Broker: 2.99 promotion lacks major feature

Broker: 2.99 promotion lacks major feature

Broker: 2.99 promotion lacks major feature 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.”
 
15 Comments
  • joewieman 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.
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  • Jim T Advent Mortgage 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!
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  • Mike Rice 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.
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