna Farinho on 2014-02-05 11:41:39 AM

    I agree! Be carefully and explain to the clients that should they have to pay out prior to maturity, the penalty is calculated differently than by most lenders . They calculate the greater of 3 mths or the IRA calculated with IA's posted reivestment rate in force at the time of payout . Those rates are pretty low....go on their website and check it out . The penalties will be substantial!!
    Plus they charge additional fees depending on when in the term you are paying it.
    Do check their guidelines and disclose it to your client before selling it. ..it is not always as good as it appears..

  • Drew on 2014-02-05 11:46:02 AM

    I wonder how other Brokers are getting 2.99 with full options.

  • Jim T Advent Mortgage on 2014-02-05 11:46:16 AM

    Ron,
    I would hate to have been one of the 11 clients that would face this issue.
    At the end of the day, all we can do is make sure we completely disclose the potential pitfalls of these less than full featured mortgages and let the client decide is they are willing to take the risk.

  • Jim T Advent Mortgage on 2014-02-05 11:51:24 AM

    Guys, you are missing the most important issues with this. If the client is forced to break the mortgage, they lose the 2.99% and are forced to take current market rates at the time of the sale. This could be huge if rates start to increase (I know I know..... rates are not going anywhere, blah blah blah blah.). The reality is we cannot predict where rates are going so you must consider this risk that you are bestowing upon your client.

  • Dan on 2014-02-05 12:14:12 PM

    Ron: Good Lord, can we please stop the bond yield penalty foolishness, that whole thing was discredited 2 articles ago.

    Can you elaborate? I wasn't aware that a huge IRD because the "current rate" is based on bond yields was discredited somehow.

  • Jim T Advent Mortgage on 2014-02-05 1:10:01 PM

    Ron,
    My point is that it is our responsibility to spell out the potential risks of such products. We all know that the average duration of a mortgage is less than 3.5 years (for whatever reason - divorce, sale, relocation, etc.) and as such, the client will face an interest rate risk if they are not able to port/ bridge/blend/extend/etc. This risk is real with this product. As a client, I would expect my mortgage professional to explain any potential pitfalls. I bet you dollars -to-donuts that very few brokers have disclosed this interest rate risk to their clients resulting from the inability to port.

  • Dan Faubert on 2014-02-05 1:54:59 PM

    Before everyone floods IA with their deals, also remember that your client taking the 5 yr fixed at 2.99% must qualify at their 3 yr POSTED rate today of 4.45%, hope everyone noticed. Seems like every lender has fine print, can barely keep track of them all. Thanks for Mark Legault at my office for bringing this to my attention. IA is not alone out there with a product that is missing important features and I have nothing against them personally. I'm as opened minded as the next guy in getting the deals in the door, but my 1st concern has to be in the best interest of the client, not my commission. I would hope that all of us out there think the same way. With over 25 yrs as a broker/agent, and still loving it, I can't but help think that that philosophy is why I'm still here today. Having happy clients return and refer friends and family is the basis of a strong business model. Yes the mortgage rates are out there now for every consumer to see in an instant, so I will continue to get the calls and fill in the missing important fine print so that they can make educated decisions, and hopefully, that will not always be accepting the "lowest" rate.

  • Victor Simone on 2014-02-06 11:22:04 PM

    Can the IA 2.99% mortgage be assumed by the purchaser of the home ?

    No lenders are going to let 1 or 2 competitors eat their lunch at 2.99% for too long. I would predict that more lenders follow suit and strip down features to match these propositions.

    Then, we'll all have dynamite in our tool box.

    For fans of the lowest rates ? If clients just bought the lowest rates on the internet, what would the financial companies need us for ?

  • Stuart Little on 2014-10-21 2:33:14 PM

    Absolutely great! If you want some cheap and profitable mortgage I suggest you to look at http://www.dreamlifemortgages.com/ This is the best mortgage broker for real!

  • Ron Butler on 2014-02-05 12:19:44 PM

    Jim, you know as well as I do that we have the financial wherewithal to float those bridges privately. Added expense? Sure. Outrageous? No. We have to respect the fact that all forms of Bridging require additional costs. IA is not the only lender that does not bridge and many lenders are reticent to do all forms and all lengths of Bridges.

    It becomes a question of just what future possibilities we need to analyse and review with the client. Lord knows anything can happen. Should we ask them how solid their marriage is; because in my 20 years that is the biggest possible problem that can occur in a family's homeownership future. But we never ask that question do we?

    Yes, we must give proper advice and disclosure BUT in the end does that send us down the road of tailoring our recommendation so the only lender that fits all the criteria is the 3.39% full commission lender?

    Sometimes the most important person we need to be truthful with is ourselves.

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