Fine print and other considerations in the era of alternative mortgages

Fine print and other considerations in the era of alternative mortgages

Fine print and other considerations in the era of alternative mortgages

Since the Office of the Superintendent of Financial Institutions’ mortgage stress test was implemented in January, Mortgages of Canada founder and CEO Samantha Brookes has seen “a huge influx” of Canadians who fail to qualify for a bank mortgage turning to alternative lenders that range from risky loan sharks to larger, more conventional companies like Home Trust.

While alternative lenders can provide a lifeline for Canadians who have run out of other financing options, Brookes said they come with pitfalls for those who don’t bother looking at the fine print.

“You need to read those contracts,” she told The Canadian Press. “[With an alternative lender], the interest rates are higher, the qualifying rate is higher than if you were going with a traditional bank and they are going to charge one per cent of the mortgage amount [as a lender’s fee] for closing, so that means your closing costs increase.”

Alternative lenders tend to offer less wiggle room on their terms, so Brookes said that means clients should pay special attention to another dangerous term she’s seen slipped into mortgage contracts: the sale-only clause. It’s less common, Brookes said, but if left in, it might mean the only way a client can break the mortgage is by selling their home.

She also advised mortgage-seekers to research a potential lender’s reputation, which can easily be done online. Looking up some lenders will reveal their involvement in growing strings of court cases, she said.

Read more: More and more mortgages being denied by big banks

Broker Ron Alphonso has seen what happens when you don’t look into your lender. He said that he has recently heard from a couple who borrowed $100,000 via a paralegal posing as a broker, who then convinced the couple to give the money back to him so he could invest it on their behalf. Instead of investing it, the paralegal disappeared to Sri Lanka with the funds, leaving the couple on the hook for the money and resulting in eviction from their home.

“They got very, very poor advice,” Alphonso explained. “If they had a lawyer working for them, at least the lawyer could have said [before they signed the mortgage] maybe this isn’t right.”

Alphonso recommends brokers to look into how tolerant a particular lender will be if a client were to default on one of their payments. Some lenders quickly force their clients into a power-of-sale or foreclosure, while others will find a way to work out an arrangement that will allow them to keep their home.

“If you are already in some kind of financial problem and you go to a lender that is not flexible, you make the situation worse,” Alphonso said. “If you miss one payment, [within] 15 days you can be in power-of-sale.”

 

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