Mortgage Brokering in Ontario
– Agent Edition
- TENTH Edition
Joseph J. White
Copyright © 2008‐2016 by Joseph J. White. All rights reserved. Printed in Canada. No part of this
publication may be reproduced or distributed in any form or by any means, or stored in a database or
retrieval system, without the prior written permission of the author.
ISBN 978‐1‐988049‐03‐8
031516
Most recent update: February, 2016
This publication is intended to provide accurate information at the time of publication regarding the
mortgage industry in Ontario. Legal and other decisions related to financial transactions should be
completed only after seeking advice from a competent professional person and should not be based on
information contained herein. Neither the publisher nor the author is engaged in rendering legal or other
professional advice. The events and characters in this book are fictitious. Any resemblance to persons,
living or dead is purely coincidental.
Acknowledgements
I’ve been blessed to have worked with some of the industry’s top professionals who have both
mentored me and shared with me their experience and knowledge over the years. In
researching this book, I’ve relied on many different sources, which I’ve highlighted throughout.
My special thanks to my editor, Susan Horne, for her patience, technical writing expertise,
dedication and friendship.
My thanks to all of the students of the Real Estate and Mortgage Institute of Canada Inc.,
Seneca College and the consortium of Ontario Colleges through Ontario Learn who have so
richly enhanced my career, and who constantly challenge my knowledge and assumptions.
Special thanks to the Ontario Real Estate Association for permission to use their agreement of
purchase and sale form.
Sincere thanks to all of my colleagues for their constant support, input and dedication to our
industry.
My thanks to my cover designer, Sana Zaidi for bringing a fresh new look to this book.
Finally, I would like to thank my incredible wife Jennifer for her unwavering support. Without
her I would not be the man I am today.
About the Author
Joseph J. White has been involved in the mortgage industry for over 22 years. He began his
career as a mortgage agent, and in the mortgage lending sector of the industry he has held
positions as National Sales Manager and VP of Sales with two national mortgage lenders, and
has owned a mortgage investment corporation.
In the industry’s mortgage brokering sector he is a licensed mortgage agent and has been a
partner at a successful mortgage brokerage, principal broker at a commercial brokerage, and
owner of his own boutique brokerage.
As an educator, Mr. White has been educating the mortgage industry for over 14 years, was a
professor and program coordinator at Seneca College and is currently President of the Real
Estate and Mortgage Institute of Canada Inc. (REMIC). Mr. White has developed several courses
for Seneca College as well as the mortgage agent and broker courses, written two textbooks
used in the mortgage industry and by over 20 Ontario colleges, as well as several business
focused books and e‐books. He has instructed over twelve thousand students and in 2003 won
the Excellence Award for teaching and leadership excellence at Seneca College. He can be
contacted at joe.white@remic.ca
Table of Contents
Acknowledgements ......................................................................................................................... iii
About the Author ............................................................................................................................ iii
I n t r o d u c t i o n ............................................................................................................................ 1
Chapter 1: Market Overview
3
Learning Outcomes ......................................................................................................................... 3
Introduction……… ............................................................................................................................ 3
1.1 A Career as a Mortgage Agent ............................................................................................... 3
Pause for clarification – term “mortgage agent” and “mortgage broker” ...................... 4
1.2 Key Participants ...................................................................................................................... 5
For your information… ..................................................................................................... 5
Success Tip – Real estate salespeople ............................................................................. 6
Pause for clarification – Loan to Value (also referred to as LTV)..................................... 7
1.3 History of the Mortgage Industry in Ontario ......................................................................... 8
1.4 Market Demographics and Trends ....................................................................................... 12
Population............................................................................................................................ 12
Size of the Mortgage Market ............................................................................................... 13
Characteristics of a Mortgage Agent’s Client ...................................................................... 13
The Average Canadian’s Credit Score .................................................................................. 17
Pause for clarification – Credit score ............................................................................. 17
1.5 The Commercial Mortgage Market ...................................................................................... 18
Success Tip – Commercial transactions ......................................................................... 20
1.6 Investing in Mortgages ......................................................................................................... 20
Private Lending .................................................................................................................... 20
Syndicated Mortgages ......................................................................................................... 21
Mortgages as Investments .................................................................................................. 21
Pause for clarification – Power of Sale .......................................................................... 22
Pause for clarification ‐ Discount ................................................................................... 23
Indirect Investing in Mortgages ........................................................................................... 24
1.7 Real Estate and Mortgage Institute of Canada Inc. (REMIC) ................................................ 24
1.8 Mortgage Associations and Professional Designations........................................................ 25
1.9 Choosing a Brokerage........................................................................................................... 25
1.10 Key Terms and Definitions ................................................................................................... 29
1.11 Review Questions ................................................................................................................. 34
Short Answer Questions ...................................................................................................... 34
Appendix 1: Schedule 1 Banks ....................................................................................................... 35
Appendix 2: Schedule 2 Banks ....................................................................................................... 36
Appendix 3: Schedule 3 Banks ....................................................................................................... 37
Chapter 2: Basic Mortgage Concepts
39
Learning Outcomes ....................................................................................................................... 39
Introduction………. ......................................................................................................................... 39
2.1 What is a Mortgage? ............................................................................................................ 40
Definition ............................................................................................................................. 40
Pause for clarification ‐ Title .......................................................................................... 40
2.2 Collateral Mortgages ............................................................................................................ 40
2.3 What is a Mortgage Agent/Broker? ..................................................................................... 41
2.4 The Mortgage Contract ........................................................................................................ 42
The Standard Charge Terms ................................................................................................ 42
Borrower Covenants ............................................................................................................ 42
Lender Covenants ................................................................................................................ 43
2.5 Mortgage Registration Documentation ............................................................................... 44
The Charge/Mortgage ......................................................................................................... 44
The Collateral Charge/Mortgage ......................................................................................... 46
The Discharge of Charge ...................................................................................................... 48
2.6 Mortgage Ranks ................................................................................................................... 50
2.7 Why is Mortgage Financing Needed? .................................................................................. 50
Pause for clarification – Down payment........................................................................ 51
Pause for clarification – Down payment requirements for insured mortgages ............ 51
2.8 The Purposes of Using a Mortgage ...................................................................................... 51
Purchase .............................................................................................................................. 51
Refinance ............................................................................................................................. 51
Success Tip – Home Buyer’s Program (HBP) .................................................................. 52
Success Tip – Home Buyer’s Tax Credit (HBTC) ............................................................. 52
Equity Take‐Out (ETO) ......................................................................................................... 52
Bridge Financing .................................................................................................................. 52
2.9 Conventional and High Ratio Mortgages ............................................................................. 53
High Ratio Mortgage ............................................................................................................ 53
Pause for clarification – Self‐insured lender .................................................................. 54
Conventional Mortgage ....................................................................................................... 54
2.10 Key Terms and Definitions ................................................................................................... 56
2.11 Review Questions ................................................................................................................. 58
Short Answer Questions ...................................................................................................... 58
Chapter 3: Advanced Mortgage Concepts
59
Learning Outcomes ....................................................................................................................... 59
3.1 Financial Components of a Mortgage .................................................................................. 59
The Face Value ..................................................................................................................... 59
The Term .............................................................................................................................. 59
The Amortization ................................................................................................................. 60
The Interest Rate ................................................................................................................. 60
The Compounding Frequency of the Interest Rate ............................................................. 60
Payment Amount ................................................................................................................. 60
3.2 Types of Mortgage Products ................................................................................................ 61
The Partially Amortized, Blended Constant Payment Mortgage – Fixed Rate .................... 61
The Partially Amortized, Blended Constant Payment Mortgage – Variable Rate ............... 62
Success Tip – Determining a borrower’s needs ............................................................. 66
The Partially Amortized, Blended Variable Payment Mortgage – Variable Rate ................ 66
The Interest Only Mortgage ................................................................................................ 66
For your information… Interest Rates ........................................................................... 67
The Home Equity Line of Credit (HELOC) ............................................................................. 68
The Interest Accruing Mortgage .......................................................................................... 69
The Reverse Mortgage......................................................................................................... 70
The Straight Line Principal Reduction Mortgage ................................................................. 70
The Graduated Payment Mortgage ..................................................................................... 71
3.3 Mortgage Options ................................................................................................................ 72
1. Prepayment Options ....................................................................................................... 72
a) Fully Open ....................................................................................................................... 72
b) Partially Open ................................................................................................................. 73
Calculating the Prepayment Penalty ............................................................................. 73
c) Closed Mortgage Prepayment Option ............................................................................ 73
Success Tip – Defining a “Closed Mortgage” ................................................................. 74
2. Repayment Options ........................................................................................................ 74
a) Periodic Payment Increase ............................................................................................. 75
b) Accelerated Mortgage Payment ..................................................................................... 76
Success Tip – Payment frequency.................................................................................. 79
c) Lump Sum Payments ...................................................................................................... 79
d) Extended Amortization ................................................................................................... 80
3. Cash Back Option ............................................................................................................ 81
4. Combined or Bundled Option ......................................................................................... 82
5. Portability Option ........................................................................................................... 83
6. Assumability Option........................................................................................................ 83
Key Terms and Definitions............................................................................................................. 85
3.4 Review Questions ................................................................................................................. 89
Short Answer Questions ...................................................................................................... 89
Chapter 4: Property Ownership in Ontario
90
Learning Outcomes ....................................................................................................................... 90
4.1 Property…… .......................................................................................................................... 90
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
Real Property ....................................................................................................................... 90
Personal Property ................................................................................................................ 90
Ownership… ......................................................................................................................... 90
Estates in Land...................................................................................................................... 90
Fee Simple Estate................................................................................................................. 90
Leasehold Estate .................................................................................................................. 91
Life Estate / Life Lease ......................................................................................................... 91
Success Tip – Life Estate / Life Lease ............................................................................. 92
Condominium Ownership .................................................................................................... 92
Encumbrances ...................................................................................................................... 92
Mortgages ............................................................................................................................ 92
Easements............................................................................................................................ 92
Restrictive Covenants .......................................................................................................... 93
Building Schemes ................................................................................................................. 93
Co‐Ownership of Real Property............................................................................................ 93
Tenancy in Common ............................................................................................................ 93
Joint Tenancy ....................................................................................................................... 94
Judgments and Liens ............................................................................................................ 94
Judgments ............................................................................................................................ 94
Liens ..................................................................................................................................... 95
Key Terms and Definitions ................................................................................................... 96
Review Questions ................................................................................................................. 98
Short Answer Questions ...................................................................................................... 98
Chapter 5: Regulation and Legislation
99
Learning Outcomes ....................................................................................................................... 99
Introduction……… .......................................................................................................................... 99
Pause for clarification – Disclosure ................................................................................ 99
Pause for clarification – Regulate ................................................................................ 100
5.1 The Regulator: FSCO .......................................................................................................... 100
The Commission ................................................................................................................ 100
Financial Services Tribunal (Tribunal) ................................................................................ 100
The Superintendent and Staff ........................................................................................... 100
Summary of the Act and Regulations ................................................................................ 101
5.2 Activities that are Regulated .............................................................................................. 102
5.3 Licensure….. ........................................................................................................................ 103
Pause for clarification – Licensure ............................................................................... 103
Four Licenses ..................................................................................................................... 104
Pause for clarification – Corporations, partnerships and sole proprietorships........... 104
Restrictions ........................................................................................................................ 104
Exemptions to Licensure.................................................................................................... 104
Pause for clarification – Vendor take‐back .................................................................. 105
Getting and Keeping a License........................................................................................... 105
Having a License Issued by FSCO ....................................................................................... 106
FSCO's Public Registry ........................................................................................................ 106
Prohibited Activities .......................................................................................................... 107
Pause for clarification – Prohibited activities .............................................................. 107
Compliance and Enforcement ........................................................................................... 107
Pause for clarification – Trust funds ............................................................................ 108
Pause for clarification – Administrative penalties ....................................................... 108
Having a License Suspended or Revoked by FSCO ............................................................ 109
5.4 The Mortgage Brokerage License ....................................................................................... 110
Licensing Requirements (Sections 1 – 3, Regulation 408/07) ........................................... 110
Pause for clarification – Errors and omissions insurance (E & O) ................................ 111
Pause for clarification – Principal broker ..................................................................... 111
Suitability for Licensing (Sections 1 – 3, Regulation 408/07) ............................................ 111
Standards of Practice (Regulation 188/08) ....................................................................... 112
Public Relations ................................................................................................................. 112
Complaints Process ............................................................................................................ 112
Customer Relations ........................................................................................................... 112
Return of Documents (Section 17, Regulation 188/08) .................................................... 113
Information about the Brokerage...................................................................................... 113
Fees and Payments ............................................................................................................ 113
Pause for clarification – Remuneration ....................................................................... 114
Duties in Particular Transactions ....................................................................................... 114
Disclosure .......................................................................................................................... 114
Policies and Procedures ..................................................................................................... 115
Record Keeping .................................................................................................................. 115
Pause for clarification – Trade completion date.......................................................... 115
Reverse Mortgages ............................................................................................................ 116
Compliance Review............................................................................................................ 116
5.5 The Mortgage Agent License .............................................................................................. 116
Standards of Practice ......................................................................................................... 117
5.6 The Mortgage Broker License............................................................................................ 118
5.7 The Principal Broker ........................................................................................................... 119
5.8 The Mortgage Administrator License ................................................................................. 119
5.9 Summary…. ......................................................................................................................... 120
5.10 External Resources ............................................................................................................. 120
5.11 Key Terms and Definitions ................................................................................................. 121
5.12 Review Questions ............................................................................................................... 126
True or False Questions ..................................................................................................... 126
Short Answer Questions .................................................................................................... 127
Appendix 1: FSCO Organization Chart as of November 23, 2015 .............................................. 128
Chapter 6: Transaction Overview
129
Learning Outcomes ..................................................................................................................... 129
Introduction………. ....................................................................................................................... 129
6.1 Who is the Client? .............................................................................................................. 129
6.2 The Role of the Mortgage Agent as Advisor ...................................................................... 130
Lender Expectations .......................................................................................................... 130
Borrower Expectations ...................................................................................................... 131
Success Tip – Act in the best interests of the client .................................................... 133
Success Tip – Service is the key ................................................................................... 133
Success Tip – Stay up to date on lender’s products .................................................... 134
Success Tip – Adopt the four borrower expectations ................................................. 135
6.3 The Steps in a Brokered Transaction .................................................................................. 135
Pause for clarification‐ Origination software............................................................... 136
Pause for clarification ‐ Appraisal ................................................................................ 136
Pause for clarification – Amortization schedule .......................................................... 137
6.4 Key Terms and Definitions ................................................................................................. 139
6.5 Review Questions ............................................................................................................... 141
Short Answer Questions .................................................................................................... 141
Chapter 7: Insurance in the Mortgage Industry
142
Learning Outcomes ..................................................................................................................... 142
Introduction……… ........................................................................................................................ 142
7.1 Mortgage Default Insurance .............................................................................................. 142
What is Mortgage Default Insurance? ............................................................................... 142
Background ........................................................................................................................ 142
How Mortgage Default Insurance Works .......................................................................... 143
Programs ............................................................................................................................ 144
CMHC ................................................................................................................................. 144
Success Tip – Purchase plus improvements program.................................................. 145
Genworth Financial............................................................................................................ 145
Canada Guaranty ............................................................................................................... 145
Default Management Programs (also known as “workout options”) ............................... 146
7.2 Mortgage Creditor and Life Insurance ............................................................................... 147
What is Mortgage Creditor Insurance? ............................................................................. 147
What is Life Insurance? ...................................................................................................... 148
Success Tip – Partner with a professional ................................................................... 149
7.3
7.4
7.5
7.6
7.7
What insurance is best for your Client? ............................................................................ 150
Property Insurance ............................................................................................................. 151
What is Property Insurance? ............................................................................................. 151
Why is it necessary? .......................................................................................................... 151
Types of Insurance ............................................................................................................. 151
Title Insurance .................................................................................................................... 154
What is Title Insurance? .................................................................................................... 154
Types of Policies ................................................................................................................ 154
Solicitor’s Opinion on Title vs. Title Insurance – A Comparison ........................................ 155
Pause for clarification – “Solicitor’s Opinion on Title” ................................................ 155
The Cost of Title Insurance ................................................................................................ 156
Making a Claim on a Title Insurance Policy ....................................................................... 156
The History of Title Insurance ............................................................................................ 156
Providers of Title Insurance ............................................................................................... 157
Success Tip – Suggest title insurance to your clients ................................................... 157
Errors and Omissions Insurance ......................................................................................... 158
What is Errors and Omissions insurance (E&O)? ............................................................... 158
Key Terms and Definitions ................................................................................................. 159
Review Questions ............................................................................................................... 165
Short Answer Questions .................................................................................................... 165
Chapter 8: Calculating a Mortgage Payment
166
Learning Outcomes ..................................................................................................................... 166
Introduction……… ........................................................................................................................ 166
8.1 The Components of a Mortgage Payment ......................................................................... 166
8.2 Configuring the HP10BII ..................................................................................................... 167
8.3 Interest Rates ..................................................................................................................... 170
Pause for clarification – Equivalent interest rates ....................................................... 172
8.4 Converting an Interest Rate with the HP10BII ................................................................... 172
Pause for clarification – “E” in your display ................................................................. 174
Pause for clarification – Rounding interest rates ........................................................ 174
8.5 Calculating a Mortgage Payment with the HP10BII ........................................................... 176
Pause for clarification – “BEGIN” in your display ........................................................ 178
Pause for clarification – Rounding a mortgage payment ............................................ 179
Success Tip ‐ N ............................................................................................................. 180
Pause for clarification – Term’s effect on a mortgage payment ................................. 180
8.6 Calculating an Interest Only Mortgage Payment ............................................................... 181
8.7 Using the SHARP EL‐738 ..................................................................................................... 182
8.8 Using the Texas Instruments BAII Plus ............................................................................... 185
8.9 Advanced Mortgage Calculations....................................................................................... 188
Accelerating a Mortgage ................................................................................................... 188
Pause for clarification – Using the “+/‐“ Key ............................................................... 188
Calculating the Outstanding Balance (OSB) of a Mortgage ............................................... 189
Pause for clarification – Important note about the HP10BII + .................................... 189
Pause for clarification ‐ Rounding outstanding balances ............................................ 190
Calculating the prepayment penalty on a partially open mortgage.................................. 193
3 Months’ Interest Penalty ................................................................................................ 193
Interest Rate Differential ................................................................................................... 194
8.10 Conclusion… ....................................................................................................................... 194
Success Tip – Practice! ................................................................................................. 195
8.11 Key Terms and Definitions ................................................................................................. 196
8.12 Review Questions ............................................................................................................... 198
Short Answer Questions .................................................................................................... 198
Chapter 9: Attracting a Client
199
Learning Outcomes ..................................................................................................................... 199
Introduction……… ........................................................................................................................ 199
9.1 The Impact of Regulation and Legislation ............................................................................. 200
The Canadian Code of Advertising Standards ................................................................... 200
Pause for clarification – Advertising Standards Canada .............................................. 202
Legislation .......................................................................................................................... 202
Public Relations Materials: Agents and Brokers ................................................................ 202
Pause for clarification – Examples of public relations materials ................................. 202
Public Relations Materials: Mortgage Brokerages ............................................................ 203
Misleading, Deceptive and False Advertising .................................................................... 204
Advertising Tips – Competition Bureau of Canada ............................................................ 206
9.2 Business Development for Mortgage Agents ........................................................................ 207
Mission and Vision Statements ......................................................................................... 207
Business Cards ................................................................................................................... 208
Unique Forms of Business Cards ....................................................................................... 209
Success Tip – Business cards ........................................................................................ 210
Networking ........................................................................................................................ 210
Success Tip ‐ Networking ............................................................................................. 211
The Marketing/Advertising of Intangibles or Services ...................................................... 211
Marketing: the Art of Differentiation ................................................................................ 212
Success Tip – Make the phone ring! ............................................................................ 214
Database Marketing .......................................................................................................... 214
Referrals............................................................................................................................. 215
Success Tip – Getting family and friends’ mortgages .................................................. 215
9.3 Key Terms and Definitions ..................................................................................................... 216
9.4 Review Questions .................................................................................................................. 218
Short Answer Questions .................................................................................................... 218
Chapter 10: First Contact
219
Learning Outcomes ..................................................................................................................... 219
Introduction……… ........................................................................................................................ 219
10.1 The Initial Telephone Call .................................................................................................... 219
Pause for clarification – Call scripts ............................................................................. 220
10.2 Incoming Call Script ............................................................................................................. 221
Tips for Success .................................................................................................................. 223
10.3 Outgoing Cold Call Script for Referrals ................................................................................ 224
Pause for clarification – Cold calls ............................................................................... 224
10.4 Key Terms and Definitions ................................................................................................... 226
10.5 Review Questions ................................................................................................................ 227
Short Answer Questions .................................................................................................... 227
Chapter 11: The Initial Consultation
228
Learning Outcomes ..................................................................................................................... 228
Introduction……… ........................................................................................................................ 228
11.1 Required Documentation .................................................................................................... 228
Documentation for all Transactions .................................................................................. 229
Specific Documentation for a Purchase............................................................................. 229
Specific documentation for a Refinance, Equity take‐Out and Switch .............................. 230
11.2 File Creation......................................................................................................................... 230
File Checklist ...................................................................................................................... 230
File Worksheet ................................................................................................................... 232
Success Tip – Is your client working with someone else? ........................................... 233
11.3 Meeting the Client ............................................................................................................... 233
First Impressions ................................................................................................................ 233
Pause for clarification – Open‐ended question ........................................................... 234
The Client’s Home .............................................................................................................. 234
Pause for clarification – Decision‐maker ..................................................................... 234
The Mortgage Agent’s Office ............................................................................................. 235
Another Outside Location.................................................................................................. 235
11.4 Identity Verification ............................................................................................................. 235
11.5 The Application Form .......................................................................................................... 236
Section‐by‐Section Application Analysis ............................................................................ 239
Pause for clarification – Co‐applicants and guarantors ............................................... 240
Tips for a Complete Application ........................................................................................ 246
11.6 Determining the Applicant’s Needs .................................................................................... 246
11.7 Key Terms and Definitions ................................................................................................... 249
11.8 Review Questions ................................................................................................................ 251
Short Answer Questions .................................................................................................... 251
Chapter 12: Application Analysis – Borrower Documents
252
Learning Outcomes ..................................................................................................................... 252
Introduction……… ........................................................................................................................ 252
12.1 Fraud and Forgery .............................................................................................................. 252
12.2 Income Documentation...................................................................................................... 253
T4A ..................................................................................................................................... 253
Success Tip ‐ SIN........................................................................................................... 255
T4.. ..................................................................................................................................... 256
Success Tip – EI premiums ........................................................................................... 259
Success Tip – Income tax rates .................................................................................... 260
Job Letter ........................................................................................................................... 261
Paystub .............................................................................................................................. 264
Notice of Assessment (NOA) ............................................................................................. 266
Business License ................................................................................................................ 267
Financial Statements ......................................................................................................... 268
12.3 Property Documentation ................................................................................................... 271
Multiple Listing Service (MLS) ........................................................................................... 271
Agreement of Purchase and Sale....................................................................................... 272
12.4 Other Documentation ........................................................................................................ 278
Gift Letter........................................................................................................................... 278
Property Assessment ......................................................................................................... 279
Mortgage Statement ......................................................................................................... 281
Tax Bill ................................................................................................................................ 283
Condominium Status Certificate........................................................................................ 284
Sample Status Certificate................................................................................................... 284
Certificate of Independent Legal Advice (ILA) ................................................................... 287
Sample Certificate of Independent Legal Advice............................................................... 287
Creditor Insurance Application .......................................................................................... 288
Success Tip – Answer honestly in the creditor insurance application ......................... 288
Sample Creditor Insurance Application ............................................................................. 289
12.5 Summary…. ......................................................................................................................... 292
12.6 Key Terms and Definitions ................................................................................................. 293
12.7 Review Questions ............................................................................................................... 295
Short Answer Questions .................................................................................................... 295
Chapter 13: Application Analysis – Application Ratios
299
Learning Outcomes ..................................................................................................................... 299
Introduction……… ........................................................................................................................ 299
13.1 Loan to Value Ratio (LTV) ................................................................................................... 299
Pause for clarification – The “/” character .................................................................. 300
Calculating the LTV of a 1st Mortgage ................................................................................ 300
Pause for clarification – Converting decimals to percentages .................................... 300
Pause for clarification – “E” in your display ................................................................. 301
Calculating the LTV of a 2nd Mortgage ............................................................................. 301
Calculating the LTV of Additional Mortgages .................................................................... 302
Using the LTV to Calculate a Maximum Mortgage Amount .............................................. 302
13.2 Gross Debt Service (GDS) and Total Debt Service (TDS) Ratios.......................................... 303
Calculating the Gross Debt Service Ratio (GDS) ................................................................ 303
The Components of GDS .................................................................................................... 304
Pause for clarification – Frequency of payments in GDS ............................................. 305
Success Tip – If GDS is above industry standard .......................................................... 306
GDS and Second Mortgages .............................................................................................. 306
Calculating the Total Debt Service Ratio (TDS): Pre‐Qualifying ......................................... 307
Success Tip – Outstanding balance or credit limit in the TDS? .................................... 308
Calculating the Total Debt Service Ratio (TDS): Verifying ................................................. 310
Success Tip – If TDS is above industry standard .......................................................... 310
13.3 Calculating the Maximum Mortgage Amount.................................................................... 311
13.4 LTV, GDS and TDS Quick Reference Guide ......................................................................... 312
13.5 Key Terms and Definitions ................................................................................................. 313
13.6 Review Questions ............................................................................................................... 314
Chapter 14: Application Analysis – Borrower Credit
316
Learning Outcomes ..................................................................................................................... 316
Introduction……… ........................................................................................................................ 316
14.1 Credit Bureaus .................................................................................................................... 316
14.2 Credit Reports .................................................................................................................... 317
Sample Credit Report Provided to Consumers .................................................................. 317
Sample Credit Report Provided to Equifax Members........................................................ 319
Equifax Credit Report Legend ............................................................................................ 324
Trade Information Descriptions......................................................................................... 327
Trade Information Ratings ................................................................................................. 328
Credit Rating Examples ...................................................................................................... 328
Equifax Glossary of Terms Used in a Credit Report ........................................................... 329
Interpreting a Credit Report .............................................................................................. 330
Success Tip – Question discrepancies .......................................................................... 332
Success Tip ‐ Collections .............................................................................................. 334
Success Tip ‐ Notes ...................................................................................................... 335
Success Tip – Questioning credit issues ....................................................................... 336
14.3 Credit Scores and Analysis.................................................................................................. 337
Understanding a Credit Score ............................................................................................ 337
Items that affect a Credit Score ......................................................................................... 339
14.4 Key Terms and Definitions ................................................................................................. 341
14.5 Review Questions ............................................................................................................... 343
Short Answer Questions .................................................................................................... 343
Chapter 15: Application Analysis – The Property
344
Learning Outcomes ..................................................................................................................... 344
Introduction……… ........................................................................................................................ 344
15.1 Appraisal Basics .................................................................................................................. 344
The Appraiser..................................................................................................................... 344
Accreditations .................................................................................................................... 345
The Appraisal ..................................................................................................................... 346
The Value of a Property ..................................................................................................... 347
15.2 Calculating the Market Value of a Property ....................................................................... 347
Pause for clarification – The number of comparables ................................................. 349
15.3 The Types of Appraisals ...................................................................................................... 350
Desktop Appraisal (also referred to as a Sales Data Report) ............................................ 350
Drive‐by Appraisal ............................................................................................................. 350
Full Appraisal ..................................................................................................................... 351
15.4 Key Terms and Definitions ................................................................................................. 360
15.5 Review Questions ............................................................................................................... 362
Short Answer Questions .................................................................................................... 362
Chapter 16: Choosing a Lender
363
Learning Outcomes ..................................................................................................................... 363
Introduction……… ........................................................................................................................ 363
16.1 Types of Lenders ................................................................................................................ 363
Prime Mortgage Lending ................................................................................................... 364
Sub‐Prime Mortgage Lending (also referred to as “Self‐Insured” Lending) ...................... 364
The Private Mortgage Market ........................................................................................... 365
Success Tip – Sub‐prime lenders ................................................................................. 365
16.2 Understanding Lender Guidelines ...................................................................................... 365
Product Sheets ................................................................................................................... 366
Rate Sheets ........................................................................................................................ 367
Success Tip – If you’re unsure...................................................................................... 367
16.3 Choosing a Lender .............................................................................................................. 368
Pause for clarification – Loyalty or points program..................................................... 368
16.4 Key Terms and Definitions ................................................................................................. 369
16.5 Review Questions ............................................................................................................... 371
Short Answer Questions .................................................................................................... 371
Chapter 17: Submitting the Application and Obtaining a Commitment
372
Learning Outcomes ..................................................................................................................... 372
Introduction……… ........................................................................................................................ 372
Success Tip – Only submit to one lender ..................................................................... 372
17.1 Submitting the Application................................................................................................. 373
17.2 Investor/Lender Disclosure ................................................................................................ 374
What Must be Disclosed .................................................................................................... 374
How Disclosure Must be Made.......................................................................................... 377
When Disclosure Must be Made ....................................................................................... 377
The Investor/Lender Disclosure Statement for Brokered Transactions ............................ 378
17.3 The Commitment Letter ..................................................................................................... 392
Success Tip –Double check the commitment letter .................................................... 392
17.4 A Declined Application ....................................................................................................... 396
17.5 Key Terms and Definitions ................................................................................................. 397
Conditions
397
UFFI (Urea formaldehyde foam insulation)
397
17.6 Review Questions ............................................................................................................... 398
Short Answer Questions .................................................................................................... 398
Chapter 18: Borrower Disclosure
399
Learning Outcomes ..................................................................................................................... 399
Introduction……… ........................................................................................................................ 399
18.1 Amendments To Ontario Regulations – January, 2016 ...................................................... 400
18.2 Completing the Borrower Disclosure Document ............................................................... 401
What Must be Disclosed .................................................................................................... 401
1. Fees and payments associated with the mortgage................................................ 401
Pause for clarification – Fees are not regulated .......................................................... 401
2. The relationship between the brokerage and lender under the proposed
mortgage…………………………………………………………………………………………………………………402
3. The role of the brokerage ...................................................................................... 403
4. The number of lenders the brokerage represented during the previous year ...... 403
5. Potential Conflicts of interest................................................................................. 404
Pause for clarification – Conflict of interest ................................................................ 404
6. Risks associated with the proposed mortgage ...................................................... 404
7. Terms and conditions of the proposed mortgage ................................................. 406
18.3
18.4
18.5
18.6
18.7
18.8
8. Estimated costs ...................................................................................................... 407
9. The cost of borrowing ............................................................................................ 407
Pause for clarification – The cost of borrowing: dollars and cents ............................. 407
Pause for clarification – Calculating the APR/cost of borrowing ................................. 408
Cost of Borrowing/APR – Included and Excluded Items .................................................... 408
Disclosure under Specific Circumstances .......................................................................... 409
1. Disclosure ‐ Fixed interest mortgage for a fixed amount....................................... 409
2. Disclosure ‐ Variable interest mortgage for a fixed amount .................................. 410
3. Disclosure ‐ Line of credit ....................................................................................... 411
4. Disclosure ‐ Credit card applications ...................................................................... 412
5. Disclosure ‐ Credit cards ......................................................................................... 413
How Disclosure Must be Made.......................................................................................... 414
When Disclosure Must be Made ....................................................................................... 414
Pause for clarification – What disclosure documents must be given to the
borrower?....................................................................................................................414
Sample Borrower Disclosure .............................................................................................. 414
Borrower Disclosure Checklist............................................................................................ 423
Summary….. ........................................................................................................................ 424
Key Terms and Definitions ................................................................................................. 425
SAMPLE BORROWER DISCLOSURE ‐ FILOGIX ..................................................................... 426
Review Questions ............................................................................................................... 428
True or False Questions ..................................................................................................... 428
Short Answer Questions .................................................................................................... 428
Chapter 19: Closing the Transaction
429
Learning Outcomes ..................................................................................................................... 429
Introduction……… ........................................................................................................................ 429
19.1 Estimating Closing Costs ..................................................................................................... 429
Common Closing Costs ...................................................................................................... 429
Success Tip – Closing Cost Worksheet ......................................................................... 434
19.2 Electronic Land Registration............................................................................................... 434
19.3 The Closing Process ............................................................................................................ 435
Pause for clarification ‐ Subsearch .............................................................................. 437
19.4 The Interest Adjustment Date (IAD) ................................................................................... 438
19.5 Key Terms and Definitions ................................................................................................. 443
19.6 Review Questions ............................................................................................................... 444
Short Answer Questions .................................................................................................... 444
Appendix 1: Acknowledgment and Direction .............................................................................. 445
Appendix 2: Document Registration Agreement (DRA) .............................................................. 447
Appendix 3: Closing Costs Worksheet ......................................................................................... 449
Chapter 20: Contract Law
450
Learning Outcomes ..................................................................................................................... 450
Introduction……… ........................................................................................................................ 450
20.1 What is a Contract? ............................................................................................................ 450
Pause for clarification – Real estate contracts must be in writing .............................. 451
20.2 The Elements of a Valid Contract ....................................................................................... 451
The Offer ............................................................................................................................ 451
Acceptance of the Offer .................................................................................................... 451
Intention to Create a Legal Relationship ........................................................................... 452
The Legal Capacity to Enter into a Contract ...................................................................... 452
Legality Requirements ....................................................................................................... 452
Exchange of Consideration ................................................................................................ 453
20.3 Contractual Defects ............................................................................................................ 453
Misrepresentation ............................................................................................................. 453
Duress ................................................................................................................................ 454
Undue Influence ................................................................................................................ 454
Unconscionable Acts.......................................................................................................... 454
Mistake .............................................................................................................................. 454
Mistake of Law ............................................................................................................. 454
Mistake of Fact ............................................................................................................ 454
The Parties to a Mistake .............................................................................................. 454
20.4 Contractual Rights .............................................................................................................. 455
Privity of Contract .............................................................................................................. 455
Vicarious Performance ...................................................................................................... 455
Assignment ........................................................................................................................ 456
20.5 Discharging a Contract ....................................................................................................... 456
Performance ...................................................................................................................... 456
Agreement ......................................................................................................................... 457
Waiver .......................................................................................................................... 457
Material Alterations ..................................................................................................... 457
Right ................................................................................................................................... 458
Option to Terminate .................................................................................................... 458
Condition Precedent .................................................................................................... 458
Condition Subsequent ................................................................................................. 458
Frustration ......................................................................................................................... 458
Operation of Law ............................................................................................................... 459
20.6 Breach of Contract and Contractual Remedies .................................................................. 459
Damages ............................................................................................................................ 459
Specific Performance ......................................................................................................... 459
Substantial Performance ................................................................................................... 459
Quantum Meruit ................................................................................................................ 460
Injunction ........................................................................................................................... 460
Rescission........................................................................................................................... 460
20.7 Key Terms and Definitions ................................................................................................. 461
20.8 Review Questions ............................................................................................................... 464
Short Answer Questions .................................................................................................... 464
Chapter 21: Mortgage Remedies
465
Learning Outcomes ..................................................................................................................... 465
Introduction………. ....................................................................................................................... 465
21.1 Power of Sale ...................................................................................................................... 465
Power of Sale Process ........................................................................................................ 466
21.2 Foreclosure and other Remedies ....................................................................................... 469
Foreclosure ........................................................................................................................ 469
Other Remedies ................................................................................................................. 469
Working with the Lender ................................................................................................... 470
Success Tip – If your client is about to miss a payment... ........................................... 470
21.3 Key Terms and Definitions ................................................................................................. 471
21.4 Review Questions ............................................................................................................... 472
Short Answer Questions .................................................................................................... 472
Chapter 22: Mortgage Fraud
473
Learning Outcomes ..................................................................................................................... 473
22.1 What is Mortgage Fraud? ................................................................................................... 473
22.2 Types of Mortgage Fraud ................................................................................................... 474
Fraud for Criminal Activities .............................................................................................. 474
Fraud for Profit .................................................................................................................. 475
Fraud for Shelter ................................................................................................................ 478
22.3 The Impact of Mortgage Fraud .......................................................................................... 480
22.4 Fraud Prevention ................................................................................................................ 480
Steps in Fraud Prevention.................................................................................................. 480
Fraud Warning Signs .......................................................................................................... 481
22.5 The Land Titles Assurance Fund ......................................................................................... 482
22.6 Advice for Clients................................................................................................................ 482
22.7 Key Terms and Definitions ................................................................................................. 485
22.8 Review Questions ............................................................................................................... 487
Short Answer Questions .................................................................................................... 487
Chapter 23: Ethics and Mortgage Brokering
488
Learning Outcomes ..................................................................................................................... 488
Introduction……… ........................................................................................................................ 488
23.1 What is Ethics? ................................................................................................................... 488
23.2 The Core Values and Beliefs of the Mortgage Industry ..................................................... 488
Borrower Expectations ...................................................................................................... 489
Lender Expectations .......................................................................................................... 489
23.3 The Decision Making Model ............................................................................................... 490
23.4 Case Study 1 ....................................................................................................................... 492
23.5 Case Study 2 ....................................................................................................................... 494
23.6 Conclusion… ....................................................................................................................... 496
23.7 Key Terms and Definitions ................................................................................................. 497
23.8 Review Questions ............................................................................................................... 498
Short Answer Questions .................................................................................................... 498
Case Study
499
Scenario and Supporting Documents………………………………………………………………………………………499
Case Study 1 Questions ..................................................................................................... 512
Section One: Complete the Mortgage Application Form ........................................... 512
Section Two: Short Answer Questions........................................................................ 514
Section Three: Borrower Disclosure ............................................................................ 515
Section Four: Financial Calculations ........................................................................... 516
Case Study 1 Answer Guide ............................................................................................... 521
Section One: Complete the Mortgage Application Form ........................................... 521
Section Two: Short Answer Questions........................................................................ 523
Section Three: Borrower Disclosure ............................................................................ 524
Section Four: Financial Calculations ........................................................................... 525
Table of Figures…......................................................................................................................... 527
Index ………………………………………………………………………………………………………………………………………530
Introduction
1
Introduction
Welcome to the exciting world of mortgage brokering!
This book, the updated edition of the last publication of Mortgage Brokering in Ontario – Agent
Edition, has been written to assist you in meeting the educational requirements to become
licensed as a mortgage agent in Ontario. Since the publication of the First Edition, the new
Mortgage Brokerages, lenders and Administrators Act, 2006 (while 2006 is part of the
legislation’s title, it actually didn’t come into effect until 2008) also referred to as the MBLAA has
been fully enacted, with the last piece of legislation coming into effect as of January 1, 2009.
There have been several significant changes, all reflected in this book, to brokering in this
province, such as changes to disclosure requirements for borrowers and Investors, marketing
and the use of specific titles by brokers and agents, to name but a few. The MBLAA also raises
the bar for both consumer protection and professionalism in the industry by promoting
appropriate training as well as the licensing of mortgage agents to meet both the regulator’s
and the industry’s demand for quality professionals to service the mortgage market. In addition,
the industry has undergone significant changes. It has survived the mortgage crisis, experienced
regulatory changes that have impacted how Ontarians borrow, and have seen market
participants leave the industry while new ones have entered it.
The one constant in our industry, as in life, is change. Change can have a positive or negative
impact, depending on how we respond to it. To be successful you will have to surpass the
minimum requirements for licensing and learn how to respond to the industry’s changes, and
that’s where additional, practical, real life information in this book will be of great interest to
you!
I have organized this book in a way that prepares you to complete a mortgage transaction to a
professional standard. To assist you further, I’ve added “Success Tips” throughout. These are
designed to provide you practical success strategies that I have gathered from my own years of
experience as well as those of my friends and colleagues in the industry. When new terms are
introduced I’ve added “Pause for clarification,” designed to quickly define the new term.
The opportunities in this industry are endless – the mortgage brokerage industry has many
diverse participants and offers those involved incredible opportunities for long, rewarding
careers. My own career has spanned over two decades, including positions on both the
brokering and lending sides, with both brokerages and lenders. Having begun as a mortgage
agent, I went on to manage mortgage agents for two large brokerages. I’ve been a partner in a
brokerage and held the positions of Vice President of Sales and National Sales Manager for two
national lenders. I’ve owned a Mortgage Investment Corporation (MIC) and an Administration
company and am now President of the Real Estate and Mortgage Institute of Canada Inc. In
addition, I spent twelve years at Seneca College as an Instructor, Part‐time Program Coordinator
and developed both the mortgage agent and mortgage agent courses for licensing purposes in
Ontario.
The need for mortgage agents has never been greater! There are more lenders than ever
before, even with the recent economic crisis, but the public has little or no knowledge of them.
To illustrate this point, take a moment to list the names of all of the lenders that you know or
have heard about. How many can you think of? In fact, there are dozens of lenders in the
Canadian mortgage market. This incredible number of lenders provides consumers with an
2
Introduction
overwhelming array of choice for their mortgage financing, and yet the majority of consumers
are unaware of them. The typical consumer needs the assistance of a knowledgeable and skilled
advisor to find a suitable product from among the various options available. In many cases
consumers require “non‐conventional” lending ‐ unique, innovative products that serve their
particular needs. Again, the consumer needs a professional mortgage agent with knowledge of
and access to these products.
Fraud is a growing concern. The professional mortgage agent must be trained to be alert to “red
flags” – indicators of potential fraud. Fraud has no place in an industry with professional
standards. By acquiring and maintaining clear personal standards and ethical values,
professionals ensure that the industry continues to be held in high regard by consumers. The
professional mortgage agent plays a key role in ensuring a healthy future for the whole industry.
It is my hope that this text will provide you valuable insights into the mortgage brokerage
industry and will continue to serve as a practical reference guide which will be of benefit on an
ongoing basis.
I firmly believe that every consumer, not just those who have been declined by their institution,
should use a qualified mortgage agent or agent. I have had the honour and pleasure of working
with and managing some of the most professional and ethical agents in our industry. They have
acted and continue to act as ambassadors on our behalf, increasing the public’s awareness and
respect of our industry. While the regulatory requirements discussed throughout this text will
help raise the standards of professionalism for our industry as a whole, regulation is not the sole
answer.
In my opinion, to increase market penetration from the current level of approximately 30%
requires a change in the public’s attitude about our industry. Every broker and agent who acts
with the highest levels of integrity, ethics and professionalism is an ambassador for our industry,
increasing consumer confidence in our abilities and reinforcing the belief that we are here to
serve them, not ourselves. Unfortunately every broker and agent who acts unethically or
unprofessionally tarnishes the reputation of the industry as a whole. Simply stated, there is no
place in our industry for those who would tarnish our reputation by taking advantage of the
public. Brokerages and lenders must continue to have and expand upon top down philosophies
that reward ethical and professional behaviour and raise the standard of professionalism above
what the MBLAA, its Regulations and the regulator require. In so doing our industry will shatter
that 30% ceiling, an event that is long overdue.
Joseph J. White
Chapter 1: Market Overview
3
Chapter 1: Market Overview
Learning Outcomes
Successful understanding of the concepts presented in this chapter will enable the learner to:
 Describe the potential of a career as a mortgage agent
 List and describe the key participants in Ontario’s mortgage market
 Discuss the history of the mortgage industry in Ontario
 Discuss the market demographics and trends that affect the Ontario mortgage market
 Define the commercial mortgage market and explain the differences between it and the
residential mortgage market
 Explain the private lending market
 Discuss the benefits and challenges of investing in mortgages
 Explain the different methods of investing in mortgages
 Explain the role of the Real Estate and Mortgage Institute of Canada Inc.
 List and describe the different mortgage associations operating in Ontario
 List and describe the different professional designations awarded by the mortgage
associations in Ontario
Introduction
The Ontario mortgage market is a vast and diverse industry comprised of dozens of lenders and
other key participants in the mortgage process.
The following sections will break down the market into its different segments and attempt to
provide context for the financing activities in the province. Of course to understand the market,
the main participants in the market must be discussed, which brings us to our first section.
1.1
A Career as a Mortgage Agent
A career as a mortgage agent can be both financially and personally rewarding. As the individual
responsible for bringing borrowers and lenders together, you will typically be compensated by
the lender in the form of a finder’s fee or commission based on a number of basis points (bps)
multiplied by the amount of the mortgage. In other cases, where you are dealing with a
borrower who doesn’t qualify with a traditional lender, you may arrange the mortgage with a
private lender. In this case you would charge the borrower a brokerage fee that would be
deducted directly from the mortgage proceeds.
While the role of the mortgage agent will be discussed in more detail later, it is useful to discuss
the potential income of a mortgage agent so that you have a clearer picture of the potential
earnings attainable should you decide to make this your career.
First, it is important to be mindful of the fact that your role is to always do what is in the best
interests of your clients, while being concerned with your own income last. In this way you will
always be conducting yourself in a professional and ethical manner.
4
Chapterr 1: Market O verview
Pa
ause for cla
arification
n – term “m
mortgage a
agent” and “mortga
age
broker”
In Ontario there
e are two lice
enses that allo
ow individualls to broker a mortgage: m
mortgage
agent and morttgage broker. The differen
nce between these two liccenses is that a mortgage
broker, in addittion to being able to broke
er mortgages,, can also be tthe Principal Broker of a
mo
ortgage broke
erage. Each mortgage
m
bro
okerage must have one Priincipal Broker to ensure
thaat the brokerrage, its agentts and brokerrs comply witth the approp
priate legislatiion and
reggulations.
w can take a look at a typ
pical transactiion. The typical finder’s feee or
With this in mind we
comm
mission paid by
b lenders in today’s
t
marke
etplace is 85 basis points ((.85%), which
h is referred to
as 85 bps. If you have
h
arranged
d a mortgage in the amounnt of $300,0000, then your brokerage
would
d be paid a fin
nder’s fee of 85bps
8
x $300
0,000, or .00885 x 300,000 w
which equals $2,550.
Mortggage agents work
w
on a com
mmission split with their bbrokerage. Fo
or experienceed mortgage
agentts the split can be, on averrage, 85/15 (the agent receeives 85% of the commission). This
would
d equate to a commission payable to yo
ou of $2,167. 50. For new mortgage agents the splitt
will tyypically be lesss until the brrokerage has determined tthat the agen
nt has gained an
appro
opriate level of
o experience
e.
The average transaaction will takke approximaately 6 hours tto complete (this is an aveerage; some
will be
e longer while others shorrter and this amount
a
of tim
me is typicallyy spread overr several dayss).
By divviding the com
mmission by the
t number of
o hours ($2,1167.50 / 6) wee can determ
mine that you
would
d have earned
d $361.25 per hour for this transaction . If an agent were to averrage 1
transaaction per day, his or her income would
d be approxim
mately $520,2200 per year ($2,167.50 x
20 business days per
p month x 12
1 months).
Now that
t
we’ve discussed the upper
u
end of an agent’s in come potenttial, let’s discu
uss the realityy
for ne
ew agents.
A new
w agent will tyypically not have an incom
me for the firs t three months of his or her career. It
takes time to find clients, then it takes time to close or fuund the transaaction, follow
wed by
receivving your com
mmission. A new
n agent sho
ould expect tto see an inco
ome after thee first three
months, and shoulld be, given in
ndustry averaages, aiming ffor 3 funded ttransactions p
per month att
the en
nd of his or her first year. An average of
o 3 fundings per month w
would equal an income of
$78,0
030 per year.
Of course these are only averagges. A highly successful aggent may earn
n substantiallly more than
this amount in his or her first ye
ear, while ano
other agent m
may earn subsstantially lesss.
As you continue on
n your new caareer path as a mortgage aagent it is important to no
ote that manyy
agentts earn six figu
ure incomes while
w
others do
d not; the p otential is dirrectly related
d to the time,
effortt and expertisse, among oth
her factors, of the agent.
As you can see, thiis can be an extremely
e
rew
warding careeer. Agents haave the poten
ntial to earn
significant incomess while helpin
ng borrowers find the prodduct that besst suits their n
needs and
Chapterr 1: Market O verview
5
mstances. In performing your
y
duties prrofessionally and ethically you will earn
n the respect
circum
of you
ur industry pe
eers, and devvelop a fulfillin
ng life long caareer.
t market in which you w
will be workingg.
Our next step is to investigate the
1.2
Key Pa
articipants
s
The mortgage
m
marrket in Ontario is comprise
ed of several kkey industry p
participants. In addition to
the mortgage
m
agen
nt, whose role
e will be discu
ussed throug hout this texttbook, the following
particcipants are vittal to the indu
ustry and are part of the pprocess of lan
nd ownership.
Institu
utional lende
er
The le
ender is the cornerstone of
o the mortgagge industry. Lenders are ggenerally grouped into two
o
main categories: in
nstitutional and private.
Institu
utional lenders represent the
t majority of lenders in Ontario, but private lendeers have
alwayys been and will
w most likelyy always be a necessary prrovider of fun
nds for borrow
wers who
don’t qualify throu
ugh institution
nal lenders.
Institu
utional lenders consist of Schedule
S
1, 2 and 3 banks,, credit union
ns, loan and trust
comp
panies, finance
e companies or other corp
porations connstructed to leend money on real estate..
Any le
ender may alsso be referred
d to as the mortgagee.
Fo
or your info
formation…
…
Un
nder the Bankk Act, banks are
a defined ass:
 Schedu
ule 1 (banks th
hat are Canad
dian owned)
 Schedu
ule 2 (branche
es or subsidiaries of foreig n banks)
 Schedu
ule 3 (foreign owned bankss operating inn Canada)
A list
l of currentt Schedule 1, 2 and 3 bankks is located inn the Append
dix
Privatte lender
A Privvate lender is typically an individual inve
estor with fu nds who wou
uld like to inveest in
mortggages. This in
ndividual will usually invest through his or her lawyeer who may have clients
requirring mortgage
e financing orr a mortgage agent. His o r her purposee may vary bu
ut normally an
investtor will investt in 2nd mortggages due to their
t
higher raate of return when compaared to 1st
mortggages and oth
her potential types of investments suchh as GICs or bonds.
Any Private
P
lenderr may also be referred to as
a the mortgaagee.
Borro
ower
The borrower is caalled the morttgagor and is the individuaal or individuaals who are taaking the
mortggage loan and
d pledging the
eir property as
a security.
Institu
utional Mortgage Originator
Severral financial in
nstitutions no
ow have their own Mortgagge Origination teams, ofteen referred to
o
as Road Warriors, who actively seek borrowers for them.. These Origin
nators are co
ompensated b
by
nd are not con
nsidered to be brokering a mortgage trransaction sin
nce they are
their institution an
6
Chapterr 1: Market O verview
der. The major differentiaating factor b etween an in
nstitutional m
mortgage
using only one lend
origin
nator and a mortgage
m
agen
nt is that, while both are d edicated to p
providing the best solution
ns
to the
eir clients, insstitutional mo
ortgage origin
nators can on ly place theirr clients with tthe lender byy
whom
m they are em
mployed and therefore
t
do not have acceess to all of th
he different p
products
availaable in the maarket.
Real Estate
E
Salesp
person
The Real
R Estate Salesperson is the
t individuall who brokerss the purchasse and sale traansaction
betwe
een a vendor (seller) and the
t purchaserr. This individdual is employed by a licen
nsed Real
Estate
e Broker, has met licensingg guidelines and
a is a membber of a local Real Estate B
Board.
Real Estate
E
Salespe
ersons are a vital
v link in th
he process of purchasing and selling reaal estate and
are th
herefore of co
onsiderable im
mportance to
o the mortgagge agent in reegards to obtaaining clients..
More information on Real Estatte Salespersons can be fouund through tthe Ontario R
Real Estate
Assocciation (OREA) at www.ore
ea.com.
Su
uccess Tip – Real esta
ate salespeople
Altthough the number of real estate salespeople is signnificant in thee Ontario marrket, before
yo
ou attempt to obtain clientts from them keep the 80‐‐20 rule in min
nd: 80% of trransactions
are
e typically do
one by 20% off a sales force
e. You shouldd focus on thee successful reeal estate
salespeople to get the most referral busin
ness possiblee.
Real Estate
E
Appraiiser
The Real
R Estate Ap
ppraiser also plays
p
a vital ro
ole in the reaal estate process, especiallly from the
standpoint of the mortgage
m
age
ent. The Appraiser determ
mines, in the ccase of financcing, the
marke
et value of the property to
o be mortgage
ed. Real Estaate Appraiserss do not havee to be
licenssed in Ontario
o, but unless they
t
have a professional
p
ddesignation, n
no lender will accept their
appraaisal for financing purposes.
There
e are several methods
m
used
d to determin
ne the markett value of a p
property, as w
well as several
metho
ods of completing an apprraisal. These topics will bee covered in tthe chapter, A
Application
Analyysis – The Property.
Home
e Inspector
Home
e Inspections began as a co
onsumer servvice in the 19770s and havee grown in popularity sincee
then. A qualified Home
H
Inspecttor will advise
e the home p urchaser / ho
omeowner in regards to
the co
ondition of th
he home and advise regard
ding issues suurrounding itss condition. TThe condition
n
of the
e home naturally affects th
he market value.
More information on Home Inspectors in On
ntario can be found througgh the Ontario Association
n
of Home Inspectorrs (OAHI) at www.oahi.ca.
w
Mortggage Default Insurer
The Mortgage
M
Defaault Insurer provides
p
morttgage defaultt insurance po
olicies to lend
ders typically
offering high ratio mortgages, although
a
defaault insurancee can be provvided on a mo
ortgage loan o
of
oan to value. The main inssurers in the Ontario
O
markket include the governmen
nt insurer, thee
any lo
Chapterr 1: Market O verview
7
da Mortgage and Housing Corporation (CMHC) and tthe two privaate insurers, G
Genworth
Canad
Financial Canada and
a Canada Guaranty Morttgage Insurannce Companyy (Canada Guaaranty).
Pa
ause for cla
arification
n – Loan to
o Value (alsso referred
d to as LTV
V)
A loan
l
to value is the amoun
nt of the loan or mortgagee to the value of the propeerty. For
example, if the mortgage is $200,000
$
and
d the value off the propertyy is $400,000
0 then the
loaan to value is 200,000 divided by $400,000 which eqquals 50%. Thhis is explaineed in detail in
chapter 13.
Mortggage Default Insurance pro
ovides protecction for the l ender in the case of mortggage default
by the
e borrower. Typically
T
the lender will paass the cost oof this insuran
nce policy on to the
borro
ower, who ben
nefits from th
he policy by being
b
able to gget a high loaan to value m
mortgage at
conve
entional ratess.
Lawye
er
A reall estate lawye
er is the profe
essional involved in a real estate transaaction who peerforms the
follow
wing tasks:
 Ne
egotiating and
d drafting Agrreements of Purchase
P
andd Sale
 Acting for buyers or sellers on
o new or re‐sale home, coondominium,, or commerccial purchasess
or sales
owers or lend
ders on mortggage transactiions, includin
ng preparing d
documents
 Acting for borro
and registering documents
Mortggage Creditorr Insurer
A morrtgage credito
or insurer is an
a insurer thaat provides a policy to the mortgage bo
orrower so
that upon
u
a claim (in
( the case of
o death; there are additionnal creditor in
nsurance policies availablee)
the mortgage
m
loan is paid by a one‐time
o
lum
mp sum paymeent to the len
nder. This inssurance is
speciffic to the morrtgage loan.
Title Insurer
I
A Title
e Insurer is an
n insurer thatt provides a policy
p
which pprovides coveerage for the insured’s titlee.
It can compensate the insured for
f real lossess associated w
with covered issues found
d in the termss
of the
e policy. For example,
e
if th
here is an old mortgage onn title that waas never disch
harged and
this prevents the property
p
from
m being conve
eyed to the puurchasers, thee title insuran
nce policy willl
take steps
s
to reme
edy this situattion.
It also
o assists in strreamlining the closing proccess (the pro cess of the laawyer closing the mortgage
transaaction), prote
ects against frraud and forggery and is av ailable on purchases, refin
nances and to
o
home
eowners who did not obtaiin a title insurance policy oon either of tthose occasions.
Mortggage Adminisstrator
A Mortgage Admin
nistrator is a person
p
or enttity that servi ces a mortgage loan on beehalf of
anoth
her. For exam
mple, a Mortggage Administtrator may prrocess paymeents, renewalss and
dischaarges, provide
e correspond
dence and actt to collect moortgage arreaars for a lendeer that has
contraacted them.
8
Chapter 1: Market Overview
Under the Mortgage Brokerages, lenders and Administrators Act, 2006, Mortgage
Administrators are licensed in Ontario. Regulation 406/07 of this legislation defines a Mortgage
Administrator as one who is “Taking steps, on behalf of another person or entity, to enforce
payment by a borrower under a mortgage.”
1.3
History of the Mortgage Industry in Ontario
Although it might not make a significant difference to a borrower, the fact is that William the
Conqueror’s victory over England’s army at the Battle of Hastings in 1066 has had an influence
on how land is owned and mortgaged in Canada today by resulting in the imposition of the
French feudal system of land ownership.
This system was based on the principle that all land was ultimately owned by the Crown and
individual citizens could only obtain rights to use this land based on agreement made with the
Crown, usually for military service or for other feudal services.
In Canada, this system was incorporated into the British North America Act, 1867 which was
later renamed the Constitution Act, 1867. Under this legislation the Crown, being the ultimate
landowner in Canada, granted rights, called patents, to Canadians to use land in exchange for
clearing the land and building a shelter.
The Crown would usually grant up to 100 acre farm lots to settlers arriving in the latter part of
the 18th century and retained timber and mineral rights to the land. This had the result of
granting an interest in the land that was less than full ownership, which allowed the owner of
these rights the use of the land but not the ultimate ownership.
In Ontario and the rest of Canada, where no initial patent was granted for a piece of land, no
private ownership could result. This is the case, even to this day.
In today’s Ontario, the Crown owns full residual interests in land which is what allows the Crown
to expropriate land for its own use. Considering that the Crown is the residual owner of the
land, expropriation or requiring the current owner of the land to sell the property back to the
Crown makes sense. Examples of this can be seen on a regular basis, when the Crown, usually in
the form of a municipality, expropriates a piece of land to build a new road. This can also be
found to happen when a property owner fails to pay their property taxes. The municipality then
has the right to take the property and sell it to recover those taxes.
The mortgage market in Ontario has undergone significant changes during the last few decades,
beginning with the introduction of bank mortgage lending in the 1960s, followed by insured
mortgages and the influx of sub‐prime lenders more recently.
Originally mortgage lending in Ontario was provided by life insurance companies. They had
significant deposits paid by the premiums of their policy holders which allowed them to lend
these amounts to individuals wishing to purchase land. Up until a major change in the Bank Act,
Banks were not permitted to lend on residential mortgages.
However, the writing was on the wall, so to speak, as banks were in a much greater competitive
position to dominate the mortgage market due to their branch network. Banks, having
Chapter 1: Market Overview
9
branches in virtually all communities could service their customers much more efficiently than
life insurance companies and had much greater direct access to potential borrowers.
In 1954 the Bank Act was changed to allow banks to lend on residential mortgages; however
there was a limit to the amount of interest that they could charge. This limit was set at 6%.
Unfortunately the market at the time saw interest rates at such a point that it was unprofitable
for banks to lend based on that constraint, so the market remained dominated by life insurance
companies until that cap was removed.
That occurred in 1967 when the Bank Act was once again amended. This amendment removed
the 6% cap and virtually overnight the banks became the predominant source of mortgage funds
in Ontario.
Today banks account for approximately 61% of all mortgages held in Canada and have a virtual
lock on mortgage lending.
In referring back to the 1970s, it can be seen why the mortgage brokerage community, in its
infancy, was not necessarily a major benefit to consumers. The market was dominated by the
main banks that offered standard mortgage products, namely 25 year amortizations, 5 year
fixed rate terms with monthly payments and standard repayment options.
If a borrower wanted a mortgage with a low rate of interest, he or she would be obtaining it
from his or her bank. If that bank declined their application they would basically be declined by
the other banks, since all of their lending criteria were virtually identical.
The mortgage brokerage community rose from the need of borrowers to obtain financing if and
when they were declined by the bank. Typically mortgage agents offered the borrower a private
mortgage at a higher interest rate and charged a fee to arrange this financing. In other
scenarios, borrowers would finance their home purchase from friends or family if they didn’t
qualify at their bank.
In essence mortgage agents offered a fringe service in the mortgage market that wouldn’t
change for some time. In the United States, the mortgage market was traveling a different
route. The mortgage lending market quickly became inundated with smaller, regional lenders
which precipitated the need for mortgage agents to assist consumers in choosing the right
lender and product that matched their needs.
The mortgage industry in Ontario can currently be said to still be in its infancy. In the late 1980s
mortgage agents were still primarily being used as sources of private mortgage funds for those
declined by the major institutional lenders, but that was due for a change.
As further legislative changes were being made that allowed an influx of mortgage funds into
Canada, the number of lenders also began to increase. Non deposit taking institutions began to
permeate the Ontario market, providing options that began to reflect the maturing real estate
market. These options gave borrowers alternatives to a bank mortgage and began the
competitive process of product innovation that is evident in today’s market.
Compared to the options available to today’s consumer, the 1970s and 1980s were the Stone
Age, while this can be compared to the Industrial or Golden Age of mortgage lending.
10
Chapter 1: Market Overview
Where there was only a handful of lenders then, there are dozens of institutional lenders in
today’s market in addition to private and non‐institutional sources of mortgage financing.
Unfortunately there has also been a slight return to more conventional lending practices due to
the market meltdown in the United States’ sub‐prime mortgage market.
While not directly impacted by the American mortgage market in recent decades, the problems
faced by our neighbours to the south in 2007 have had a significant impact on our sub‐prime
mortgage market.
To begin with, it is necessary to understand what constitutes a sub‐prime mortgage.
The Sub‐Prime Mortgage Market
The Sub‐Prime Mortgage Market, also referred to as the Alternative Mortgage Market, Non‐
Conforming Mortgage Market or “B” type lending has been with us since the early days of our
industry when borrowers who were declined by their bank had to seek financing from private
lenders. This was typically due to income or credit issues that disqualified them from traditional
mortgage lending.
In recent years the Ontario market has seen significant changes in its workforce and
demographics. For example, there has been a 40% increase in self‐employed individuals in the
workforce since the late 1980s1. Since most traditional lenders did not have products for these
borrowers, they were relegated to obtaining private or non‐institutional financing.
As this trend increased and as new lenders entered the Canadian mortgage market, products
that catered to the self‐employed were introduced. Over time these products became more
aggressive, allowing for programs that permitted borrowers to simply state their income
without having to prove it. The concept behind these programs was that, if the borrower had
good credit and other assets that would be evidence that they had sufficient income to meet
these obligations, then they had the ability to repay a mortgage.
Simply put a borrower would be required to write a letter, often referred to as a self‐declared
income letter stating what their gross income was for the year. That amount would then be
used to determine if they qualified for the mortgage based on ratios used to calculate loan
amounts. There was not, and still isn’t, income verification under this program.
These programs were introduced in the United States before they were picked up on in Canada.
In addition, the American market was providing loans to borrowers that were far more
aggressive than could be found in the Canadian market. While interest only loans were being
introduced in Canada, they were amounting to nearly one third of all new mortgages in 2005 in
the United States.
Our American counterparts were also offering negative loan to value mortgages. In other
words, an American borrower could borrow in excess of 100% of the value of their home.
Consider then that borrowers were being allowed to state their own incomes, and in
conjunction with income fraud (borrowers using false income verification), many American
lenders were providing mortgages to borrowers who in essence could not afford those loans.
1
Statistics Canada
Chapter 1: Market Overview
11
Just as crucial was the fact that lenders were offering teaser rates (over 90% of subprime
mortgage in 2006 were adjustable rate mortgages with teaser rates) to these borrowers. A
teaser rate was a rate that began low but that would increase over time. This resulted in a
mortgage payment that was low for the first few years, but that would increase later. Although
borrowers could afford these teaser rate payments, affordability became a problem when the
rates increased.
You may wonder why anyone would get a mortgage that would become unaffordable. The
answer was simple. Lenders and brokers told borrowers that before their rates went up they
would get refinanced into a new teaser rate mortgage, thereby avoiding the rate increase.
Unfortunately that wasn’t the case, as the hot American housing market cooled and prices
began to dip. Because of this (and other reasons) lenders would not refinance, leaving
borrowers with increased mortgage payments that many could not afford.
In 2007 the default ratios on these sub‐prime mortgages began to rise. As they increased more
borrowers began to walk away from their homes, basically telling their lender that they could no
longer afford the payments. This caused American lenders to take over these properties and
foreclose, meaning that they took title from the original homeowner and sold the property.
The first major indicator of market trouble occurred in California, where this became an
increasing trend. As the number of properties being foreclosed increased, the number of homes
in the real estate market increased, and supply began to outpace demand. Basic economics
dictates that when supply is greater than demand, prices tend to fall in an attempt by the
market to restore equilibrium.
With falling prices, more homeowners found themselves with payments that they couldn’t
afford and properties where they owed more than the house was worth. This resulted in a
downward spiral where lenders had to foreclose on an ever increasing number of properties.
The result was that many lenders had to write off billions of bad mortgage debt that was
unrecoverable. In and of itself this might not have caused a major meltdown in the market.
Lenders have had to write off bad debts before. However the way many of these lenders
obtained the funds that they used to lend to borrowers was based on a system that had them
borrowing money to lend.
In other words, a non‐bank lender would find a major institution that would provide them with a
line of credit (referred to as a warehouse line of credit). This lender would then make loans to
borrowers and eventually, once the line of credit was full, sell the mortgages in a pool to other
investors, such as banks or pension funds. This process is referred most typically to as
securitization.
The way a lender involved in this process would make their money would be from up front
lender’s fees that they charged in addition to servicing the loan, if applicable, on behalf of the
investor or purchaser of the pool of mortgages.
However once the rates of default began to skyrocket on these mortgages the potentials buyers
of these loan pools dried up. The market then had lenders with lines of credit that they couldn’t
repay since there was virtually no one to purchase these pools of mortgages.
The sub‐prime mortgage meltdown of 2007 had begun.
12
Chapterr 1: Market O verview
e most Canadians looked on
o with intere
est in the earl y part of 20007, the impactt on the
While
Canad
dian market wasn’t
w
immed
diately forese
een. The sub‐‐prime mortggage market in
n Canada wass
less aggressive thaan its counterpart in the United States aand thereforee less likely to
o see the sam
me
types of default rates.
By all accounts the
e Canadian su
ub‐prime market wasn’t exxhibiting the ssame number of bad loanss
and th
herefore shou
uld not be subject to the same
s
problem
ms associated
d with the Am
merican sub‐
prime
e market. This outlook was soon proved to be erronneous.
The world‐wide
w
market for purcchasing sub‐p
prime pools oof mortgages virtually shutt down.
Investtors and lenders alike were so paranoid
d about sub‐pprime losses tthey were exp
periencing in
the United States that
t
there waas a virtual mo
oratorium onn buying sub‐p
prime pools o
of mortgages,,
includ
ding Canadian
n pools.
This has
h had a sign
nificant impacct on the Canaadian sub‐pri me market w
with a few sub
b‐prime
lende
ers exiting the
e market altoggether, otherrs adopting a more conservvative approaach to lendingg,
while others still siimply struggliing to stay in business. Deeposit taking institutions, o
on the other
hand,, have not see
en the same types
t
of volattility in the Caanadian markket due to theeir reliance on
n
depossits from conssumers as the
e source of th
heir mortgagee loans. This “old fashioneed” way of
lendin
ng has served
d them well an
nd should allo
ow them to w
weather this ““sub‐prime sttorm.”
As lon
ng as Canadiaan consumerss continue the
eir strong rec ord of repaying mortgage debt, Canadaa
will co
ontinue to be
e a profitable market for le
enders.
1.4
Markett Demogra
raphics an
nd Trend
ds
The sttudy of Ontarrio’s demograaphics is requ
uired to devel op an undersstanding of th
he makeup off
the market
m
and its potential fro
om the standp
point of morttgage financin
ng.
Pop
pulation
The fo
ollowing figurre illustrates the
t breakdow
wn of the Cannadian populaation by proviince and
territo
ory, as of Julyy 1, 2013. With approximaately 39% of CCanada’s pop
pulation, the m
mortgage
marke
et in Ontario is the largest in Canada, re
epresenting aapproximatelyy 40% of all m
mortgages
appro
oved in the co
ountry in 2010
0. Although Quebec
Q
rankss next in popu
ulation, the n
next largest
provin
nce for mortggage financingg was Albertaa, followed cloosely by British Columbia, then
Quebec2.
2
Statistics Canada, Preliminary
P
posstcensal estimates
1
13
Chapterr 1: Market O verview
Figure 13 – Population
n and Age Distrib
bution by Provin
nce and Territorry
July 1, 20133
All ages
0 to 14
15 to 64
65 and olderr
Cana
ada
35,158,304
4
16.1
68.6
15.3
Median
Age
40.2
Albe
erta
4,025,074
4
18.2
70.6
11.2
36
British Columbia
4,581,978
8
14.8
68.8
16.4
41.7
Man
nitoba
1,265,015
5
18.7
66.9
14.4
37.7
New
w Brunswick
756,050
14.7
67.7
17.6
43.9
New
wfoundland an
nd Labrador
526,702
14.5
68.4
17.1
44.2
Nortthwest Territo
ories
43,537
21.1
72.8
6.1
32.4
Nova
a Scotia
940,789
14.3
68
17.7
43.8
Nuna
avut
35,591
30.8
65.7
3.5
25.4
Onta
ario
13,537,994
4
16.2
68.6
15.2
40.3
145,237
15.8
66.9
17.3
43.1
Quebec
8,155,334
4
15.4
68
16.6
41.6
Saskkatchewan
1,108,303
3
18.8
66.7
14.4
37.1
36,700
16.7
73.4
9.9
38.9
Princce Edward Islland
Yuko
on
Size
e of the Mortgage
M
Market
As of May, 2014 th
he size of the Canadian mo
ortgage markeet, in terms o
of the value o
of all
outstaanding mortggages in the county was esstimated at $11.235 trillion4. The total reesidential
mortggage credit ou
utstanding in Canada has risen
r
significaantly since 19981, increasing by over
850% in 25 years.
As the
e following figgure illustrate
es, the lendin
ng market is ddominated byy the chartereed banks, who
o
accou
unt for nearly half of all outstanding mo
ortgages in anny given year.. Credit Unio
ons are a
distan
nt second.
Cha
aracterist ics of a Mortgage
M
e Agent’s Client
Appro
oximately 30%
% of Ontario consumers
c
ussed a mortga ge agent in 2014, a numbeer that has
remaiined consistent for the passt several yeaars, while 50%
% used a bankk.
Accorrding to a rece
ent Mortgage
e Consumer Survey
S
by CM HC, the averaage mortgagee agent’s
client had the follo
owing charactteristics:
 51% had a houssehold income under $60,0
000 while 49%
% had an inco
ome over $60
0,000
 44% were betw
ween 35 and 54
5 years old, while
w
34% weere 18 to 34 yyears old and 22% were
over 55 years old
3
4
Statistics Canada, http://www.sta
h
atcan.gc.ca/pu
ub/91‐215‐x/20013002/t588‐eeng.htm#T588FN1
CMH
HC, Canadian Housing Observver, http://www
w.cmhc‐schl.gcc.ca/odpub/pd
df/68189.pdf
14
Chapter 1: Market Overview
 19% were self employed
 92% of first time purchasers who used a mortgage agent were either rather or totally
satisfied
 87% of repeat purchasers who used a mortgage agent were either rather or totally satisfied
 87% of refinancers who used a mortgage agent were either rather or totally satisfied
 80% of renewers who used a mortgage agent were either rather or totally satisfied.
Of all consumers,
 81% of renewers remained with their current lender indicating that service was their major
reason for this loyalty
 65% of repeat purchasers remained with their current lender indicating that service was their
major reason for this loyalty
 65% of refinancers remained with their current lender indicating that service was their major
reason for this loyalty
 58% of first time purchasers remained with their current institution indicating that
relationship was their major reason for this loyalty, followed closely by rate.
In addition, 68% of all consumers indicated that they wanted to pay off their mortgage as
quickly as possible. However, only 27% of consumers actually used prepayment options in 2009.
According to an RBC Survey, 34% of respondents said they didn’t use prepayment options
because they didn’t have the money to take advantage of prepayment options, while 30% had
other debts they wanted to pay off first and 20% wanted to invest before prepaying their
mortgage. The following chart illustrates the number of families by income segment in Canada.
2012 is the latest date that data is available from Statistics Canada.
15
Chapter 1: Market Overview
Figure 2 – Residential Mortgage Credit by Lender by Year5
Residential Mortgage Credit
by Lender by Year
($ millions)
$1,200,000
$1,000,000
$800,000
$600,000
$400,000
$200,000
$0
1985
5
1990
1995
2000
2005
2010
2011
2012
Life Insurance Companies
Chartered Banks
Trust and Mortgage Loan Companies
Credit Unions and Caisses Populaires
Securitization
MBS
Pension Funds
Totals
2013
Statistics Canada, Residential Mortgage Credit, http://www.statcan.gc.ca/tables‐tableaux/sum‐
som/l01/cst01/fin21‐eng.htm
16
Chapter 1: Market Overview
Figure 36 – Family Income, by Family Type
Total, all income groups
Under $10,000
$10,000 and over
$15,000 and over
$20,000 and over
$25,000 and over
$30,000 and over
$35,000 and over
$40,000 and over
$45,000 and over
$50,000 and over
$60,000 and over
$70,000 and over
$75,000 and over
$80,000 and over
$90,000 and over
$100,000 and over
$150,000 and over
$200,000 and over
$250,000 and over
Family income, by family type
(Couple families)
2008
2009
2010
7,832,060
7,926,210
7,989,380
194,670
199,350
189,700
7,637,400
7,726,860
7,799,670
7,527,140
7,613,770
7,695,970
7,374,900
7,459,680
7,552,050
7,177,060
7,262,910
7,355,530
6,876,780
6,958,650
7,045,540
6,549,220
6,620,770
6,708,710
6,228,650
6,288,200
6,383,220
5,900,920
5,949,750
6,052,150
5,571,420
5,611,520
5,719,630
4,915,080
4,939,370
5,059,180
4,277,270
4,292,660
4,420,250
3,969,160
3,982,590
4,111,920
3,672,840
3,684,990
3,815,020
3,119,370
3,129,560
3,258,520
2,626,660
2,636,310
2,761,360
1,063,240
1,072,990
1,148,440
476,110
476,050
510,820
261,300
256,550
274,930
2011
8,091,960
182,900
7,909,060
7,811,680
7,676,700
7,497,090
7,199,220
6,864,160
6,540,470
6,217,470
5,893,430
5,246,310
4,617,280
4,313,490
4,018,690
3,462,890
2,960,190
1,276,150
576,700
309,200
2012
8,169,080
181,120
7,987,950
7,896,460
7,768,900
7,604,140
7,334,630
7,006,160
6,685,630
6,368,450
6,050,800
5,414,280
4,793,640
4,492,200
4,198,650
3,642,000
3,135,540
1,395,820
641,950
341,540
Median total income $
75,880
75,320
76,950
79,530
81,980
Note: Family income is the sum of the incomes of all members of the family.
1. A census couple family consists of a couple living together (married or common‐law, including same‐sex
couples) living at the same address with or without children. Beginning in 2001, same‐sex couples
reporting as couples are counted as couple families.
Source: Statistics Canada, CANSIM, table 111‐0012.
Last modified: 2014‐07‐23.
6
Statistics Canada
1
17
Chapterr 1: Market O verview
Figure 47 – Median Total Income, by Family
F
Type, by Province and Teerritory
Median totall income, by faamily type, by province and territory
2008
8
2009
2010
2011
2012
Canada
68,860
68,410
69,860
72,240
7
74,540
Newfoundlan
nd and Labrado
or
59,320
60,290
62,580
67,200
7
70,900
Prince Edwarrd Island
61,010
62,110
63,610
66,500
6
69,010
Nova Scotia
61,980
62,550
64,100
66,030
6
67,910
New Brunswiick
59,790
60,670
62,150
63,930
6
65,910
Quebec
63,830
64,420
65,900
68,170
7
70,480
Ontario
70,910
69,790
71,540
73,290
7
74,890
Manitoba
64,530
65,550
66,530
68,710
7
70,750
Saskatchewan
69,800
70,790
72,650
77,300
8
80,010
Alberta
86,080
83,560
85,380
89,830
9
94,460
British Colum
mbia
67,890
66,700
66,970
69,150
7
71,660
Yukon
85,070
84,640
86,930
91,090
9
94,460
Northwest Te
erritories
98,530
98,300
101,010
105,560
1
106,710
Nunavut
58,590
60,160
62,680
65,280
6
65,530
The Average
e Canadia
an’s Cred
dit Score
It is off particular in
nterest to notte that historiically the majjority of morttgage agents surveyed
believve that the avverage Canadian has a cred
dit score nearr 650. In actu
uality, the facct is quite
different, with the average cred
dit score of Caanadians beinng approximaately 740. The following
h illustrates th
he breakdown
n of beacon scores (a cred it score used in Equifax’s ccredit report))
graph
by percentage of the population according to Equifax Cannada.
Pau
use for cla
arification – Credit sccore
A crredit score, caalled Beacon Score by Equifax and Emppirica Score byy Transunion,, is a
num
merical repressentation of an
a individual’s overall creddit.
While
e there are no
o statistics avaailable to indicate the ave rage beacon score of a typ
pical mortgagge
broke
erages’ clientss, anecdotal evidence
e
poin
nts to the factt that the majjority of brokkerage
business is in the range
r
of 650 and
a below. This
T would inddicate that brrokerages aree missing the
majorrity of Canadians with good to excellentt credit.
One factor
f
behind this trend maay be that maany brokerag es focus on cconsumers at the lower en
nd
of the
e credit spectrum. This can
n be evidence
ed by commoon advertisingg found in maany
publiccations that advertise
a
morrtgages availaable to consum
mers with po
oor credit, preevious
bankrruptcies, non‐‐verifiable inccome, and so on.
7
Statistics Canada
18
Chapterr 1: Market O verview
he mortgage brokerage
b
ind
dustry to breaak through thhe 30% markeet penetration number, a
For th
parad
digm shift mayy be required
d: from focussing on those declined by tthe banks to tthose who arre
appro
oved by the banks. All ane
ecdotal inform
mation tends to point to th
he fact that th
he majority of
consu
umers, if apprroved by their bank, will ob
btain their m ortgage finan
ncing there ass opposed to
from a mortgage agent.
a
Figure 5 – Distribution
n of Canadian Beeacon Scores
Distrribution of Canadian
C
B
Beacon Sco
ores
source: Equifax Canada,, 2015
30%
%
%
27%
24%
25%
%
1 9%
20%
%
15%
%
11%
10%
%
5%
%
0%
%
1.5
6%
6%
550 to 599
600 to 649
5%
4%
549 and
below
65
50 to 699
700 to 749
750 to 799
800 to 84
49 850 and over
The Co
ommercia
al Mortgag
ge Marke
et
The mortgage
m
marrket in Ontario can be divid
ded into two major areas o
of expertise: commercial
and re
esidential finaancing. Of co
ourse, in eithe
er specializatiion there can
n be sub‐specializations. In
n
other words, a com
mmercial morrtgage agent may focus onn financing ind
plexes as
dustrial comp
oppossed to apartm
ment buildings. Likewise, a mortgage aggent specializzing in residential financing
may decide
d
to focu
us on refinanccing, renewalls, etc.
It’s im
mportant to ke
eep in mind that
t
commerccial mortgagee financing, allthough very lucrative, is
also extremely
e
spe
ecialized. It iss not uncomm
mon for a com
mmercial transaction to takke three
months or longer to
t be completted. In additiion, if a mortggage agent w
who has not co
ompleted a
comm
mercial transaaction before attempts one
e, that brokerr is apt to find
d that there aare substantiaal
differences, from the
t security or
o property involved, to th e underwritin
ng process. A common
phrasse that “you don’t
d
know what you don’tt know” are w
words to remember for co
ommercial
transaactions. A ressidential brokker with no co
ommercial exxperience may attempt to apply the
reside
ential processs to the comm
mercial transaaction becausse he or she d
doesn’t realize the
differences. This can
c only lead to confusion and frustrati on for both the broker and the
borro
ower.
Chapter 1: Market Overview
19
Here are six of the major differences between commercial and residential transactions.
Property
The property types of a commercial transaction are significantly different from residential. In a
commercial transaction ICI, or Industrial, Commercial, Investment type properties are being
dealt with. These can include:
 Apartment buildings
 Office buildings
 Strip plazas
 Shopping malls
 Warehouses
 Factories
 Recreational properties such as a golf course, etc.
To be able to provide sound advice to the potential borrower, the mortgage agent must have
intimate knowledge of the workings of the property that is the subject of the financing. Without
such knowledge the broker will ultimately fail to ask the appropriate questions.
Appraisal
To appraise a residential property in Ontario will normally cost in the range of a few hundred
dollars, depending on where the property is located. For example, in the GTA an appraisal may
cost slightly less than three hundred dollars. In a commercial transaction an appraisal may cost
from a low of $2,000 to a high of $50,000, depending on the property and the scope of the
appraisal, and may take up to three months to complete. It is important to know what appraisal
requirements are involved, based on the potential lender, before requiring a client to pay such a
significant amount for an appraisal.
Environmental Assessment
In many cases at least a Phase 1 ESA (Environmental Site Assessment) will be required by the
lender. This is to determine whether there are any contaminates in the property. If there are, a
Phase 2 and Phase 3 may be required, which can take several months to complete and several
thousand dollars in costs.
Income
To determine the viability of a commercial mortgage request, the broker must look at the type
of property. If it is an incoming producing property such as an apartment building, then the
Income Approach of appraising a property will be used. The broker must be familiar with the
Net Operating Income, how to standardize it and what should be used and excluded within it. If
it is not income producing, then typically the broker will have to obtain financial statements
from the corporation applying for the mortgage and be knowledgeable enough to decipher and
interpret them accurately.
Lenders
The commercial lending market in Ontario and Canada as a whole is quite small, limiting the
number of options available to a broker. This has also resulted in commercial lenders being very
selective about with whom they deal. Most commercial lenders do not like dealing with
inexperienced brokers. They also have certain requirements regarding application submissions
to which brokers must adhere.
20
Chapterr 1: Market O verview
ng
Timin
While
e a typical residential transsaction can be
e completed within two w
weeks (some ccan be funded
d
quicke
er while othe
ers, such as pu
urchases mayy close a few months afterr the initial ap
pplication)
comm
mercial transaactions can take anywhere
e from three m
months to a yyear, dependiing on the
type of
o the transacction and its complexity.
c
Su
uccess Tip – Commerrcial transa
actions
If you
y are new to
t the mortgaage brokerage industry or if you have n
not brokered a commerciaal
traansaction beffore, seek the
e advice of your supervisorr, manager, o
or Broker befo
ore
proceeding. Co
onsider co‐bro
okering the application wi th a commerrcial mortgagee broker and
t split their commission
c
with
w you. In a best‐case sccenario, ask h
him or her to
ask him or her to
e involved in the
t transactio
on so that you
u might learn from an experienced Broker.
be
1.6
Investin
ng in Morrtgages
Priv
vate Lend
ding
In the
e mortgage brrokerage indu
ustry, the privvate lending m
market has allways been and continues
to be a major sourrce of funds fo
or many morttgage agents.. Until the recent influx off institutionall
sub‐p
prime lenders into the marrket, the prim
mary source off mortgage fin
nancing for b
borrowers who
were declined by banks,
b
trust companies, an
nd credit unioons was private lenders.
A privvate lender is best describe
ed as an indivvidual who le nds his or her own moneyy to a propertty
owne
er, securing th
his loan by a mortgage.
m
Most private leenders in Ontaario are soph
histicated and
d
have many charactteristics that resemble insttitutional len ders. A privaate lender will underwrite a
ower’s applicaation based on his or her in
ncome and crredit, and thee property. H
However,
borro
where
eas an institutional lenderr will base its decision prim
marily on a bo
orrower’s cred
dit, a private
lende
er will base hiss or her decission primarilyy on the propeerty. This is ssimilar to insttitutional sub‐‐
prime
e lenders. Wh
hile these lenders will conssider a borrow
wer’s credit, most private lenders will
ignore
e derogatory credit and baase the decisiion to lend prrimarily, and in many cases solely, on
the prroperty and the
t loan to vaalue of the loaan. Most privvate lenders w
will not lend aabove 85%
loan to
t value, exce
ept in rare circcumstances.
Manyy well‐establisshed mortgagge agents havve private lendders with whom they currrently deal
with and
a are often
n approached by individuals looking to llend money.
Example
Malikk Adams has a home valued
d at $200,000
0 with a curreent mortgagee of $155,000. Mr. Adams
has missed
m
several payments on his mortgagge in the pastt twelve montths and is currrently three
months in arrears. He is curren
ntly behind on
n his two creddit card paym
ments and alth
hough up to
o his car loan, has missed
d two of those
e payments inn the past tw
welve months.. His
date on
mortggage came up
p for renewal two months ago and his ccurrent institu
utional lender is refusing tto
renew
w the mortgagge.
The other institutio
onal lenders he has approached have aalso declined Malik due to his poor
creditt and the factt that he is currently in deffault on his m
mortgage. Maalik’s banker ssuggested thaat
Malikk approach a mortgage
m
age
ent for the fin
nancing, whic h Malik has d
done.
Chapterr 1: Market O verview
2
21
a
was ablle to get Mali k a mortgagee from a privaate lender forr
In thiss scenario, the mortgage agent
85% of
o the propertty value, whicch allowed Malik
M
to consoolidate his oth
her debts and
d refinance hiss
mortggage. This mo
ortgage was an
a interest on
nly mortgage with a one‐yyear term at a rate 3%
above
e current bank posted rate
es and a lende
er’s fee of 2%
% of the total mortgage am
mount.
Becau
use private lenders typically do not pay finder’s feess, the mortgagge agent charrged a fee of
2% off the total mo
ortgage amou
unt.
Syn dicated Mortgage
M
es
Anoth
her option forr a private len
nder is to inve
est in a singlee mortgage w
with other privvate lenders.
For exxample, if a developer requires two milllion dollars too begin consttruction of a ccondominium
m
building, the develloper may go to a mortgagge agent to obbtain that fun
nding. Most iinstitutional
ers won’t lend
d money to a developer for soft costs, ssuch as markeeting, etc. and
d if the
lende
developer doesn’t have enough
h money of itss own, it mayy need additio
onal soft cost funding to
get th
he project started.
Howe
ever most privvate lenders will
w not have two million ddollars to inveest, so the mo
ortgage agentt
may gather
g
10 of itts private lenders (it can be
b as few as tw
wo or as man
ny as necessary) to pool
their money. This is referred to
o as a syndicated mortgagee. One morttgage will be rregistered on
n
title however
h
all off the investorrs are included in that morrtgage.
Morrtgages as
a Investm
ments
To understand whyy private inve
estors will len
nd money to bborrowers through mortgaages, it is
imporrtant to unde
erstand the ch
haracteristics of a mortgagge as an invesstment.
Rate of
o Return
The principal reaso
on that an invvestor will len
nd to a borrow
wer is based o
on the rate of return. A
privatte lender can typically expect to receive
e a rate of retturn far in exccess of traditional
investtment vehicle
es with limited risk in comparison to ot her high return investmen
nts like the
stock market.
For a first mortgagge, a private le
ender will traaditionally chaarge in excesss of 7% intereest, and as
high as
a 9% interestt, while on a second
s
mortggage interest rates of 13%
% and higher aare typical,
makin
ng second mo
ortgages the vehicle
v
of cho
oice among m
most private leenders.
In add
dition to a higgher rate, mo
ost private len
nders will cha rge a lender’ss fee. This reepresents an
amou
unt equal to a certain perce
entage of the
e total mortgaage (usually b
between 1 and 4%) and is
deduccted from the
e mortgage prroceeds. A private lender’’s fee is also rreferred to ass a bonus,
which
h is an additio
onal incentive
e for the privaate lender to lend money tto a sub‐prim
me borrower.
Securrity
It is offten assumed
d that mortgaages are safe investments because the ssecurity for the loan is a
prope
erty. Howeve
er, this assumption is some
etimes faulty.. The privatee lender’s morrtgage will bee
based
d on a maximum loan to vaalue, set at his or her maxiimum risk tolerance. This is typically
85% loan to value. As discussed
d earlier, a loan to value iss based on th e value of thee loan to the
value of the prope
erty, expressed as a percen
ntage. Thereffore, the maxximum loan amount is
determined by the
e property’s value.
v
22
Chapterr 1: Market O verview
must have
To ensure that his or her investment is adequately proteccted, the privvate lender m
confid
dence in the value
v
of the property
p
befo
ore he or she makes the fin
nal decision to lend. In
orderr to determine
e the value, the private len
nder will requuest that a full appraisal be completed
on the
e property. To
T further pro
otect the private lender, h e or she will u
usually only d
deal with an
appraaisal firm thatt is felt to be reliable,
r
accurate and consservative and
d that the privvate lender
has de
ealt with in th
he past.
Even though
t
the private lender may have an
n accurate ap praisal done tto determinee the exact
marke
et value of the property, that will be litttle consolatioon if the real estate markeet takes a
down
nturn and property prices fall,
f especiallyy if the loan t o value is 85%
% of the original appraised
d
value.
Example
To illu
ustrate this po
oint, let us co
ontinue with the
t Example.
Malikk Adams received a private
e mortgage tw
wo years ago in the amoun
nt of $170,000 that
represented 85% of
o the appraissed value at the time the m
mortgage wass funded. Sin
nce that time,,
Malikk has once agaain failed to make
m
his morttgage payme nts and the p
private lenderr has
underrtaken steps to
t sell the pro
operty and re
etrieve his invvestment. To do so, the prrivate lender
has re
etained a lawyer who is haandling the po
ower of sale pprocess as weell as a Real Estate
Salesp
person who will
w be selling the house on
n behalf of th e private lend
der.
The Real
R Estate Salesperson hass informed th
he private lennder that the vvalue of the p
property has
declin
ned over the past
p year as the
t market haas taken a dow
wnturn. The price that the Real Estatee
Salesp
person is sugggesting that the
t property be
b sold for is $185,000. Iff that sale pricce is realized,,
the prrivate lender will lose approximately $2
2,780. A costt analysis reveeals that the private
lende
er’s rate of retturn is reduce
ed from 9% to
o approximattely 7.4% (exccluding the bo
onus).
Pau
use for cla
arification – Power off Sale
The term power of sale referss to the proce
ess by which a lender can obtain the am
mount lent
to the borrower and associate
ed costs, inclu
uding unpaid interest, upo
on default by the
borrower. More
e information on this can be
b found in thhe chapter Mo
ortgage Remeedies.
Here is the breakdown of that transaction.
t
Although
A
thiss is a theoretical breakdow
wn, it is
evident that if therre is a decrease in the valu
ue of the propperty a loan tto value of 85
5% does not
necesssarily mean that
t
the lende
er’s investme
ent is safe. Fuurther, consid
der the potential losses if
the orriginal appraisal had been incorrect and
d the value off the propertyy too high. Itt should now
be evident why an accurate app
praisal is so im
mportant in a private morttgage.
Outstanding mortggage balance
$170,0000 (balance iss the same ass the advancee
since it is an interestt only mortgaage)
Mortggage Arrears
$3,755..22 (based on
n 3 months off missed
interestt only paymeents)
Collecction Costs
$475.000
Real Estate
E
Fees
$11,1000 (6% of the ssale price)
Chapterr 1: Market O verview
Legal Fees
$2,450
Total to be repaid from procee
eds
$187,7880.22
2
23
Challe
enges for the
e Private lend
der
Although private mortgages
m
can
n offer the prrivate lender a higher rate of return witth relatively
low risk based on an
a accurate appraisal
a
and a conservativve loan to value, there still remain
challe
enges for the private lende
er.
R
 Assessing the Risk
t risk, or de
etermining thhe probabilityy that the borrrower will
The first challenge is assessing the
e terms that are
a set out in the mortgagge contract. TThis requires
repayy the mortgagge loan on the
the prrivate lender to understan
nd the underw
writing processs (the processs of assessin
ng the merits
of an application) as
a well as being able to an
nalyze the borrrower’s cred
dit, income an
nd debt
he private len
nder is not sophisticated e nough to com
mplete these analyses, theen
servicce ratios. If th
he or she will have
e to rely on th
heir mortgage
e agent to maake a recomm
mendation.
 Siggnificant Capiital Outlay
To invvest in a morttgage, a privaate lender will typically be required to invest tens off thousands of
dollarrs as opposed
d to hundredss of dollars. This
T makes invvesting in mo
ortgages difficcult for the
small investor.
 Re
einvestment of
o Return
The next challenge
e is how the private
p
lenderr will reinvestt the return o
on his or her investment.
equire tens off thousands oof dollars to advance and tthe typical
Since mortgage loaans usually re
repayyment is a mo
onthly amoun
nt of interest only,
o
it will taake some timee before the private lendeer
can accquire enough monthly paayments to invest in yet annother mortggage. In the m
meantime, thee
monthly returns will
w have to be
e invested in an
a investmennt vehicle with
h lower rates of return
since the investme
ent amount iss so low. Thiss is not the caase with somee other investtments such
as mu
utual funds th
hat will reinve
est profits as they
t
occur.
 Lacck of Liquiditty
Unlike
e the stock exxchange, therre is no centraal exchange tthat deals witth mortgages. A private
lende
er cannot list his
h or her mo
ortgage for sale in a centra l registry, since none existt. The result is
that, if a private lender wishes to
t sell his or her
h mortgagee he or she must locate a p
potential
buyerr through a mortgage
m
agen
nt or other so
ource, possibl y even havingg to advertisee. The time
involvved in this pro
ocess may be lengthy and cause the priivate investorr to lose otheer investmentt
opporrtunities and//or result in selling
s
the mo
ortgage at a ddiscount to reecover their in
nvestment
more quickly.
Pau
use for cla
arification ‐ Discountt
The term discoun
nt refers to an amount thaat is subtracteed from the ssale price of a mortgage
to make
m
it more attractive to a buyer. The
e concept is siimilar to obtaaining a piecee of
merrchandise from a retailer for a price low
wer than its o riginal; in oth
her words, it iis on sale.
24
Chapterr 1: Market O verview
Indi rect Inve
esting in Mortgage
M
es
To be able to mitiggate the challenges identiffied above, a private lendeer may decidee to invest in a
pool of
o mortgages, such as morrtgage‐backed
d securities oor in a Mortgaage Investmen
nt
Corpo
oration (MIC).
Mortggage Backed Securities (M
MBS)
A morrtgage backed
d‐security is an
a investmen
nt in a pool off amortized reesidential mo
ortgages
insure
ed through CM
MHC under th
he National Housing
H
Act (N
NHA). NHA M
MBS issuers are approved
by CM
MHC and must be a chartered bank, a trrust companyy, an insurancce company, a caisse
popullaire (meaning “people’s bank”
b
in Frencch), a credit uunion, or a loaan company.
o
a rate of return similar to GICs and higher thann Governmen
nt of Canada B
Bonds that
MBS offer
have equivalent te
erms, although lower than private morttgage loans.
They answer the isssue of liquidiity by being able
a to be soldd easily and tthe issue of seecurity by
being fully guarantteed by the Government
G
of
o Canada. M
MBS are not lim
mited to the m
maximum
insuraable amount of $100,000 provided
p
by the
t Canada D eposit Insurance Corporattion.
Since being launch
hed in 1987 byy CMHC, MBSS have becom
me very popullar with over 47,000
investtors investingg over 27 billio
on dollars in the
t NHA MBSS program.
Mortggage Investm
ment Corporattion (MIC)
A morrtgage investment corporaation (MIC) iss a corporatioon that enablees small invesstors to invest
in a diversified poo
ol of mortgagges on residen
ntial real esta te with the b
benefit of usin
ng the
corpo
orate form by purchasing shares
s
in the corporation.
c
A MIC is gen
nerally treated
d as a conduitt
for income tax purrposes. Its inccome may be flowed throuugh to its shareholders and
d taxed in
their hands withou
ut tax at the corporate
c
leve
el.
One hundred
h
per cent
c
of a MIC’s annual net income mustt be distributted to its sharreholders in
the fo
orm of a divid
dend.
Accorrding to the In
ncome Tax Acct, a MIC musst have at leasst 20 shareho
olders with no
o individual
shareholder ownin
ng more than 25% of the MIC.
M In additiion, at least 550% of the MIIC’s assets
must be comprised
d of residential mortgagess.
1.7
Real Es
state and
d Mortgag
ge Institu
ute of Can
nada Inc. (REMIC)
The Real
R Estate and Mortgage Institute of Caanada Inc. (REEMIC) is a nattional organizzation
dedicated to providing the morrtgage and reaal estate induustries with reesources desiigned to
increaase market pe
enetration an
nd the success of its membbers. Foundeed in 2008 by Joseph J.
White
e, REMIC is a membership driven organ
nization that ffocuses on th e needs of aggents and
broke
ers by providing education, training and
d a wealth of resources forr its memberss.
e trade associations like CA
AAMP and IM
MBA representt the mortgagge industry to
o regulators,
While
REMIC
C’s focus is on
n assisting itss members in building thei r businesses by providing a rich supplyy
of eassily accessible
e resources. These
T
resources focus on marketing, ad
dvertising, seelling, sourcing
business using a vaariety of strattegies, as well as other areeas vital to an
n agent/brokeer’s success.
Chapter 1: Market Overview
25
More information can be found on REMIC by visiting its website at www.remic.ca
1.8
Mortgage Associations and Professional Designations
Mortgage associations have become much more prevalent in Ontario over the past several
years. Providing a voice for their members as well as industry networking events, they
represent a significant portion of Ontario ‘s mortgage brokering community.
Association of Mortgage Investment Professionals (AMIPROS) – www.amipros.org
The Association of Mortgage Investment Professionals, AMIPROS, a non‐profit organization, is
the national association for and collective voice of the mortgage investment industry. The
Association represents several mortgage investment disciplines, including syndicated
mortgages, private mortgages and other mortgage investment vehicles.
AMIPROS sets high quality industry standards designed to protect investors and ensure the
continued integrity of the industry. AMIPROS’ designees are committed to promoting the
industry with integrity, fairness and professionalism. AMIPROS offers the Certified Mortgage
Investment Professional (CMIP) designation.
Mortgage Professionals Canada, aka The Canadian Association of Accredited Mortgage
Professionals (CAAMP) – www.caamp.org
CAAMP, a national association, was founded in 1994 as the Canadian Institute of Mortgage
agents and Lenders (CIMBL) and underwent a name change in 2006. They once again
underwent a name change in 2016 and are now called Mortgage Professionals Canada. They
have approximately 10,500 members throughout the country.
They offer the Accredited Mortgage Professional (AMP) designation. This designation was
launched in January of 2004 and as of 2015 the association has approximately 2,200 AMPs
(down from 3,400 in 2011).
The Independent Mortgage agents Association of Ontario (IMBA) – www.imba.ca
Founded in 2000, IMBA is a provincial association. IMBA has over 1,800 members in Ontario.
1.9
Choosing a Brokerage
Choosing a brokerage for whom to work can be a difficult process if you don’t know what
questions to ask or what to look for. With several hundred brokerages licensed in Ontario, you
certainly have choice, so the first tip in choosing a brokerage is to ensure that you interview with
several before deciding which one to join.
Be sure to treat your first contact and interview the same as you would any other interview.
When making your initial inquiry be sure to use proper grammar, punctuation and if using email
format it correctly. Be prepared to submit your resume before your interview. At the interview
dress professionally, bring a copy of your resume and be prepared to answer questions,
including why you feel you’ll be a success.
26
Chapter 1: Market Overview
You can use FSCO’s website to search for brokerages and their contact information, as well as
online search engines like Google, and other mediums like newspapers and the Yellow Pages.
You may also wish to call an agent who works for the brokerage you’re considering to learn of
his or her opinion on the brokerage.
In addition I suggest asking some or all of the following questions so that you can get a feel for
what the brokerage has to offer and you can compare different brokerages before making your
final decision. Deciding which of the following questions is most important to you is a personal
decision and will change from person to person. Keep in mind that the commission rate
shouldn’t be your only consideration. You need to look at everything in context, determine
what is ultimately in your best interests and then decide where you want to work. At the end of
the following form there is a spot for your general comments on the brokerage as well as any
additional questions that were not included in this guide.
Question
Commission
1. What is your commission split?
2. Do you pay volume bonus?
3. Does the commission split and/or
volume bonus vary based on
production? If so, what are the levels?
4. Do you have a minimum level of
production that I must meet to remain
an agent with you?
Costs
5. What are the costs to join?
6. How much does your Errors and
Omissions Insurance cost?
7. How much does a credit bureau report
cost?
8. Do I have to be a member of CAAMP
or IMBA?
9. Do you charge agents any other costs?
If so, what are they?
Contract
10. Do you have an agent contract that I
have to sign?
11. Does the contract have a term during
which I cannot work for another
brokerage if I leave?
12. How much notice must I give if I
decide to leave?
Answer
Chapter 1: Market Overview
Training
13. Do you provide training?
14. If so, at what location or is it online?
15. If so, on what topics?
16. If so, how often?
17. If so, is there a cost to me?
18. Do you have lenders attend meetings
to provide agents with information?
19. If so, how often?
20. If so, at what location?
Policies and Procedures
21. Do you provide a compliance manual
so I’m aware of your compliance
policies?
22. Do you provide a file checklist so I
know what I have to submit to get
paid?
23. Do you have a Policies and Procedures
Manual for your agents?
Website
24. Do you provide me with a website?
25. Can I change its content?
26. Do you provide updated content?
27. Is there any cost?
28. Does it have an online application that
submits the application to me?
Support
29. Do you provide help on deals that I do
not know which lender to use?
30. Do you have a central underwriting
department that can handle a deal
that I can’t do? If so, what is my
commission split?
31. What is your process if I disagree with
a lender that declines an application?
32. Do you provide office space for me to
meet with clients? If so, is there a
cost?
27
28
Chapter 1: Market Overview
33. Do you advertise? If so, do I get any
leads from your advertising? Is the
commission split different on these
leads?
General
34. How long have you been in business?
35. Are there any lenders you do not deal
with? Why?
36. Do any lenders not deal with you?
Why?
37. What origination software do you use?
38. Do you provide training on using that
software and if so, when, where and is
there a cost?
Additional Questions (use this section to list any additional questions you may have)
General Notes (Use this section to make notes on your impression of the brokerage and/or
provide any other information relevant to making your decision)
Chapter 1: Market Overview
29
1.10 Key Terms and Definitions
“B” type lending
Mortgage lending to borrowers who have impaired credit or some other impairment that
prevents them from being able to qualify for traditional lending products
Alternative Mortgage Market
A market for borrowers who do not qualify for traditional lending products
AMP Designation
The Accredited Mortgage Professional designation awarded by CAAMP
Bank
An institution approved as a Schedule I, II, or III Bank under the Bank Act. Schedule 1 Banks are
Canadian owned, while Schedule II Banks are subsidiaries of foreign owned Banks and Schedule
III Banks are foreign owned Banks.
Bank Act
The legislation that governs chartered banks in Canada
Borrower
The individual responsible for the receipt and repayment of mortgage proceeds
British North America Act, 1867
On March 29, 1867, the British Parliament passed the British North America Act, which
established the provisions of the Confederation of the Province of Canada (Ontario and
Quebec), New Brunswick and Nova Scotia into a federal state with a parliamentary system
patterned on the British model. The Act established the division of powers between the central
Parliament and the provincial legislatures. The federal government was responsible for, among
other things, banking business, criminal law, the post office, the armed forces; the provinces
could legislate, among other things, property law, contracts, and local work.
Commercial Mortgages
A commercial mortgage is similar to a residential mortgage, except the collateral is a commercial
building or other business real estate, not residential property.
Constitution Act, 1867
The Constitution Act, 1867 (formerly called the British North America Act, 1867, and still known
informally as the BNA Act), constitutes a major part of Canada's Constitution. The Act entails the
original creation of a federal dominion and defines much of the operation of the Government of
Canada, including its federal structure, the House of Commons, the Senate, the justice system,
and the taxation system. It received its current name in 1982, with the patriation of the
constitution (originally being enacted by the British Parliament).
30
Chapter 1: Market Overview
CPMA Designation
The Certified Professional Mortgage Agent designation awarded by IMBA
CPMB Designation
The Certified Professional Mortgage Broker designation awarded by IMBA
Crown
The executive branch of government, the Queen acting through Her Agents (the members of the
Cabinet)
Demographics
Refers to selected population characteristics as used in government, marketing or opinion
research
Errors and Omissions Insurance
Insurance that provides coverage for errors or omissions made by a brokerage, broker, agent or
Administrator. This insurance must contain a provision for fraud.
Expropriate/Expropriation
The act of a public authority (such as federal, provincial, municipal governments or other bodies
empowered by statute) taking property without the consent of an owner through a statutory or
common law process. This process involves the payment of compensation to the owner by the
authority and the owner having the right to claim additional compensation to be determined by
the courts or an administrative board. Compensation is intended to make the owner whole, in
light of the loss suffered.
Financial Statements
Formal records of a business' financial activities. These statements provide an overview of a
business' profitability and financial condition in both short and long term.
Foreclosure
A lender’s remedy that enables the lender to obtain title to the defaulted borrower’s property
and dispose of it. Any profit or loss will belong to the lender while the borrower is free of the
debt.
FSCO
The Financial Services Commission of Ontario. This is the regulatory body that oversees the
mortgage brokerage industry and enforces the Mortgage Brokerages, lenders and
Administrators Act, 2006 (formerly the Mortgage agents Act), as well as several other industries
and Acts.
Home Inspector
A home inspection is a non‐invasive examination of the condition of a home, often in connection
with the sale of that home. This is carried out by a home inspector, who usually has special
equipment and training to carry out such inspections.
IMBA
The Independent Mortgage agents Association of Ontario, the provincial mortgage association
of Ontario
Chapter 1: Market Overview
31
Income Approach
An approach to calculating the value of an income producing property through the usage of the
net operating income and capitalization rate typical for that type of property and the area in
which it is located
Institutional lender
A lender considered to be a Bank, Loan or Trust Company, Credit Union or caisses populaires.
Institutional Mortgage Originator
An individual employed by an institutional lender to provide suitable borrowers to that
institution for mortgage financing
Lawyer
A person licensed to practice law
Life Insurance Company
A licensed company providing life insurance to policy holders
Mortgage Administrator
An individual or business that processes mortgage loans on behalf of another party.
Mortgage Backed Security
An investment in a pool of amortized residential mortgages insured through CMHC under the
National Housing Act (NHA)
Mortgage Agent or Broker
Individuals who are remunerated for dealing in mortgages or trading in mortgages in Ontario, as
employees or otherwise. A mortgage agent may hold the position of principal broker and may
supervise licensed mortgage agents. Mortgage agents must be licensed.
Mortgage Brokerage Community
The mortgage brokerage industry as a whole
Mortgage Brokerages, lenders and Administrators Act, 2006
The legislation that governs the mortgage brokerage industry in Ontario. This legislation is
enforced by FSCO and replaces the previous Mortgage agents Act.
Mortgage agents Act
The legislation predating the Mortgage Brokerages, lenders and Administrators Act, 2006. This
legislation governed the mortgage brokerage industry in Ontario until July 1st, 2008 and was
enforced by FSCO.
Mortgage Default Insurer
An insurer that provides a policy to the insured lender. This policy will compensate the lender
for losses incurred in a mortgage transaction. As of 2011 the insurers that are in Ontario include
CMHC, Genworth Financial and Canada Guaranty.
Mortgage Investment Corporation (MIC)
A corporation created to invest in mortgages. Investors purchase shares in the corporation and
32
Chapter 1: Market Overview
receive income through dividend payments.
Mortgage Professionals Canada, aka The Canadian Association of Accredited Mortgage
Professionals (CAAMP)
A national mortgage industry association
National Housing Act (NHA)
The legislation that created mortgage default insurance in 1954
Non‐Conforming Mortgage Market
Mortgage loans for borrowers who have impaired credit or some other impairment that
prevents them from being able to qualify for traditional lending products
Ontario Real Estate Association (OREA)
A professional association of Ontario Real Estate practitioners
Premiums (Life Insurance)
Payments made in return for a policy
Private lender
A private lender is typically an individual investor with funds who would like to invest in
mortgages. This individual will usually invest through his or her lawyer who may have clients
requiring mortgage financing or a mortgage agent. His or her purpose may vary but normally an
investor will invest in 2nd mortgages due to their higher rate of return when compared to 1st
mortgages and other potential types of investments such as GICs or bonds.
Real Estate and Mortgage Institute of Canada Inc. (REMIC)
A national organization dedicated to providing the mortgage and real estate industries with
resources designed to increase market penetration and the success of its members.
Real Estate Appraiser
An individual, usually licensed, who provides a report illustrating several components of a
property, including its value, usually in the form of its market value
Real Estate Board
A non‐profit organization representing local real estate brokers and agents, that provides
services to its members
Real Estate Broker
According to the Real Estate and Business Brokers Act, 2002, a “Broker” means an individual
who has the prescribed qualifications to be registered as a broker under the Act and who is
employed by a brokerage to trade in real estate.
Real Estate Brokerage
According to the Real Estate and Business Brokers Act, 2002, a “Brokerage” means a
corporation, partnership, sole proprietor, association or other organization or entity that, on
behalf of others and for compensation or reward or the expectation of such, trades in real
estate or holds himself, herself or itself out as such.
Real Estate Lawyer
Chapter 1: Market Overview
33
A lawyer specializing in real estate law
Real Estate Salesperson/Salespersons
According to the Real Estate and Business Brokers Act, 2002, an “agent” means an individual
who has the prescribed qualifications to be registered as an agent under this Act and who is
employed by a brokerage to trade in real estate.
Residential Mortgages
Mortgage lending on properties that are zoned residential
Securitization
The selling of a pool of mortgages to a third party
Sub‐Prime Mortgage
A mortgage loan for a borrower who has impaired credit or some other impairment that
prevents him or her from being able to qualify for traditional lending products
Sub‐Prime Mortgage Market
A market for borrowers who do not qualify for traditional lending products
Title Insurer
A provider of title insurance
Title Insurance
An insurance policy that provides protection against errors in title such as survey errors, zoning
infractions and property encroachments. It can also protect the homeowner against fraud.
34
Chapterr 1: Market O verview
1.11
1 Review
w Questio
ons
Answers to the Revview Questio
ons are found at www.REM
MIC.ca
Sho
ort Answe
er Questio
ons
1. Wh
hat are the main
m differencces between Schedule
S
I, II and III Banks?
2. Lisst and define the
t key particcipants in the
e Ontario morrtgage industtry.
3. Explain when an
nd why bankss began lending in the resiidential mortggage market..
4. De
efine the sub‐prime mortgaage market.
e sub‐prime market
m
in the United State s collapsed in
n 2007.
5. Explain why the
6. Wh
hat impact haas the U.S. sub‐prime markket collapse hhad on the On
ntario mortgaage market?
7. Wh
hich type of lender is the predominant
p
lender in thee Canadian mortgage markket?
8. Wh
hat segment of the Canadian populatio
on has a Beacon Score of 7750 to 799?
9. Wh
hat are the six major differences betwe
een the comm
mercial and reesidential mo
ortgage
maarkets?
10. What
W
is the typ
pical maximum loan to vallue of a privatte mortgage??
11. What
W
advice would
w
you give
e to an individual wishing to invest in m
mortgages?
W
options are available for investors who wish to invest in mortgages but h
have a low
12. What
tollerance for rissk?
13. What
W
are the two
t mortgage
e associationss currently in operation in Ontario and what are thee
diffferences betw
ween the two
o?
14. Discuss the rolle of professio
onal designattions in the m
mortgage indu
ustry and explain how theyy
are
e of benefit to
o the mortgage agent.
35
Chapter 1: Market Overview
Appendix 1: Schedule 1 Banks
Schedule 1 Banks8
As at December 31, 2014
Name of Bank
B2B Bank
Bank of Montreal
Bank of Nova Scotia (The)
Bridgewater Bank
Canadian Imperial Bank of Commerce
Canadian Tire Bank
Canadian Western Bank
CFF Bank
Citizens Bank of Canada
Continental Bank of Canada
CS Alterna Bank
DirectCash Bank
Equitable Bank
First Nations Bank of Canada
General Bank of Canada
Hollis Canadian Bank
HomEquity Bank
Laurentian Bank of Canada
Manulife Bank of Canada
National Bank of Canada
Pacific & Western Bank of Canada
President’s Choice Bank
RedBrick Bank
Rogers Bank
Royal Bank of Canada
Tangerine Bank
Toronto‐Dominion Bank (The)
Zag Bank
8
Schedule I, Bank Act ( 1991, c. 46 )
Head Office
Ontario
Quebec
Nova Scotia
Alberta
Ontario
Ontario
Alberta
Alberta
British Columbia
Ontario
Ontario
Alberta
Ontario
Saskatchewan
Alberta
Ontario
Ontario
Quebec
Ontario
Quebec
Ontario
Ontario
Ontario
Ontario
Quebec
Ontario
Ontario
Alberta
36
Chapter 1: Market Overview
Appendix 2: Schedule 2 Banks
Schedule 2 Banks9
As at December 31, 2014
Name of Bank
Amex Bank of Canada
Bank of America Canada
Bank of China (Canada)
Bank of Tokyo‐Mitsubishi UFJ (Canada)
Bank One Canada
BNP Paribas (Canada)
BofA Canada Bank
Citco Bank Canada
Citibank Canada
CTBC Bank Corp. (Canada)
Habib Canadian Bank
HSBC Bank Canada
ICICI Bank Canada
Industrial and Commercial Bank of China (Canada)
J.P. Morgan Bank Canada
J.P. Morgan Canada
Korea Exchange Bank of Canada
Mega International Commercial Bank (Canada)
Shinhan Bank Canada
Société Générale (Canada)
State Bank of India (Canada)
Sumitomo Mitsui Banking Corporation of Canada
UBS Bank (Canada)
Walmart Canada Bank
9
Schedule II, Bank Act ( 1991, c. 46 )
Head Office
Ontario
Ontario
Ontario
Ontario
Ontario
Quebec
Ontario
Ontario
Ontario
British Columbia
Ontario
British Columbia
Ontario
Ontario
Ontario
Ontario
Ontario
Ontario
Ontario
Quebec
Ontario
Ontario
Ontario
Ontario
37
Chapter 1: Market Overview
Appendix 3: Schedule 3 Banks
Schedule 3 Banks10
As at December 31, 2014
Name of Authorized
Foreign Bank (FB)
Bank of America,
National Association
Bank of New York
Mellon (The)
Barclays Bank PLC
BNP Paribas
Capital One Bank
(USA), N.A.
China Construction
Bank
Citibank, N.A.
Comerica Bank
Coöperatieve
Centrale Raiffeisen‐
Boerenleenbank B.A.
Credit Suisse AG
Deutsche Bank AG
Fifth Third Bank
First Commercial
Bank
JPMorgan Chase
Bank, National
Association
M&T Bank
Maple Bank GmbH
Merrill Lynch
International Bank
Limited
Mizuho Bank, Ltd.
Northern Trust
Company (The)
PNC Bank, National
Association
10
Name under which FB is
permitted to carry on
business in Canada
Bank of America, National
Association
Bank of New York Mellon
(The)
Barclays Bank PLC, Canada
Branch
BNP Baribas
Capital One Bank (Canada
Branch)
China Construction Bank
Toronto Branch
Citibank, N.A.
Comerica Bank
Type of Foreign
Bank Branch (FBB)
Principal Office
Full‐service
Ontario
Full‐service
Ontario
Full‐service
Ontario
Full‐service
Quebec
Full‐service
Ontario
Full‐service
Ontario
Full‐service
Full‐service
Ontario
Ontario
Full‐service
Ontario
Lending
Ontario
Full‐service
Full‐service
Ontario
Ontario
First Commercial Bank
Full‐service
British Columbia
JPMorgan Chase Bank,
National Association
Full‐service
Ontario
M&T Bank
Maple Bank
Full‐service
Full‐service
Ontario
Ontario
Merrill Lynch International
Bank Limited
Lending
Ontario
Full‐service
Ontario
Full‐service
Ontario
Full‐service
Ontario
Rabobank Nederland
Credit Suisse AG, Toronto
Branch
Deutsche Bank AG
Fifth Third Bank
Mizuho Bank, Ltd., Canada
Branch
Northern Trust Company,
Canada Branch (The)
PNC Bank Canada Branch
Schedule III, Bank Act ( 1991, c. 46)
38
Royal Bank of
Scotland N.V. (The)
Royal Bank of
Scotland plc (The)
Société Générale
State Street Bank and
Trust Company
U.S. Bank National
Association
UBS AG
MUFG Union Bank,
National Association
United Overseas Bank
Limited
Wells Fargo Bank,
National Association
Chapter 1: Market Overview
Royal Bank of Scotland N.V.,
(Canada) Branch (The)
Royal Bank of Scotland plc,
Canada Branch (The)
Société Générale (Canada
Branch)
Full‐service
Ontario
Full‐service
Ontario
Full‐service
Quebec
Full‐service
Ontario
Full‐service
Ontario
Full‐service
Ontario
Union Bank, Canada Branch
Lending
Alberta
United Overseas Bank Limited
Full‐service
British Columbia
Wells Fargo Bank, National
Association, Canadian Branch
Full‐service
Ontario
State Street
U.S. Bank National
Association
UBS AG Canada Branch
Chapter 2: Basic Mortgage Concepts
39
Chapter 2: Basic Mortgage Concepts
Learning Outcomes
Successful understanding of the concepts presented in this chapter will enable the learner to:
 Explain the term “mortgage”
 Explain the role of a mortgage agent
 Explain what constitutes the mortgage contract
 Describe the documents related to the registration and discharge of a mortgage
 Explain how mortgages are ranked, such as 1st, 2nd and other mortgages
 Describe the need for mortgage financing
 Discuss the two main purposes of mortgages: purchasing and refinancing
 Differentiate between a conventional and high ratio mortgage
 Differentiate between a standard mortgage and a collateral mortgage
Introduction
The Ontario mortgage market has experienced various changes over the past two decades, with
the introduction of new mortgage brokering legislation in 2008, and more recently with the loss
of a few mortgage lenders, the introduction of several new lenders, changes in many lender’s
guidelines and the implementation of several new regulatory modifications regarding mortgage
financing in Canada, such as alterations of certain default insurance policies.
The mortgage brokerage industry in Ontario has also experienced a variety of changes over the
past several years. What was once a small, fringe industry has grown into the mainstream,
gathering more acceptance by the consumer as a whole.
Although the industry still has a long way to go to achieve the results of our American
counterparts where it was estimated that between 75% and 80% of all mortgage transactions
were brokered prior to the mortgage crisis (statistics are not precise at this time), the Ontario
mortgage brokerage industry is well on its way.
A major reason behind this transformation is the professionalism that both consumers and the
industry itself have begun demanding of mortgage agents. In a complex market where
consumer choice for mortgage financing is more diverse than at any other time in history, it has
become necessary to upgrade the training available to the industry.
As professional students of the mortgage industry, all must endeavour to keep abreast of the
innovations in the market. For the new student or someone just entering the industry, it is
necessary to begin with a firm foundation of knowledge related to mortgage financing in
Ontario.
40
Chapter
C
2: Bassic Mortgage Concepts
2.1
What is
s a Mortg
gage?
Defiinition
Accorrding to the Ontario
O
Mortg
gages Act, R.SS.O. 1990 c.M
M.40 (the legisslation that go
overns
mortggages in Ontaario), the word mortgage iss defined as, “any charge o
on any propeerty for
securing money orr money’s wo
orth.”
Most consumers would
w
not neccessarily unde
erstand that ttechnical defiinition. In acttuality, a
mortggage is eviden
nce of a debt.. It is both an
n interest in laand created b
by the mortgaage contract
and se
ecurity for a debt.
d
Howe
ever, the more common de
efinition of a mortgage staates that:
A morrtgage is a loaan secured byy real properrty
That is a straightfo
orward, simple definition, but
b there is m
more to a mortgage than tthis. This
definiition must be broken down into its core
e componentts.
 A loan
This is the amou
unt of moneyy advanced to
o a borrower.
 Secured
This means thatt a Charge (a legal docume
ent that outli nes the terms of the loan)) is registered
d
on title of the property
p
to se
ecure the loan
n. If the borroower defaults on the loan, the lender
has the right to exercise its interest in the
e security throough several methods.
Pa
ause for cla
arification
n ‐ Title
Tittle is a term that refers to the ownership of a bundlee of rights thaat its owner h
has in a
property, typicaally fee simple ownership. If somethingg is registered
d “on title” it means that iit
o
regisstered againsst the ownersship of the prooperty througgh the Land TTitles Office,
is officially
wh
here propertyy ownership is recorded.
eal Property
 Re
Re
eal property iss the term use
ed to describe the home aand the land u
upon which itt resides. It iss
a legal term thaat differentiattes real estate
e ownership ffrom other tyypes of propeerty such as
personal property. Personall property is comprised
c
of items that arre typically m
movable
pro
operty, also often
o
referred
d to as chatte
els.
2.2
Collate
eral Mortg
gages
Unlike
e a standard mortgage thaat places a charge on title, a collateral m
mortgage, wh
hich has been
n
aroun
nd for years but
b typically only
o used for secured
s
lines of credit, is a promissory note with a
lien on the propertty for the totaal amount reggistered. Youu can registerr more debt aagainst the
prope
erty than the property is worth
w
since no
ormal regulattory limitation
ns on loan to values do no
ot
apply.
Chapter 2: Basic Mortgage Concepts
41
For example, TD Bank changed their mortgage lending practices on October 18, 2010, changing
their mortgages to collateral mortgages. They began registering 125% of the property value,
even though that amount may not have been advanced to the borrower initially.
Since the collateral mortgage allows for the “re‐advancing” of principal, like a revolving line of
credit, the balance can rise. Most chartered banks will not allow transfers of collateral
mortgages from other chartered banks. This results in additional legal fees over and above what
are normally charged for a straight transfer on renewal because the mortgage must be fully
discharged as opposed to simply being transferred.
In addition, collateral mortgages allow lenders to lend more money to borrowers, based on their
qualifications, after closing without registering a new mortgage because the current mortgage is
registered at a higher amount than is advanced. The rate can also be increased because the rate
on the collateral mortgage is also registered at a higher amount than is charged.
For example, a bank can register a mortgage at 125% of the value of the home and at prime plus
10%, but may only advance 80% of the value of the home and charge prime at the time of
closing. This allows for both additional advances of principal and increases in the rate during the
life of the mortgage.
Since the mortgage is registered for such a high loan to value, the homeowner won’t be able to
take out a second mortgage, regardless of how low the outstanding balance is on the first
mortgage. While this type of situation allows for the homeowner to borrow more funds after
closing without having to discharge a current mortgage and register a new one, it also comes
with the above mentioned risk, making it important to explain this to the borrower when
arranging this type of product.
2.3
What is a Mortgage Agent/Broker?
There are two licenses that allow individuals to broker a mortgage: mortgage agent and
mortgage agent. The difference between these two licenses is that a mortgage broker, in
addition to being able to broker mortgages, can also be the Principal Broker of a mortgage
brokerage. Each mortgage brokerage must have one Principal Broker to ensure that the
brokerage, its agents and brokers comply with the appropriate legislation and regulations.
For our purposes we will use the term mortgage agent and mortgage agent interchangeably, as
both terms refer to a licensed individual authorized to broker mortgages in Ontario.
A mortgage agent/broker is a practicing professional, licensed by the Financial Services
Commission of Ontario (FSCO) who assesses a borrower’s financial goals with respect to real
estate financing and, after detailed analysis, provides solutions to meet those goals by acting as
an intermediary with the appropriate lending source.
Mortgage agents have two clients: the borrower (the individual receiving the mortgage) and the
lender (the provider of the mortgage). In order to maintain a healthy market, it is imperative
that the broker “marry” the borrower to the lender best suited for both.
In Ontario, the legal distinction between a mortgage agent and a mortgage agent is determined
by licensing. Until July 2008, mortgage agents had to be licensed in Ontario while mortgage
42
Chapter
C
2: Bassic Mortgage Concepts
ensed) by the
eir broker withh the FSCO. A
As a matter o
of interest, the
agentts were registtered (not lice
term mortgage age
ent did not evven exist in Ontario
O
legislaation until thee Mortgage a
agents Act waas
replacced by the Mortgage Brokkerages, lendeers and Adminnistrators Actt, 2006 (2006
6 makes up
part of
o the title and is not when
n it was enactted).
As of July 2008, un
nder the Morttgage Brokera
ages, lenders and Adminisstrators Act, 2
2006, there
are th
hree distinct licensing cate
egories with re
egards to brookering (theree is also a mortgage
admin
nistrator’s lice
ense, but that doesn’t affe
ect brokering activities). FFor individualss there are
the mortgage
m
agen
nt and mortgaage agent lice
enses. For ann organization
n there is the mortgage
broke
erage license.
This le
egislation takkes into accou
unt that the in
ndustry has c hanged from the “Mom and Pop” typee
broke
erage where a mortgage aggent was typiically an indivvidual, to the era of the “Super Broker””
where
e brokerages typically emp
ploy from sevveral to severral hundred m
mortgage agen
nts.
The ro
ole of the mo
ortgage agentt/broker revolves around hhis or her abillity to obtain a client and
fulfill the financingg needs of thaat client. In essence, the r ole of the mo
ortgage agentt involves
sellingg the right product to the client, and se
elling the cliennt to the right lender. Forr the purpose
of sim
mplicity, the tiitles mortgage agent and mortgage
m
ageent will be useed interchanggeably
throughout this bo
ook.
2.4
The Mortgage
M
Contractt
The Standarrd Charge
e Terms
The Standard Charrge Terms is a document th
hat is createdd by the lendeer and must b
be registered
with the
t Director of
o Titles unde
er the Land Tittles Act. Manny lenders’ Sttandard Chargge Terms can
n
be vie
ewed at httpss://www.teranetexpress.caa/content/tv user/schedules/ereg_fidocs.html
d
is the mortgage contract. It contains
c
detaailed informattion on the leender’s and
This document
borro
ower’s obligattions, referred
d to as covenants, as well as the remed
dies available to the lender
if the borrower does not meet these
t
obligations. A covennant is a prom
mise to do or not do
something. In a mortgage
m
conttract, both the
e mortgagee,, who is the leender, and mortgagor, thee
borro
ower, have covenants that each must ab
bide by.
It is viital to undersstand that the
e borrower, while
w
at the laawyer’s signin
ng the final do
ocumentation
n
to reggister the morrtgage, signs acceptance of
o the Standarrd Charge Terrms. What m
many
borro
owers fail to re
ealize is that they have Staandard Chargge Terms on ttheir mortgagge and that
they outline
o
the rigghts and resp
ponsibilities of the borroweer. Contravention of the tterms of this
docum
ment is consid
dered defaultt and the lend
der can exerccise its rights, which the bo
orrower
agree
es to, that are
e found in thiss document.
The fo
ollowing is a breakdown
b
of both the mo
ortgagor and mortgagee ccovenants as listed in the
Stand
dard Charge Terms.
T
Borrrower Co
ovenants
When
n a borrower pledges his or
o her real pro
operty as secuurity for a loaan by placing a mortgage
on thaat property, he
h or she has several obliggations.
Chapter
C
2: Bassic Mortgage Concepts
4
43
epay the loan
1. Re
The borrower agrees
a
to repaay the loan baased on the ppayment scheedule outlined
d in the
contract. Failurre to do so re
esults in the borrower deem
med to be in default or in contraventio
on
of the terms of the mortgage
e contract.
2. Inssure the prop
perty
The borrower agrees
a
to keep
p adequate property insurrance on the property to p
protect the
len
nder from losing his or herr security due
e to a fire or oother covered
d risks. If the borrower fails
to keep insuran
nce on their property, the lender
l
will coonsider him o
or her in defau
ult.
3. Ma
aintain the property
The borrower agrees
a
to keep
p the propertty in good saleeable condition including repairing anyy
po
ortion of the property
p
that requires it. Failure
F
to do so will result in the lenderr considering
the
e borrower to
o be in defaullt.
4. No
ot to commit waste
Waaste is a legall term which includes actio
ons or conducct that could result in dam
mage to the
pro
operty or a lo
oss of propertty value. Com
mmitting wastte will result in the lender considering
the
e borrower to
o be in defaullt. This may include signifiicant renovattions, such ass the addition
of another store
ey to the buillding. This is due to the faact that if the borrower run
ns out of
mo
oney during the renovation and it remaains incompleete, the valuee of the propeerty will be
dim
minished.
axes
5. Pay Property Ta
The borrower iss required to pay his or her property ta xes on time. If the borrow
wer doesn’t
the
e lender can pay
p those taxxes, add them
m to the borroower’s mortgaage and/or co
onsider the
bo
orrower in deffault. This is because the Municipality
M
can register a lien against the
bo
orrower’s prop
perty for unp
paid taxes. Th
his lien will ta ke precedencce over any o
other
mo
ortgages regisstered on title
e reducing the lender’s se curity.
6. Follow the term
ms of the Stan
ndard Charge
e Terms
The Standard Charge Terms is the docum
ment that makkes up the bulk of the conttract. It is vitaal
to understand that
t
the borro
ower, while at
a the lawyer’ s signing the final documeentation to
reggister the mo
ortgage signs acceptance
a
of
o the Standarrd Charge Terrms. This doccument details
the
e rights and responsibilitie
es of the borrower. Contraavention of th
he terms of this documentt
is considered
c
de
efault and the
e lender can exercise
e
its ri ghts, which tthe borrower agrees to,
thaat are found in
i this docum
ment.
Len der Cove
enants
The mortgagee,
m
orr lender, also has several covenants by which they m
must abide. TThe following
list su
ummarizes tho
ose covenantts.
1. Ce
ertificate of Discharge
D
On
nce the mortggagee has recceived funds that
t
are sufficcient to comp
pletely repay the
outstanding ballance of the mortgage,
m
the
e mortgagee is required to
o provide the mortgagor, o
or
bo
orrower, with a Certificate of Discharge that indicatees that the am
mount borrow
wed has been
rep
paid in full. The
T mortgage
ee does not haave to registeer this certificcate of dischaarge on title,
wh
hich means th
hat the borrow
wer is respon
nsible for haviing this registtered. If the mortgage is
44
Chapter
C
2: Bassic Mortgage Concepts
being refinance
ed by anotherr lender, it is standard
s
proccedure for the new lenderr to have their
Solicitor closingg the mortgagge register the
e certificate oof discharge b
before they reegister their
new charge.
2. Assignment of mortgage
The mortgagor has the right to request th
hat the mortggagee assign tthe mortgagee to a new
len
nder as long as
a the mortgaagor’s mortgaage is in good standing and
d the mortgaggor has the
rigght to redeem
m the mortgagge. For the exxact legislatioon referring to
o assignmentts, refer to the
Mo
ortgages Act, Part 1, and Section
S
2.
3. Pro
ovide Quiet Possession
P
Qu
uiet Possessio
on is a legal te
erm that refle
ects the right of the mortggagor to have possession o
of
the
e property fre
ee from interference by th
he mortgageee, except wheen in default.
2.5
Mortga
age Regis
stration Document
D
tation
The Charge/Mortg
C
gage
The Charge/Mortg
C
gage is the insstrument thatt is used to reegister the deebt or loan aggainst the
borro
ower’s properrty. It forms the
t security of
o the debt.
D
of Charge/Mortg
C
gage
The Discharge
This iss the instrument used to discharge
d
the debt or loan against the b
borrower’s prroperty. It
releasses the lender’s interest in
n the propertyy.
Case Study
S
– Figurres 6 ‐ 9
Jack Adams
A
curren
ntly has a seco
ond mortgage
e on his cond ominium with a private leender. You
have arranged a ne
ew mortgage through Sup
perBank for $225,000 that Jaack is using to
o pay off this
secon
nd mortgage. Figure 6 sho
ows the new charge/mortg
c
gage that is beeing registereed on Jack’s
condo
ominium whille Figure 9 shows the disch
harge of charrge registered
d by the privaate lender’s
lawye
er. If Jack wass getting a collateral mortggage, the chaarge would look like it does in figure 7.
The Charge//Mortgage
e
Figure 6 – Charge/Mortgage
LRO # 80
Charge/M
Mortgage
Receipted
R
as A
AT1101777 on 2008 10 10
yyyyy mm dd
pplicant(s) hereeby applies to the Land Regisstrar.
The ap
at 16:15
Page 1 of 1
Pro
operties
Pin 118
872‐0259 LT
Interest/Estate
Fee Simp le
Descriiption
UN
NIT 6, LEVEL 16
6, METROPOLITTAN TORONTO
O CONDOMINIU
UM CORPORATTION NO. 811,
PTT LT 2, PL 1234,, CITY OF TORO
ONTO AS DESC RIBED IN SCHEEDULE ‘A’ OF D
DECLARATION
D1
167901 TORON
NTO, CITY OF TO
ORONTO
Address
1211 SUITE
04
4727 SHEPPARD
D AVENUE EASST
TO
ORONTO
45
Chapter 2: Basic Mortgage Concepts
Chargor(s)
The chargor(s) hereby charges the land to the chargee(s). The chargor(s) acknowledges the receipt of the
charge and standard charge terms, if any
Name
ADAMS, JACK
Address for Service
4727 Sheppard Avenue East
Toronto, Ontario
M1S 5B2
I am at least 18 years of age. This document is not authorized under Power of Attorney by this party.
Chargee(s)
Capacity
Name
SUPERBANK
Address for Service
5588 King Street East
Toronto, Ontario
L1L 1L1
Share
Provisions
Principal
$25,000.00
Calculation Period
semi‐annually, not in advance
Balance Due Date
2009 10 31
Interest Rate
14.75%
Payments
$338.26
Interest Adjustment Date
2008 10 10
Payment Date
Last day of each and every month
First Payment Date
2008 11 30
Last Payment Date
2009 10 31
Standard Charge Terms
200033
Insurance Amount
full insurable value
Guarantor
N/A
CurrencyCDN
Additional Provisions
This Charge/Mortgage of Land secures the monies owing by the Chargor to the Chargee from time to time
up to the Principal Amount as set out in the Standard Charge Terms.
See schedules
46
Chapter
C
2: Bassic Mortgage Concepts
Sig
gned By
Pau
ul Jonathon Jacobs
Tel
Fax
55 Main Stree
et
Toronto M1M
M 1K1
acting for
Chargor(s)
Signed 2008
8 10 10
4165559990
4165559991
1
ocument on beehalf of the Chaargor(s)
I havve the authoritty to sign and register the do
Sub
bmitted By
PAU
UL JACOBS,
BAR
RRRISTOR &
SOLLICITOR
Tel 4165559990
1
Fax 4165559991
55 Main Stree
et
Toronto M1M
M 1K1
8 10 10
Signed 2008
Fee
es/Taxes/Pa
ayment
Statu
utory Registratio
on Fee
$60.00
Totaal Paid
$60.00
File
e Number
Charrgor Client File Number:
N
08‐1823
The Collaterral Charg e/Mortga
age
Figure 7 – Collateral Charge/Mortgag
C
ge
LRO # 80
Charge/M
Mortgage
Receipted
R
as A
AT1101777 on 2008 10 10
yyyyy mm dd
pplicant(s) hereeby applies to the Land Regisstrar.
The ap
at 16:15
Page 1 of 1
Pro
operties
Pin 118
872‐0259 LT
Interest/Estate
Fee Simp le
Descriiption
UN
NIT 6, LEVEL 16
6, METROPOLITTAN TORONTO
O CONDOMINIU
UM CORPORATTION NO. 811,
PTT LT 2, PL 1234,, CITY OF TORO
ONTO AS DESC RIBED IN SCHEEDULE ‘A’ OF D
DECLARATION
D1
167901 TORON
NTO, CITY OF TO
ORONTO
Address
1211 SUITE
04
4727 SHEPPARD
D AVENUE EASST
TO
ORONTO
Cha
argor(s)
The ch
hargor(s) hereb
by charges the land to the ch
hargee(s). The chargor(s) ackknowledges thee receipt of thee
charge
e and standard
d charge terms, if any
Name
ADAMS, JACK
47
Chapter 2: Basic Mortgage Concepts
Address for Service
4727 Sheppard Avenue East
Toronto, Ontario
M1S 5B2
I am at least 18 years of age.
This document is not authorized under Power of Attorney by this party.
Chargee(s)
Capacity
Name
SUPERBANK
Address for Service
5588 King Street East
Toronto, Ontario
L1L 1L1
Share
Provisions
Principal
$25,000.00
CurrencyCDN
Calculation Period
See Additional Provisions
Interest Rate
See Additional Provisions
Payment Date
ON DEMAND
Interest Adjustment Date
2008 10 10
Payment Date
Last day of each and every month
First Payment Date
2008 11 30
Last Payment Date
2009 10 31
Standard Charge Terms
201027
Insurance Amount
full insurable value
Guarantor
N/A
Additional Provisions
See Schedule 1
Signed By
Paul Jonathon Jacobs
Tel
Fax
55 Main Street
Toronto M1M 1K1
acting for
Chargor(s)
Signed 2008 10 10
4165559990
4165559991
I have the authority to sign and register the document on behalf of the Chargor(s)
Submitted By
PAUL JACOBS,
BARRRISTOR &
55 Main Street
Toronto M1M 1K1
Signed 2008 10 10
48
Chapter
C
2: Bassic Mortgage Concepts
SOLLICITOR
Tel 4165559990
Fax 4165559991
1
Fee
es/Taxes/Pa
ayment
Statu
utory Registratio
on Fee
$60.00
Totaal Paid
$60.00
File
e Number
Charrgor Client File Number:
N
08‐1823
Figure 8 – Schedule forr Collateral Charge
The Discharg
ge of Cha
arge
Figure 9 – Discharge of Charge
LRO # 80
Dischargge of Charge
Receipted
R
as A
AT1101589 on 2008 10 05
yyyyy mm dd
pplicant(s) hereeby applies to the Land Regisstrar.
The ap
at 16:15
Page 1 of 1
Pro
operties
Pin
11872‐0259
9 LT
Interest/Estate
Fee Simp le
Descriiption
UN
NIT 6, LEVEL 16
6, METROPOLITTAN TORONTO
O CONDOMINIU
UM CORPORATTION NO. 811,
PTT LT 2, PL 1234,, CITY OF TORO
ONTO AS DESC RIBED IN SCHEEDULE ‘A’ OF D
DECLARATION
D1
167901 TORON
NTO, CITY OF TO
ORONTO
Address
1211 SUITE
04
4727 SHEPPARD
D AVENUE EASST
TO
ORONTO
49
Chapter 2: Basic Mortgage Concepts
Document to be Discharged
Registration No.
Date:
Type of Instrument:
AT770911
2008 10 05
Charge/Mortgage
Discharging Party(s)
This discharge complies with the Planning Act. This discharge discharges the charge.
Name
LENDER, PRIVATE
Address for Service
1299 John Street, Toronto, Ontario, L4B 1B1
This document is not authorized under Power of Attorney by this party.
This party giving this discharge is the original chargee and is the party entitled to file an effective
discharge.
Signed By
Lender, Private
Tel
416 5551255
Fax
4165551266
1299 John Street
Toronto L4B 1B1
acting for Applicant(s)
Signed 2008 10 01
Submitted By
LEGALWORKS, INC. 987 Adams Street
Toronto M1M 1K1
Tel
416 5556547
Fax
4165556548
Fees/Taxes/Payment
Statutory Registration Fee
Total Paid
$60.00
$60.00
Signed 2008 10 05
50
2.6
Chapter 2: Basic Mortgage Concepts
Mortgage Ranks
There are different ranks of mortgages, referring to the number of mortgages on the same
property.
A first mortgage simply means that the mortgage was registered first, or before any other
mortgages on the property. A mortgage registered after the first mortgage is called a second
mortgage. A mortgage registered after the second mortgage would be considered a third
mortgage, and so on. If a borrower who has a first and second mortgage pays off that first
mortgage, the second mortgage would now become the first mortgage.
The rank of the mortgage has nothing to do with the amount of the mortgage but in most cases
lenders will not advance a second mortgage that is larger than the first mortgage or that
exceeds a maximum percentage of the size of the first mortgage.
Typically the interest rate on a mortgage will increase with the level of risk attached to that
mortgage. A second mortgage is considered riskier than a first, a third mortgage riskier than a
second, and so on. The reasoning behind this is that if the borrower defaulted on the first
mortgage, the first mortgage lender would begin the power of sale process to recover the
money owing on its mortgage. Once the property is sold, the remainder of the proceeds of the
sale would go to the other mortgage holders, such as a second mortgage lender. This is a risk
for the second mortgage lender since there may not be enough money left from the sale of the
property to fully pay off their mortgage. To offset this risk the second mortgage lender will
typically charge a higher interest rate.
2.7
Why is Mortgage Financing Needed?
In Ontario, housing costs have risen from an average of $155,000 in 1995 to $360,000 in 2010.
This represents an annual increase of 5.78%. If a family had wanted to purchase a home in 2010
and had started saving in 1995, it would have had to save $15,467 per year (assuming a rate of
return on their savings of 6% for those fifteen years to come up with the full purchase price).
That equates to $1,288.92 per month. The average Canadian family’s gross income as of 1995
was approximately $51,0001, or $4,250 per month. The amount that this average family would
have to spend to save this amount would be equal to 30% of its gross income. Considering that
this family would still be renting and using considerably more of its income, it becomes evident
as to why there is such a significant need for mortgages.
As it stands, the percentage of “shelter to income” costs (the percentage of income that is used
to pay for shelter or housing costs) was approximately 21% in 19952. However the numbers are
analyzed, they do not add up. It is therefore not plausible for the average Canadian to save the
purchase price of a home.
In addition it has become increasingly difficult for individuals to save for a down payment. In
fact, the average debt‐to‐income ratio (the amount of debt compared to income, expressed as a
1
2
Statistics Canada,
Statistics Canada
Chapter
C
2: Bassic Mortgage Concepts
5
51
entage) for the average Canadian house
ehold was a sttaggering 1633% in 20123, ccompared to
perce
150% in 2010, 105% in 1995 and 55% in 19834. This gavee birth to morre aggressive programs
such as
a the “No Money Down” mortgage wh
here the purcchaser can ob
btain a mortgaage without
having to provide a down paym
ment.
Pa
ause for cla
arification
n – Down payment
p
A down
d
payment is the amo
ount of moneyy that a purchhaser will be providing from his or her
proceeds (not borrowed)
b
tow
wards the purchase price of the properrty being purchased.
Pa
ause for cla
arification
n – Down payment
p
reequiremen
nts for insu
ured
mortgag
ges
Efffective February 15, 2016 the minimum
m down paym
ment for new iinsured mortgages
inccreased from 5% to 10% fo
or the portion
n of the housee price abovee $500,000. TThe 5%
miinimum down
n payment for insured mortgages remaains for propeerties up to $5
500,000. For
example, a pro
operty being purchased
p
forr $500,000 w
would require a minimum d
down
paayment of $25
5,000 (.05 x $500,000). A property beinng purchased
d for $1,000,0
000 would
req
quire a minim
mum down paayment of $75
5,000 (.05 x tthe first $500,,000 plus .10 x the next
$5
500,000)
2.8
The Pu
urposes of
o Using a Mortgag
ge
There
e are four typical purposess that mortgagges are used for.
1. Purchase
2. Refinance
3. Equity take
e‐outs
4. Bridge Finaancing
Purc
chase
Peoplle use mortgaages to assist in purchasingg a home in ccombination w
with a down p
payment, or
depen
nding on the financing avaailable, they may
m qualify too borrow the complete purchase price.
A dow
wn payment is the amountt of money th
hat the purchaaser has to giive to the ven
ndor in cash.
The balance of the
e purchase price is made up of a mortgaage.
Refiinance
If a bo
orrower alreaady has a hom
me, he or she may wish to refinance thee property. R
Refinancing
mean
ns to increase the size of th
he mortgage, or renegotiatte it in some fashion. If hee or she
decides to do this during the term of the mo
ortgage, that person may h
have to pay a penalty to
the le
ender for repaaying the morrtgage before
e the end of t he mortgage contract, refferred to as
the te
erm, unless th
he current mo
ortgage is fullly open. The refinanced m
mortgage will reflect the
3
4
http:://www.statcan.gc.ca/pub/75‐006‐x/20150
001/article/141167‐eng.htm
CBC Newsworld
52
Chapter
C
2: Bassic Mortgage Concepts
er’s current raate of interestt, which may or may not bbe lower than the borroweer’s current
lende
rate.
Su
uccess Tip – Home Buyer’s Program (HBP
P)
Th
he Canada Revenue Agenccy (CRA) has a program enttitled the Hom
me Buyer’s Prrogram (HBP))
that allows a first time buye
er to use up to
o $25,000 of ttheir RRSPs aas a down payyment withou
ut
paaying tax on the withdrawaal. The amou
unt removed must be repaaid within 15 years.
pouse, or com
RA defines a first
f
time buyer as an indivvidual or the iindividual’s sp
mmon‐law
CR
paartner who haas not owned
d a home thatt they occupieed as a principal place of rresidence
du
uring the period beginningg January 1 off the fourth yeear before th
he year of thee withdrawal
an
nd ending 31 days before the
t withdraw
wal.
or example, iff you withdrew
w funds on March
M
31, 20115, the four‐yyear period would have
Fo
be
egun on Januaary 1, 2011 and would havve ended on FFebruary 28, 2015.
Su
uccess Tip – Home Buyer’s Taxx Credit (HB
BTC)
Fo
or 2011 and subsequent ye
ears, the fede
eral governmeent provides a non‐refund
dable tax
credit, based on an amount of $5,000, fo
or certain hom
me buyers thaat acquire a q
qualifying
ho
ome. The HBTTC is calculated by multipllying the loweest personal iincome tax raate for the
ye
ear by $5,000. The current maximum crredit is $750. More inform
mation can bee found on thee
Caanada Revenu
ue Agency (CR
RA) website.
Equ ity Take--Out (ETO
O)
An eq
quity take‐outt is when a bo
orrower incre
eases the size of their morttgage or takees out a
secon
nd mortgage or
o another de
ebt against th
he property, ssuch as a line of credit. An
n ETO is most
often used to conssolidate highe
er interest ratte debt such aas credit card
ds. In the casee of paying offf
other debts, on clo
osing the lawyyer issues che
eques to the ccreditors bein
ng paid out frrom the
proce
eeds. Borrowers may also take equity out
o of their prroperty to pu
urchase otherr assets such
as a boat
b
or a cottaage, or for an
ny other reaso
on as allowedd by their lend
der.
Brid
dge Finan
ncing
Bridge
e financing is used when a person is selling their currrent home and buying a n
new home. In
n
some cases a buye
er may find th
hat the home that is being sold has a clo
osing date aftter the homee
hasing is set to
t close. Thiss results in thee homeowneer temporarilyy owning two
o
that they are purch
home
es. The proble
em with this is that normaally the down payment forr the new purrchase would
be coming from th
he sale of the current home. Without thhe down payment when the new homee
is set to close, the borrower willl lose the new
w home and fforfeit the deeposit. Bridgee financing is
simplyy a second mortgage place
ed on the first home whilee waiting for iit to sell. Thiss money is
used as the down payment on the
t new home. Once the ffirst home seells the mortggage is repaid.
This provides
p
a “brridge” betwee
en the two ho
omes.
Chapter
C
2: Bassic Mortgage Concepts
2.9
5
53
Conven
ntional an
nd High Ratio
R
Morrtgages
A morrtgage can be
e described ass either conve
entional or hiigh ratio. To determine ho
ow the
mortggage is classiffied, the loan to value of th
he mortgage must first be calculated.
This iss calculated by
b dividing the
e mortgage amount
a
by thee value of thee property.
Example
he had $50,000 as a down
If a bo
orrower wished to purchasse a propertyy for $400,0000 and he or sh
n
payment, the loan to value wou
uld be calculaated using thee following fo
ormula:
Morttgage Amoun t
Pro
operty Value
To ob
btain the morttgage amount, the amoun
nt of the downn payment m
must first be su
ubtracted
from the purchase
e price.
Purchase Price
e – Down Payment = Requ ired Mortgagge Amount
$400,000 ‐ $50,000 = $3350,000
m
amo
ount is then divided
d
by the
e property va lue (which is,, in this case, the purchasee
The mortgage
price))
$350,000
$
$400,000
$
= 0.875 or 87.5% loan too value
Bill C‐‐37, enacted in
i 2007 by the federal govvernment, conntains legislattion that chan
nged the
definiition of conve
entional and high
h ratio mo
ortgages in Caanada. By am
mending sectio
on 418,
subse
ection 1 of the
e Bank Act, th
he federal govvernment chaanged what cconstitutes a high ratio
mortggage in Canad
da from 75% loan
l
to value to 80% loan to value.
The fo
ollowing is the text of the amendment:
( A bank sha
all not make a loan in Canada on the seecurity of resiidential propeerty in Canada
418. (1)
for the purpose of purchasing, renovating
r
orr improving thhat property, or refinance such a loan, iif
the am
mount of the loan, togetheer with the am
mount then ooutstanding off any mortga
age having an
n
equall or prior claim
m against thee property, wo
ould exceed 880 per cent off the value of the property
at thee time of the loan.
l
High
h Ratio Mortgage
M
A high
h ratio mortgage is a mortgage that excceeds 80% loaan to value. TThis refers to
o either a
purch
hase where th
he purchaser has less than 20% for a doown paymentt or, in a refin
nancing
scenaario, where th
here is less than 20% equitty in the propperty. If a mortgage is provvided by a
federally regulated
d bank, that bank
b
must obtain mortgagge default insu
urance on thee loan if the
loan exceeds
e
80% loan to value
e. This is impo
ortant for an agent to know because th
he premium
54
Chapter
C
2: Bassic Mortgage Concepts
t the mortgaage amount aand will increaase the
for this default insurance is typically added to
mortggage payment.
ortgage defau
ult insurance
If the mortgage is not provided by a federally regulated bbank, then mo
is not required. Many
M
lenders that
t
do not usse mortgage default insurers refer to th
heir
mortggages as “selff‐insured”. Th
his simply me
eans that the lender will ch
harge a lendeer’s fee
(referrred to as the self‐insured fee), typicallyy similar in am
mount to a deefault insurerr’s fee. The
lende
er will often use these feess to create a reserve
r
fund tthat can be accessed to heelp offset
lossess suffered by a borrower’s default.
Pa
ause for cllarification
n – Self‐inssured lendeer
A “Self‐Insured
d” lender is sim
mply a lenderr that does noot use defaultt insurance, b
but that
ch
harges a lende
er’s fee and pools
p
this mon
ney in a reserrve fund to heelp offset thee risks
asssociated with
h lending high
h ratio mortgages withoutt the protectio
on of default insurance.
Th
he amount off this fee is typ
pically similarr to what a boorrower would pay for deffault
insurance.
More information on mortgage
e default insurrance may bee found in thee chapter, Inssurance in thee
Mortggage Industryy.
Con
nventiona
al Mortga ge
A conventional mo
ortgage is one
e that is 80% loan to value or less. Thiss refers to eith
her a purchasse
where
e the purchasser has 20% or
o more for a down paymeent or, in casees of refinancing, where
there is more than
n 20% equity in
i the properrty.
5
55
Chapter
C
2: Bassic Mortgage Concepts
High Ratio
Over 80% (80
0.1%
L
and higher) LTV
is called higgh
ratio
100%
% LTV
80%
% LTV
Conventional
Up to
o 80% LTTV is
a convention
nal
mortgage
m
e
0% LTV
56
Chapter 2: Basic Mortgage Concepts
2.10 Key Terms and Definitions
1st Mortgage
The first mortgage registered on title of a property
2nd Mortgage
A mortgage registered on title of a property after a 1st mortgage
3rd Mortgage
A mortgage registered on title of a property after a 2nd mortgage
Assignment of mortgage
The transference of a mortgage from one lender to another
Charge/Mortgage
The document that indicates that there is a debt registered against the title of a property
Chattel
Personal property, movable property and other property not deemed to be fixtures
Collateral Mortgage
A promissory note secured by a lien on the property for the total amount registered, which may
differ from the total amount advanced.
Conventional Mortgage
A mortgage not exceeding 80% loan to value
Discharge of Charge/Mortgage
The document that indicates that a debt has been removed from the title of a property
Down Payment
An amount of a purchaser’s money provided to the vendor from his or her own resources (not
included in a mortgage loan). Under certain programs this amount may be borrowed.
Equity Take‐Out (ETO)
The removal of equity by refinancing of the property
Interest Rate
The rate at which interest, which is a fee paid to the lender for borrowing money, is calculated
Mortgage
The providing of real property to a lender as security in exchange for a debt
Mortgagee
The lender
Mortgagor
The borrower
Chapter 2: Basic Mortgage Concepts
57
Payment
A periodic amount, in dollars, required to be made in relation to a mortgage contract. A
payment may be interest only or a blend of interest and principal.
Personal Property
Everything one owns that is not real property. That includes chattels and other goods. Personal
property is typically not fixed in its location and normally has a shorter useful life expectancy
than real property.
Real Property
Land and everything affixed to it. It is in a fixed location and is permanent, remaining, to one
extent or another, long after the current owners have relinquished their rights to it.
Self‐Insured lender
A lender that does not use default insurance, but that charges a lender’s fee and pools this
money in a reserve fund to help offset the risks associated with lending high ratio mortgages
without the protection of default insurance. The amount of this fee is typically similar to what a
borrower would pay for default insurance.
Standard Charge Terms
The terms and conditions of the mortgage contract, including the remedies available to the
lender upon default by the borrower
Term
An amount of time before the mortgage contract must be repaid or renegotiated
Title
A term that refers to the ownership of a property. If something is registered “on title” it means
that it is officially registered against the ownership of the property through the Land Titles
Office, where property ownership is recorded
58
Chapter
C
2: Bassic Mortgage Concepts
2.11
1 Review
w Questio
ons
Answers to the Revview Questio
ons are found at www.REM
MIC.ca
Sho
ort Answe
er Questio
ons
1. Disscuss the difference betwe
een a mortgage and a car loan.
2. There are two mortgages
m
reggistered again
nst the title oof Barbara’s p
property. Onee was
reggistered on May
M 20, 2006 and the other was registe red on March
h 17, 2005. W
Which is the 1st
nd
mo
ortgage and which
w
is the 2 ?
3. Jon
nathan owns a house valued at $250,00
00 with a cur rent 1st mortggage that hass a balance off
$190,000. Jonaathan has cred
dit card debtss of $12,500 tthat he wishees to consolid
date by
e. Would Jonaathan requiree a conventio
onal or high raatio
inccreasing his first mortgage
mo
ortgage?
4. De
escribe the pu
urpose of the Charge/Morttgage.
ontract.
5. Naame and desccribe three of the main borrrower obligaations under a mortgage co
6. Every mortgage
e comes with a set of Stand
dard Charge TTerms. Discu
uss the purpose of this
do
ocument and its importancce in the morttgage transacction.
Chapter 3: Advvanced Mortggage Conceptts
5
59
Chaptter 3: Advanc
A
ced Moortgagee Conceepts
Lea
arning Outccomes
Succcessful undersstanding of th
he concepts presented
p
in tthis chapter w
will enable the learner to:
 Liist and definee the financial components of a mortgaage
 Describe
D
the tyypes of mortggage repayment plans andd explain the benefits and risks of each
 Describe the different
d
prepayment optio
ons available to borrowerss and explain the benefits
an
nd risks of each
 Describe
D
the cash
c
back option available to borrowerss and explain its benefits aand risks
 Describe
D
a com
mbination or bundled morrtgage and exxplain its beneefits and riskss
 Discuss
D
the po
ortability optio
on and describe its benefitts and risks
 Discuss
D
the asssumability op
ption and describe its beneefits and riskss
3.1 Financia
al Compo
onents off a Mortga
age
The basic premise behind everyy mortgage is the borroweer’s promise tto repay the aamount
borro
owed. There are
a several co
omponents to
o a mortgage,, as is illustrated in the Staandard Chargge
Termss, but at its co
ore a mortgagge payment iss made up off the followingg financial co
omponents:
The Face Va
alue
The faace value or the
t face amou
unt of a loan is the total am
mount of thee mortgage th
hat is
registtered against the property. This is the amount
a
that tthe borrowerr has contractted to repay.
It is im
mportant to note
n
that this amount is no
ot necessarilyy what the bo
orrower receivves, but it is
the am
mount for wh
hich the borro
ower is liable..
The Term
The mortgage
m
conttract will indicate the time
e that the conntract will be in force. Afteer this time
expire
es the contract must eithe
er be paid in full (referred tto as paying tthe lender a b
balloon
payment) or renew
wed with the current lende
er. These aree the only two
o options that a borrower
has.
Refinaancing with the current len
nder has the same effect aas making a b
balloon payment since the
mortggage is paid out
o by the new
w loan. In esssence, the lennder is giving itself the balloon
payment. The sam
me occurs with a switch, transfer of the mortgage fro
om one lendeer to another,,
or goiing to anothe
er lender and getting a new
w mortgage. In this case, tthe mortgagee is paid out
through a balloon payment mad
de by the new
w lender.
60
Chapter 3: Advvanced Mortggage Conceptts
The Amortiz ation
The co
ontract will sttipulate the amortization
a
period for thee mortgage. The amortizaation refers to
o
the to
otal number of
o years that it
i will take to fully repay thhe amount bo
orrowed, and
d requires a
blend
ded periodic payment
p
of bo
oth interest and
a principal. Interest Acccruing Mortgaages and
Intere
est Only Morttgages do nott have an amo
ortization perriod and are d
discussed lateer under
“Type
es of Contemp
porary Mortggage Repayme
ent Plans.”
The Interest Rate
The mortgage
m
conttract also stip
pulates the am
mount of inteerest charged to the borro
ower, includin
ng
how this
t interest iss to be calculaated. Slight variations
v
in tthe rate will leead to changes in the
payment amount as
a well as the
e amount paid
d in interest.
For exxample, a mo
ortgage with a face value of
o $200,000 a mortized oveer 25 years, w
with a 5‐year
term and a rate of 6% calculated semi‐annuaally, will resu lt in a monthly payment o
of $1,279.62.
Over the
t term of the mortgage,, the borrowe
er will repay $$76,777.20, o
of which $20,327.06 will bee
applie
ed to principaal and $56,450.14 will be applied
a
to inteerest.
If the rate were 6.1
1% instead off 6%, with all other factorss remaining th
he same, the borrower
would
d be making payments
p
of $1,291.53.
$
Over
O
the term of the mortggage, the borrrower would
repayy $77,491.80, of which $20
0,074.54 would be applied to principal aand $57,417.26 would be
applie
ed to interestt.
This .1
1% increase in the rate fro
om 6% to 6.1%
% has resulte d in a $714.660 increase in the amount
paid during
d
the firsst 5 years by the
t borrowerr, or an averaage of $142.922 per year.
The Compou
unding Frrequency of the In
nterest R
Rate
Lende
ers must indiccate the rate of interest be
eing applied i n either annu
ual or semi‐an
nnual
comp
pounding, as per
p the Intereest Act, R.S., 1985,
1
c. I‐15, ss. 6; 2001, c. 4, s. 92. Morre information
on the
e effects of co
ompounding frequencies may
m be foundd in the chaptter, Calculatin
ng a Mortgagge
Payment. The follo
owing section
n of the Intereest Act clearlyy stipulates th
hat:
When
never any prin
ncipal money or interest seecured by mo rtgage on reaal property orr hypothec on
n
immo
ovables is, by the mortgagee or hypothecc, made payabble on a sinkiing fund plan,, on any plan
underr which the pa
ayments of prrincipal moneey and interesst are blendedd or on any plan that
involvves an allowance of interesst on stipulateed repaymennts, no interesst whatever sh
hall be
charg
geable, payab
ble or recovera
able on any part
p of the priincipal moneyy advanced, u
unless the
mortg
gage or hypotthec containss a statement showing the amount of thhe principal m
money and the
rate of
o interest cha
argeable on that money, calculated yeaarly or half‐yeearly, not in a
advance.
R.S., 1985,
1
c. I‐15, s. 6; 2001, c. 4, s. 92.
Pay ment Am
mount
The co
ontract will laay out the am
mount of each
h payment duuring the term
m, based on th
he face value,,
intere
est rate, paym
ment frequency, and the am
mortization. It is of intereest to note that the term iss
not ussed in the calculation of th
he payment amount.
a
The term is only o
of interest to the date of
the co
ontract expiryy.
Chapter 3: Advvanced Mortggage Conceptts
6
61
3.2 Types of Mortgag
ge Produ
ucts
As a mortgage
m
age
ent it will be your
y
role to de
etermine thee most approp
priate producct for your
client. To do so yo
ou will need to
o fully undersstand your cliients’ needs aand circumstaances, which
is disccussed in detaail in the chap
pter on the in
nitial consultaation. To be aable to make an informed
recom
mmendation to
t your clientt requires you
u to be well veersed in all off the current products
availaable. This secction examine
es the types of
o mortgage pproducts that may be available to you
and discusses the benefits
b
and risks of each. By understaanding the beenefits and rissks you will bee
able to
t better iden
ntify which prroduct is best suited to youur client. Oncce you have a firm
underrstanding of the
t product tyypes, we will then examin e the optionss that are avaailable with
these products. It’’s comparable
e to buying a car; first youu find the mod
del that’s righ
ht for you theen
you decide on the options. We begin by listiing the most common types of mortgagge products,
follow
wed by a detaailed examination of each.
1.
2.
3.
4.
5.
6.
7.
8.
9.
The Partially Am
mortized, Blen
nded Constan
nt Payment M
Mortgage – Fixxed Rate
The Partially Am
mortized, Blen
nded Constan
nt Payment M
Mortgage – Vaariable Rate
The Partially Am
mortized, Blen
nded Variable
e Payment M ortgage – Variable Rate
The Interest On
nly Mortgage
The Home Equity Line of Cre
edit (HELOC)
The Interest Accruing Mortgage
The Reverse Mo
ortgage
The Straight Lin
ne Principal Re
eduction Morrtgage
The Graduated Payment Mo
ortgage
The Partially
y Amortiz
zed, Blen ded Consstant Payyment Mo
ortgage –
Fixe
ed Rate
This iss the most co
ommon repayyment plan in Canada todaay. This mortgage has seveeral
characteristics.
Partia
ally Amortized
The amortization refers
r
to the total
t
amount of time that it will take to
o repay the m
mortgage. Thee
2 years, although there a re several diffferent length
hs currently
most common amortization is 25
availaable. The term
m partially am
mortized indiccates that theere is a term iinvolved. If there wasn’t a
term, it would be a fully amortized mortgage
e, which is unncommon in O
Ontario todayy.
Term
This iss a period of time
t
in which
h the loan is repaid, typica lly anywhere between six months and
five years (althouggh longer term
ms are availab
ble). The morrtgage contraact is based on this term
and, at
a the end of the term, the
e contract com
mes up for reenewal. The b
borrower can
n then renew
with his
h or her current lender based
b
on the terms
t
of the rrenewal, refin
nance with th
he current
lende
er or a new lender, or switcch to a new le
ender.
Blend
ded Payment
The blended paym
ment is a comb
bination of prrincipal and innterest, allow
wing the borro
ower to pay
the acccumulated in
nterest due fo
or the payme
ent period as well as an am
mount to pay down the
principal amount of
o the loan that is outstand
ding.
62
Chapter 3: Advvanced Mortggage Conceptts
Consttant Paymentt
This means
m
that th
he payment does not change throughouut the term. For example,, given a
mortggage of $200,,000 at a rate of 6% compo
ounded semi‐‐annually, a term of 5 yearrs and an
amorttization of 25
5 years, the monthly
m
payment is $1,2799.62.
This payment
p
would remain con
nstant for the
e full 5 years, at the end off which time the
outstaanding balancce would havve to be repaid, either by rrenewal, refin
nance, switch or full
payment from the borrower’s own
o money.
The portion of inte
erest and prin
ncipal within this
t constant payment will change everry month as
the am
mount of inte
erest payable decreases. In this exampple, the amount of principaal paid in the
first payment
p
would be $291.90
0 while the in
nterest paid w
would be $9877.72. By the end of the
term, in the sixtietth payment th
he amount off principal paiid has increassed to $390.3
36 while the
unt of interestt has decreased to $889.26
6.
amou
Fixed Rate
This refers to the fact
f that the interest rate is
i fixed or doees not changee for the entire term.
Beneffits
 Security
m benefit of
o this type off mortgage re
epayment pla n centres aro
ound securityy.
The main
The borrower know
ws what the payment
p
is th
hroughout thee term of thee mortgage an
nd can budget
accordingly. This security
s
should not be ove
erlooked in teerms of imporrtance, especially for first
time home
h
buyers who may be used to renting and payinng a fixed amo
ount for sheltter every
month. Many firstt time home buyers
b
are no
ot fully awaree of the other costs associaated with
home
e ownership, the
t clarification of which is part of the duty of the m
mortgage agent.
Risks
 Pootential Lack of
o Savings.
There
e are no basicc risks attache
ed to this type
e of mortgagee repayment plan for the b
borrower
other than the factt that he or sh
he may not saave as much interest as po
ossible when compared to
o
the vaariable rate option.
The fo
ollowing figurre illustrates the
t reduction
n of the outsttanding balannce on a Blend
ded Constantt
Payment Mortgage
e.
The Partially
y Amortiz
zed, Blen ded Consstant Payyment Mo
ortgage –
Variiable Ratte
The characteristicss of this type of mortgage are the samee as the Partiaally Amortized
d, Blended
Consttant Paymentt Mortgage – Fixed Rate, except concerrning the interest rate.
While
e there are diffferent types of variable raate mortgagees, the main feature is thatt a variable
rate mortgage
m
has an interest rate that flucttuates.
This type of repaym
ment plan is designed
d
to protect
p
the le nder from miismatching fu
unds that it
has on deposit. Ass their rates paid
p on depossit products, ssuch as bank accounts and
d investmentss
fluctu
uate, so does the rate of th
he variable rate mortgage.. This allows a lender to keeep the
spread between what
w
it is payin
ng on its depo
osits to what they are receeiving on theiir mortgages
more consistent, thus protectin
ng profit marggins.
Chapter 3: Advvanced Mortggage Conceptts
his increased security to th
he lender, the
e borrower teends to receivve a lower ratte than on a
For th
fixed rate mortgagge.
Figure 10 – Outstandin
ng Balance of a Blended Consta
ant Payment Moortgage
ollowing figurre illustrates how
h principal and interestt are repaid o
on a Blended Constant
The fo
Payment Mortgage
e.
nd Principal Paid
d in a Blended Constant
C
Paymennt Mortgage
Figure 11 – Interest an
6
63
64
Chapter 3: Advanced Mortgage Concepts
At the beginning of the mortgage, the payment is typically set at the lender’s posted 3‐year rate.
Many lenders offer a capped variable rate mortgage that caps the amount of interest that can
be charged at that preset rate, which is typically included in a Schedule attached to the Standard
Charge Terms.
The rate fluctuation is normally tied to the lender’s current prime rate and can be reset monthly.
Typical variable rate mortgages carry interest rates that are lower than their fixed rate
mortgages. For example, a lender may offer its variable rate mortgage at its prime rate minus
50 basis points (a basis point is 1/100th of 1 percent; therefore there are 100 basis points in 1
percent). If its current rate is 6.5%, then its current variable rate would be 6.5% ‐ .5% = 6%.
In this type of variable rate mortgage, the payment remains the same, or constant, while the
percentage of the payment allocated to interest and principal fluctuates according to the
current interest rate. If the rate goes up, more of the payment is comprised of interest, and vice
versa. If the rate was to rise past a certain point, the borrower would not be repaying all of the
interest for the period, let alone any principal. This would result in a negative amortization; in
other words the mortgage would not be paid off during the amortization period. In fact, it
would extend beyond the contracted amortization period. For this reason lenders will have a
clause in the standard charge terms that indicates that if the amount of the loan exceeds a set
percentage the lender has the right to increase the payment amount.
There was an increase in the number of variable rate mortgages taken out from 2001 to 2005
due mainly to the fact that variable rate mortgages provided a lower interest rate than fixed
rate mortgages. In 2006, it was estimated that 22 per cent of new or renewed mortgages were
comprised of variable rate mortgages compared to 36 per cent in 2005, due mainly to the
decrease in the difference between fixed and variable rates. However, it was back up to 48% in
the third quarter of 2008 as that spread increased. Once again that trend reversed itself as the
economy faltered. According to CMHC’s Canadian Housing Observer report, only 21% of insured
mortgages funded in 2010 were variable rate mortgages.
Benefits
 Savings
For borrowers who are not “risk sensitive” (fluctuations in rates do not cause them stress) this
type of repayment plan can save them money. In most cases, the rate for variable rate
mortgages has been lower than those of fixed rate mortgages.
 Ability to Switch to a Fixed Rate
Most variable rate mortgages offer the flexibility of allowing the borrower to switch to a fixed
rate product through the same lender without penalty. This provides the borrower with the
comfort of being able to switch if the variable rate begins to rise.
Risks
 Volatility
This type of mortgage, while being able to save the borrower money, can also have the reverse
affect if the lender increases its rates. The borrower must be financially sophisticated enough to
keep a close watch on rates and make the decision to switch to a fixed rate product if and when
the situation warrants it.
Chapter 3: Advvanced Mortggage Conceptts
6
65
 Neegative Amorttization
If the interest rate rises, the possibility existss that the fixeed payment w
will not be suffficient to
coverr the interest due for the payment
p
perio
od. This will ccause the borrrower to pottentially enteer
a negative amortizzation scenariio, which can force him orr her into incrreasing his or her mortgage
mortgage to a positive
payment or payingg a lump sum of money to the lender too return the m
amorttization.
 Payment Increaase
entioned under Negative Amortization,
A
, if the borrow
wer falls into that categoryy and must
As me
increaase his or herr payment, the question th
hen becomes can the borro
ower afford tthe higher
payment?
The fo
ollowing is an
n example of a variable ratte clause:
This tells thee borrower w
when this
clause is app
plicable
GNATED AMO
OUNT (applicaable to Variab
ble Rate Morttgages only)
DESIG
(a) “D
Designated am
mount” shall mean
m
the lessser of:
(i) the designate
ed amount sp
pecified in the
e schedule, o r
(ii)) if you have a conventionaal mortgage, 80% of the faair market vallue of your
pro
operty as estaablished by an up‐to‐date appraisal repport of your p
property whicch
eitther we obtain at your exp
pense, from a real estate a ppraiser acceeptable to us,, or
wh
hich you provvide to us, sign
ned by a real estate appraaiser first approved in writing
by us, or
(iii) if you have a CMHC insured mortgage
e, the lesser oof:
A. 80% (95
5% if insured under the Firrst Time Hom
me Buyer Proggram) of the lesser
of the appraised value or
o purchase price
p
of your property, plu
us the CMHC
insurance premium, or
B. 110% of
o the original balance of th
he Mortgage,, including thee CMHC insurance
premium.
This section
n tells the borrrower what is expected
to happen if
i this clause aapplies
(b) If the
t loan amo
ount exceeds the designate
ed amount, yyou shall be reequired to takke
one of
o the followin
ng actions:
A. increase the
e amount of each
e
regular payment
p
undeer the Mortgaage, in order to
am
mortize the Mortgage overr the remainin
ng amortizatioon period;
um
B. reduce the total amount of the loan amount then oowing by makking a lump su
payment sufficient to reduce
e such total amount to a ppoint below th
he designated
d
am
mount; and
C. convert the Mortgage to a fixed rate mortgage
m
havving equal mo
onthly
payments.
If you are unable to take any off the actions set
s out in (i), ((ii) or (iii) abo
ove, then, at o
our option,
the Mortgage
M
will immediately become due and payable..
66
Chapter 3: Advvanced Mortggage Conceptts
Su
uccess Tip – Determiining a borrrower’s n
needs
Many borrowers do not kno
ow what to lo
ook for in theiir mortgage. Do they need
d a fixed or
vaariable rate mortgage?
m
The answer isn’’t always stra ightforward. It is necessary to
de
etermine the borrower’s needs
n
and asssess his or herr risk tolerancce to determiine the right
type of mortgage for him orr her. More in
nformation caan be found iin the chapteer, The Initial
Co
onsultation. This
T will help ensure that you
y get your client the right product, and thereby
su
uccessfully clo
ose the transaaction!
The Partially
y Amortiz
zed, Blen ded Vari able Payyment Mo
ortgage –
Variiable Ratte
This type of variable rate mortggage is identiccal to the Varriable Rate, Fiixed Paymentt mortgage
excep
pt that the payment will ch
hange each tim
me that the l ender’s prime rate, which is used to
determine the variiable rate, changes. This iss designed too minimize thee risk to the lender of the
borro
ower experien
ncing a negatiive amortization.
Beneffits
 Savvings
This type of mortgage tends to offer the borrrower the greeatest savinggs possible sin
nce the rate o
of
est charged te
ends to be the
e lowest amo
ong mortgagee products offfered in the m
market today..
intere
In add
dition if the raate drops, the
e payment wiill drop, improoving the borrrower’s cash
h flow.
 Maaintain Amorttization
Regarrdless of the change
c
in the
e interest rate
e the paymennt will fluctuatte to match that change,
thereby keeping th
he amortizatio
on the same. This is impoortant if the borrower is insistent that
m
be paid
p off in a sp
pecific numbe
er of years wiithout being aaffected by th
he rate.
the mortgage
Risks
 Voolatility
This type of mortgage, while be
eing able to saave the borroower money, can also havee the reverse
effectt if rates rise. The borrowe
er must be fin
nancially sophhisticated eno
ough to keep
p a close watcch
on rattes and make
e the decision
n to switch to a fixed rate pproduct if and
d when the situation
warraants it.
 Payment Fluctuuation
h time the len
nder’s interesst rate fluctuaates, the borrower must
Since the paymentt is reset each
ensurre that he or she
s has sufficcient funds to reflect any inncreases in th
he payment. This results in
cash flow
f
uncertainty for the bo
orrower.
The Interest Only Mo
ortgage
The in
nterest only mortgage
m
is sttraightforwarrd. The borroower takes ou
ut a lump sum
m of money
and only
o repays the interest due each payment period. TThis means th
hat, througho
out the life of
the mortgage,
m
the borrower will always owe
e the same am
mount of prin
ncipal. For example, given a
mortggage of $200,,000 with an interest
i
rate of
o 6% compoounded semi‐aannually, nott in advance,
over a 1‐year term
m, the borrower would be making
m
montthly repaymen
nts of $987.73. An interesst
only mortgage
m
doe
es not have an amortizatio
on since theree is no repaym
ment of principal.
Chapter 3: Advvanced Mortggage Conceptts
6
67
Beneffits
 Inccreased Cash Flow
From a borrower’ss perspective,, the fact thatt no principal is being inclu
uded in the m
mortgage
payment typically results in a lo
ower payment than would otherwise bee the case in an amortized
d
mortggage. This maay be beneficcial to a borro
ower who knoows that he o
or she will be receiving an
increaase in income
e in the near future.
f
Once that increasee is realized, tthe borrowerr can switch to
a blen
nded paymen
nt mortgage.
Fo
or your infformation…
… Interest Rates
Mortgage interrest rates on Partially Amo
ortized, Blendded Constant Payment Mo
ortgages,
eitther fixed or variable rate,, typically follow this hieraarchy:
Hiighest Rate
1 Year Open
n Mortgage
6 Month Op
pen Mortgage
e
10 Year Clossed Mortgage
e, Zero Downn Payment Mo
ortgages
7 Year Close
ed Mortgage,, Cash Back M
Mortgages (deepending on %
%)
6 Year Close
ed Mortgage
5 Year Close
ed Mortgage
4 Year Close
ed Mortgage
3 Year Close
ed Mortgage
2 Year Close
ed Mortgage
1 Year Close
ed Mortgage
Variable Ratte Mortgage
Lo
owest Rate
 Inccreased Purchhasing Powerr
If, how
wever, the bo
orrower wishes to keep the payment att the same am
mount as he o
or she would
have been paying in a blended payment mortgage, he or she will be able to borrow
w more moneey
than otherwise
o
possible. See th
he following figure
f
for an iillustrated example.
 Invvestments
If thiss type of repayment plan iss used to purcchase an inveestment prop
perty, for exam
mple, the
investtor can deducct the interest paid as a co
ost of investinng. Under this scenario, th
he investor is
able to
t purchase a property at a higher value
e than using a blended payyment repayment plan
while using the inccome from the property to
o make the m
mortgage paym
ments.
Risks
 Noo Principal Reduction
The faact that there
e is no princip
pal reduction can put both the lender and the borrow
wer at risk.
The riisk to the lend
der is that, if the borrowerr defaults andd the propertty does not ap
ppreciate,
their principal mayy be at risk, de
epending on the loan to v alue.
For th
he borrower, if he or she uses
u
this repayyment plan too increase hiss or her purch
hasing powerr
and property
p
price
es decrease, he
h or she can end up owin g more than the property is worth. The
intere
est only mortggage is one of the factors that
t
contribuuted to the mortgage crisiss in the United
Statess in 2007.
68
Chapter 3: Advvanced Mortggage Conceptts
Figure 12 – Amounts Available
A
to Borrrow – Blended Payment
P
vs. Inteerest Only
The Home E quity Lin e of Cred
dit (HELO
OC)
A HELLOC is a Line of
o Credit secu
ured by real property.
p
A Liine of Credit ((LOC) is an am
mount of
creditt made available to a borro
ower but not advanced onn closing. For example, if a borrower haad
a $200,000 LOC he
e or she would
d be able to use
u these fun ds wheneverr he or she wiished. As of
mber, 2014 the Office of the Superintendent of Finaancial Instituttions (OSFI) reequires
Novem
federally‐regulated
d financial insstitutions to limit the loan to value of in
nterest only H
HELOCs to
65%.1
Howe
ever, payments are only made on the outstanding baalance of the LOC. A typiccal HELOC hass
monthly paymentss of interest only
o based on
n a variable raate. The borrrower can maake paymentss
as small as the inte
erest only or as
a large as he
e or she wishees.
Beneffits
 Fleexibility
This plan
p allows the borrower to borrow fun
nds as necessaary and makee repaymentss that fit his o
or
her bu
udget.
Risks
 Voolatility
A HELLOC contains the same rate
e volatility ass a variable raate mortgage..
1
http:://www.osfi‐bssif.gc.ca/eng/fii‐if/rg‐ro/gdn‐o
ort/gl‐ld/pagess/b20.aspx
Chapter 3: Advvanced Mortggage Conceptts
6
69
The Interest Accruing
g Mortgag
ge
Intere
est accruing mortgages
m
are
e loans that have
h
no repayyment of prin
ncipal or interrest during
their life. At the end of the mortgage, the en
ntire principaal amount is rrepayable, inccluding all of
the acccrued interest. Standard forms of Inte
erest Accruingg Mortgages tend to be fo
or short
period
ds of time due to the lender’s risk. As the
t following figure illustraates, this type of mortgage
accum
mulates intere
est at a very fast
f pace, which is why lennder’s don’t liike these repayment planss
to be outstanding for much longer than a ye
ear.
Beneffits
 Cash Flow
ment plan therre is absolute
ely no impact on a borroweer’s cash flow
w. In other
Under this repaym
wordss, they can sim
mply borrow the funds and forget abouut the mortgaage, until the term expiress,
of cou
urse.
Risks
 Inccreasing Debtt
Under this repaym
ment plan the amount borrrowed increasses over timee. The followiing chart
illustrrates that incrrease. Based on this exam
mple, the borrrower will ow
we just under $270,000 at
the en
nd of 5 years,, an increase of nearly $70
0,000 in debt..
 Reeduced Equityy
Since the debt incrreases it eats into the equiity that the p roperty has. The borroweer must hope
that the property appreciates
a
in
n value over the
t same per iod to offset this loss.
Figure 13 – Outstandin
ng Balance of an
n Interest Accruing Mortgage
70
Chapter 3: Advvanced Mortggage Conceptts
The Reverse
e Mortgag
ge
A Revverse Mortgagge is a type off interest accruing mortgaage that is typ
pically provideed to seniors.
The major
m
provider of Reverse Mortgages in Ontario todaay is the Canaadian Home Income Plan
(CHIP). This organization provid
des homeown
ners who are 55 years of aage or older u
up to 50% of
the prroperty value
e in a lump sum of cash, less any currennt debt secureed by the pro
operty. This
amou
unt accumulattes interest until the death
h of the homeeowner (the ssurviving hom
meowner, in
the caase of spouse
es) or until the
e property is sold, at whichh time the mo
ortgage is due and
payab
ble.
Accorrding to CHIP,, this tax free type of morttgage is suitabble for seniorrs looking to eenhance theirr
lifestyyle, renovate their home or
o pay off their debts withoout having to
o use their savvings. As of
Novem
mber, 2013, the
t current raate for a CHIP
P reverse morrtgage rangess from 3.99 to
o 5.79%.
At one point, Reve
erse Mortgage
es were referrred to as RAM
MS or Reverse Annuity Mo
ortgages.
These
e mortgage pllans would op
perate the same as the CH
HIP Reverse M
Mortgage but,, instead of
provid
ding the borrower with a lump sum of cash,
c
the pro ceeds would be used to purchase an
annuiity that would
d pay the borrower a monthly income. Proceeds fro
om a CHIP Reverse
Mortggage can still be used to acccomplish this, but the terrm RAM is no
ow no longer aas relevant ass
it oncce was.
Beneffits
 Cash Flow
he Reverse M
Mortgage has no impact on
n the
Similaar to the Interrest Accruing Mortgage, th
borro
ower’s cash flo
ow.
 Reepayment
Since the Reverse Mortgage is not
n due (unde
er the CHIP) pprogram, until death of the remaining
home
eowner or sale of the prop
perty, the borrower never has to repay the debt in his or her
lifetim
me.
Risks
 Reeduced Equityy
This mortgage
m
mayy reduce in paart or in whole the amounnt of equity reemaining to b
be passed into
o
the esstate. In addition, the potential of redu
uced equity m
may be an issu
ue if the hom
meowner
decides to sell the property durring his or herr lifetime.
The Straightt Line Pri ncipal Re
eduction Mortgag e
A Straaight Line Prin
ncipal Reducttion Mortgage
e is a type of repayment p
plan that allow
ws the
borro
ower to pay offf a set amount of principaal each paymeent along witth the accrued interest
(interrest that has accumulated)
a
) for that period. This is noot a common
n form of morrtgage in
Ontarrio or Canada, but is more prevalent in the United Sttates.
This type of loan may
m be benefiicial to the maanufacturing industry wheen dealing in depreciating
assetss. For examp
ple, if an autom
mobile rental company puurchases a fleeet of automo
obiles it can b
be
said that their expenses would be less to maaintain those vehicles at th
he outset wheen they are
new. Over time, itt will become more expenssive to maint ain the fleet d
due to higherr maintenancce
costs.. Under this scenario,
s
the company maay wish to havve its loan payyments decreease over tim
me
to maatch the incre
ease in its costts.
Chapter 3: Advvanced Mortggage Conceptts
7
71
Beneffits
 Cash Flow
ents occur at the outset off the mortgagge. This can b
be beneficial tto a business
The highest payme
if it be
elieves its cassh flow will de
ecrease over time and it h as the cash fllow to comfo
ortably make
the in
nitial paymentts.
Risks
 Higgh Initial Paym
ment Size
The siize of the payyment is large
est at the outset. This resuults in limited
d circumstancces where thiss
beneficial
to
type of
o repaymentt plan can be
the borrowe r.
The Graduatted Paym
ment Morttgage
A Graduated Paym
ment Mortgagge is a type off loan that hass lower paym
ments at the o
outset that wiill
e. For the first several payments, the am
mount paid iss not sufficien
nt to pay the
increaase over time
full am
mount of inte
erest accumullated during the
t period, m
meaning that tthe outstandiing balance o
of
the mortgage
m
is acctually increassing. This trend will continnue until the payment incrreases to such
h
a poin
nt that it payss the full amo
ount of the intterest for thee period plus ssome principal. This, like
the Sttraight Line Principal Redu
uction Mortgaage, is not a c ommon form
m of mortgagee in Ontario o
or
Canad
da.
The major
m
risk to a lender unde
er this repaym
ment plan is thhat the borro
ower’s cash flo
ow will not be
able to
t afford the increase
i
in paayments overr time, and/o r that the pro
operty value w
will not
appre
eciate. This co
ombination can
c lead to a property
p
withh a higher loan balance thaan its value
where
e the borrower cannot afford the paym
ments.
A similar situation to this occurred in the Un
nited States inn 2007, which
h saw tens of thousands off
home
becoming unaffordable
eowners walkk away from their propertie
es due to theeir payments b
along with the com
mbination of loan
l
to valuess in excess off 100 per centt. Although the situation iin
w not due to
t Graduated
d Payment Moortgages, the effect was th
he same.
the United States was
This type of repaym
ment plan wo
ould be benefficial for someeone who exp
pects their income to
increaase over time
e, such as in a newly forme
ed business. H
However, thee risks to the lender make
this tyype of plan virtually unheaard of, exceptt in texts and theory.
Beneffits
 Cash Flow
h flow for a
The payment in this repaymentt plan is at its lowest initiallly, resulting iin better cash
borro
ower who beliieves their cash flow will in
ncrease over time.
Risks
 Priincipal Risk
This type of repaym
ment plan has risk associated with the principal, since it acts as a type of
intere
est accruing lo
oan at the outset due to th
he payments being insufficcient to pay tthe full
amou
unt of principaal and interesst due in each
h period.
72
Chapter 3: Advvanced Mortggage Conceptts
3.3 Mortgag
ge Option
ns
In tod
day’s market, there are maany features that
t
lenders ooffer borroweers to suit theeir financing
needss. Lenders, ovver the past several
s
decad
des, have becoome more seensitive to thee changing
marke
et and have produced
p
morrtgage features that betteer reflect the b
borrower’s go
oals and
attitudes towards mortgage financing.
These
e features can
n be broken down
d
into categories:
1. Pre
epayment Op
ptions
a)) Fully Open
n
b) Partially Open
c)) Closed
2. Re
epayment Opttions
a)) Periodic Paayment Increase
b) Accelerate
ed Mortgage Payment
m Payments
c)) Lump Sum
d) Extended Amortization
A
3. Cash Back Optio
ons
4. Bu
undled Option
ns
5. Po
ortability Options
6. Assumability Op
ptions
1. Prepayme
P
ent Optio ns
Lende
ers are offerin
ng borrowers more option
ns than ever bbefore to prep
pay their morrtgages, that
is, to pay the morttgage off soon
ner than was agreed to in the original m
mortgage con
ntract. The
lende
er begins with
h the standard
d repayment plans that weere discussed
d earlier. The borrower
then has
h options to
o enhance the repayment plan by deteermining the ttype of prepaayment
features they would like as partt of the plan. In this sectioon we’ll be discussing the sseveral
b
havve when it co
omes to prepaaying and rep
paying their m
mortgage,
different options borrowers
beginning with the
e fully open prepayment option.
a) Fully
F
Ope n
A fullyy open mortggage allows th
he borrower to
t repay the m
mortgage, in whole or in p
part, at any
time without
w
penaalty or notice. This option is particularlyy beneficial to
o those borro
owers who
know that they maay be coming into a cash windfall,
w
such as from an in
nheritance orr property
sale.
Beneffits
 Fleexibility
The mortgage
m
can be repaid at any time, pro
oviding the boorrower with the flexibilityy to pay the
mortggage off from
m his or her ow
wn proceeds or
o refinance tthe mortgagee with anotheer lender.
 Noo penalties
A fullyy open mortggage has no prepayment penalties, meaaning that thee borrower caan prepay thee
mortggage without being charge
ed the 3 montth interest peenalty or the interest rate differential
(discu
ussed later in this chapter). This can savve the borrow
wer from hun
ndreds to tenss of thousand
ds
of dolllars in penaltties.
Chapter 3: Advvanced Mortggage Conceptts
7
73
Risks
 Higgher Rate
Most fully open mortgages are at a higher in
nterest rate. TThis is primarrily due to thee fact that the
lende
er has no guarrantee in how
w long the borrrower will keeep the fundss. This meanss that the
lende
er has no certaainty about the overall ratte of return oon the mortgaage. Since a b
borrower
would
d usually onlyy take this opttion if he or she planned too repay the m
mortgage early, the lenderr
typicaally charges a premium intterest rate forr that right.
b) Partially
P
Open
O
A parttially open mortgage allow
ws the borrow
wer to repay tthe mortgagee in whole witth a penalty o
of
eitherr 3 months’ worth
w
of interest or the interest rate diffferential (thee difference b
between the
mortggage’s rate an
nd lender’s cu
urrent mortgaage rate).
Beneffits
 Fleexibility
The mortgage
m
can be repaid at any time, pro
oviding the boorrower with the flexibilityy to pay the
mortggage off from
m his or her ow
wn proceeds or
o refinance tthe mortgagee with anotheer lender.
Risks
 Higgher Rate
Although this optio
on doesn’t caarry the same rate premium
m as the Fullyy Open featurre, it can
come with a higher rate than fo
ound in a Clossed mortgagee.
 Penalties
t flexibility to prepay the mortgage aat any time, th
he penalty to
o fully prepay
Although it offers the
m
mayy outweigh the benefits of refinancing w
with a different lender, because the cosst
the mortgage
of the
e penalty mayy be more thaan the amoun
nt saved by reefinancing at a lower rate w
with anotherr
lende
er. These pote
ential penalties are discussed next.
Calculating thee Prepaym
ment Penallty
The actual prepaym
ment penaltyy when prepayying the entirre amount off the principall during the
term is based on either 3 months’ worth of interest
i
or th e interest ratte differential, whichever iis
higheer. For the detailed equatio
ons used to calculate
c
thesse penalties p
please refer to
o the chapterr,
“Calcu
ulating a Morrtgage Payme
ent.”
c) Closed
C
Mo
ortgage Prepayme
P
ent Optio
on
This type of prepayyment featurre actually only applies to tthe sale of the property. U
Under all
other circumstance
es, the borrow
wer has no right to prepayy the entire p
principal owed
d, although
there are typically other repaym
ment options such as increeasing his or h
her periodic p
payment or
makin
ng lump sum payments. However,
H
the main charactteristic of thiss feature is th
hat it does not
allow for full prepaayment at anyy time duringg the term of the mortgagee except by saale of the
prope
erty. This must normally be
b considered
d an arm’s lenngth sale, as w
well, meaningg that a
borro
ower couldn’t “sell” the pro
operty to a faamily membe r simply to prrepay the mo
ortgage.
Although this type of mortgage feature is no
ot the norm, sseveral lenders do offer it.. It is
imporrtant to ensure that the lender’s prepayyment optionns are undersstood before deciding on a
mortggage for the client.
c
74
Chapter 3: Advvanced Mortggage Conceptts
d
a closeed mortgage as one that ccan only be
For exxample, Home Trust has a clause that defines
repaid
d on a “bona fide sale”. It reads, “You may
m prepay tthe initial loan
n or any otheer fixed loan o
or
renew
wal of such loan only upon
n the closing of
o a bona fidee arm’s length
h sale of yourr property in
the op
pen market and
a payment of the prepayyment chargee set out belo
ow in section 5.3. If the
initial loan or the fixed
f
loan or the
t renewal is for a term oof more than three (3) yeaars, you may
also at
a any time affter the third year of the te
erm, prepay yyour mortgagge in full but o
only with
payment of the pre
epayment charge set out below
b
in secttion 5.4.”
Contrrast this with a clause foun
nd in CIBC’s Sttandard Charrge Terms desscribing repayyment of its
closed
d mortgage. It reads, “If you have a fixe
ed rate closedd mortgage o
or a 6‐month convertible
closed
d mortgage, you
y may prep
pay some or all
a of the outsstanding princcipal amount of your
mortggage before maturity.”
m
ment before
Both lenders refer to their morttgages as clossed, but whilee CIBC offers full prepaym
maturity Home Tru
ust does not. Once again, it is very impportant that the lender’s teerminology iss
fully understood.
u
Beneffits
 Rate
p
feature
f
provid
des the lendeer with significant security regarding
Since this type of prepayment
their mortgage portfolio, they are
a often incliined to providde their loweest rates on th
heir Closed
mortggages. If the borrower is fairly certain that
t
they wonn’t need to reefinance theirr mortgage orr
prepaay it in full during the term
m then this typ
pe of feature can be financcially beneficial due to thee
lowerr rate.
Risks
 Lacck of Flexibilitty
As the
e borrower is “locked in” on
o this mortgage, he or sh e has no flexibility to prep
pay the entiree
mortggage amount or refinance with anotherr lender. Thiss can limit hiss or her options if rates
decre
ease or if he or
o she wishes to increase his
h or her morrtgage amoun
nt.
Su
uccess Tip – Defining
g a “Closed
d Mortgag
ge”
Th
he term “Clossed Mortgage
e” is often use
ed interchanggeably with th
he term “Fixed Rate
Mortgage.” Altthough this iss an incorrectt usage of thee terms, it is im
mportant thaat you, as a
nt, understand
d what each lender
l
meanss by its termin
nology.
mortgage agen
Fo
or example, iff a lender calls its loan a “cclosed mortgaage” it is impeerative that yyou read its
gu
uidelines to determine whether it mean
ns a closed m ortgage, as w
was described
d above, or
whether it meaans a partiallyy open mortgage. There iss no universally accepted p
phraseology
that must be fo
ollowed by lenders, so to provide
p
your cclient with th
he best advicee, it is up to
yo
ou to understand the lende
er’s products!
2. Repaymen
R
nt Option
ns
While
e prepaymentt options focu
us on the ability of the borrrower to make a lump sum
m payment
and fu
ully prepay th
he mortgage, repayment options
o
focus on the abilityy to change h
how they
repayy the mortgagge during its term.
Chapter 3: Advvanced Mortggage Conceptts
7
75
a) Periodic
P
Payment
P
Increase
e
This option
o
allows the borrower to increase his or her payyment, in maany cases up tto 100% of th
he
origin
nal payment amount,
a
durin
ng the term of
o the mortga ge. This can be an extrem
mely importan
nt
measure when it comes
c
to paying a mortgagge off more q uickly and saving money in the processs.
Anoth
her nice featu
ure of this opttion is that most lenders w
will allow the borrower to lower his or
her paayment to an
n amount no less than the original paym
ment amount if he or she ffinds that the
increaased payment can no longger be afforde
ed.
The exact timing of the paymen
nt increase an
nd the exact aamount of thee increase will determine
the prrecise savingss but, as the following
f
chart illustrates, those savinggs can be subsstantial, even
n
with as
a low as a 25
5% increase in
n the paymen
nt. The follow
wing chart usees the examp
ple of a
$200,000 mortgage with an inte
erest rate of 6%
6 compoun ded semi‐ann
nually, not in advance, witth
monthly paymentss. The originaal amortizatio
on period is 2 5 years. The increase in th
he monthly
payment is assume
ed to take plaace from the first
f
paymentt forward.
Increaasing the payment amount at other tim
mes during thee life cycle off the mortgagge will have
similaar, but less dramatic effectts, dependingg on when thee payment inccrease occurss.
Figure 14 – Effects of Increasing
I
Morttgage Paymentss over time
Beneffits
 Savvings
As is illustrated by the above ch
hart, the effeccts of an increeased paymeent will save substantial
sums over time.
Risks
 Cash Flow
76
Chapter 3: Advvanced Mortggage Conceptts
ncreased, there is a decreaase in the borrrower’s cash flow. This
Since the paymentt amount is in
must be examined
d before incre
easing the payyment amounnt to ensure tthat the borro
ower will not
be ne
egatively impaacted.
b) Accelerat
A
ed Mortg age Paym
ment
An accelerated mo
ortgage paym
ment option is simply an opption that pro
ovides for an iincreased
dic mortgage payment. Th
his can be com
mpared to th e Periodic Paayment Increaase; howeverr
period
this option allows the borrowerr to increase his or her moortgage payment before th
he first
payment begins, whereas
w
the Periodic
P
Paym
ment Increase is required to
o be requesteed once the
mortggage has been
n advanced.
Typicaally, mortgage origination software (software used bby the mortgage agent thaat performs
comm
mon calculatio
ons and allow
ws for the elecctronic submiission of an a pplication) w
will allow the
origin
nator to reque
est an accelerrated mortgage payment ffor the borrow
wer, and in so
o doing does
not haave to do a manual
m
calculaation to deterrmine the am
mount of the aaccelerated p
payment. Thiss,
howe
ever, has led to
t some misco
onceptions ab
bout the acceelerated paym
ment.
First, accelerating a payment haas virtually no
othing to do w
with the paym
ment frequen
ncy. You may
have heard the staatement that “by changingg the payment frequency a borrower caan save tens o
of
thoussands of dollaars over the liffe of their mo
ortgage.” Thiis statement is patently false.
Changging the paym
ment frequency is not whaat acceleratess a mortgage; increasing th
he mortgage
payment is. The fo
ollowing exam
mple illustrate
es this point.
Barbaara requires fiinancing in th
he amount of $200,000. S he is able to o
obtain a morttgage in this
amou
unt amortized
d over 25 yearrs and at a ratte of 6% com
mpounded sem
mi‐annually, n
not in
advan
nce.
We be
egin our analysis by calculating her regular monthly payment und
der this scenaario. You will
learn how to calculate a payme
ent using a fin
nancial calculaator later in tthe course, but in the
ntime I can tell you that he
er monthly payment workss out to be:
mean
$1,279.62
$
Based
d on this scenario it will takke Barbara 30
00 payments to retire this mortgage. (A
Actually
299.9
9964 paymentts, but this wiill be explaine
ed in detail inn the section o
on calculatingg a mortgage
payment). By multtiplying the number
n
of payyments by th e payment am
mount, the to
otal amount
that Barbara
B
will be
b repaying ovver the life off this mortgagge in monthlyy payments caan be
calcullated.
Total Amount
A
Repaaid by Barbaraa in monthly payments = $$1,279.62 x 300
= $383,886
It is now necessaryy to calculate what Barbara would be ppaying if she w
was making w
weekly
payments instead of monthly payments. In this scenario the weekly p
payment workks out to be:
$294.74
Chapter 3: Advanced Mortgage Concepts
77
Based on this scenario it will take Barbara 1,300 payments to repay this mortgage. By
multiplying the number of payments by the payment amount, the total amount that Barbara will
be repaying over the life of this mortgage in weekly payments can be calculated.
Total Amount Repaid by Barbara in weekly payments = $294.74 x 1,300
= $383,162
Now we can calculate the savings by taking what she would pay in monthly payments, $383,886,
and subtract from it what she would pay in weekly payments, $383,162
Barbara’s savings =$383,886 ‐ $383,162
= $724
That is a savings of $724, over 25 years! That is hardly the tens of thousands of dollars’ worth of
savings that we are led to believe exists simply by changing the payment frequency.
In actuality, the only way to pay a mortgage off faster is to increase the amount of the periodic
payment. With that said, let’s look at how to accelerate this mortgage. As mentioned, the
typical software will calculate the accelerated mortgage payment for the user. The equation
that is used is simple and straightforward. The regular monthly payment is divided by the
frequency of the accelerated payment.
For example, if an accelerated weekly payment is desired, the software would calculate the
payment using the following formula.
Monthly Payment / 4 weeks = accelerated payment
It is important to note that there are not 4 weeks in a month, except in February. If there were
only 4 weeks in a month there would only be 48 weeks in a year (4 weeks x 12 months). This is
why the payment ends up being accelerated. To calculate the accelerated weekly payment we
must divide the monthly payment by 4.
$1,279.62 / 4 = $319.91
You can already see that this weekly payment is larger than the weekly payment that was
calculated earlier.
By making weekly payments of $319.91, it will take a total of 1,092.34 payments to repay this
mortgage. (You will learn how to calculate this number later in the course).
The total amount paid under this scenario is calculated by multiplying the weekly payment by
the number of payments it will take to repay the mortgage.
$319.91 x 1,092.34 = $349,450.49
Now let’s compare this to the non‐accelerated weekly payment. To do so we can subtract the
amount repaid by accelerated payments from the amount repaid by non‐accelerated payments.
$383,162 ‐ $349,450.49 = $33,711.51
78
Chapter 3: Advanced Mortgage Concepts
That is a significant savings. In actuality, the effect of increasing the weekly payment under this
scenario is equivalent to making one extra monthly payment per year. In each case of
accelerating a mortgage payment, whether it is weekly or bi‐weekly, the net effect is that the
borrower is making what equates to an additional monthly payment annually.
As a matter of fact, you can accelerate a monthly payment as well. Let’s look at how this would
be accomplished. As mentioned, the effect of acceleration is simply an additional monthly
payment per year. Therefore, if thirteen monthly payments were spread over twelve months,
the result would be an accelerated monthly payment. We begin by multiplying 13 months times
the regular monthly payment. We then take that amount and divide it by 12 months.
13 x $1,279.62 = $16,635.06 (amount paid per year)
$16,635.06 / 12 = $1,386.26
Therefore, the accelerated monthly payment would be $1,386.26. It can now be calculated that,
by making accelerated monthly payments it will take 253.03 months to repay this mortgage.
Under this scenario the total paid is:
$1,386.26 x 253.03 = $350,765.37
Compared to the non‐accelerated monthly payment this equates to a savings of:
$383,886 ‐ $350,765.37 = $33,120.63
That is also a significant savings!
You may hear some say that the majority of the savings occur due to the fact that under a
weekly scenario, more periodic payments are being applied to the principal than under a
monthly repayment plan, but that is simply not the case. There is no magic of compounding
interest saving the borrower tens of thousands of dollars; it is simply that they are making larger
payments.
Looking at this example, the effects of compounding on this transaction are minimal.
Accelerated Weekly Savings – Accelerated Monthly Savings = Total Savings
$33,711.51 ‐ $33,120.63 = $590.88
This $590.88 represents the total savings over the entire life of the mortgage that the change in
payment frequency has from monthly to weekly.
To summarize, accelerating a mortgage payment is achieved by increasing the amount of the
mortgage payment, not by changing the payment frequency.
Benefits
 Savings
As discussed the effects of an accelerated payment are clear: tens of thousands of dollars in
savings over time.
Chapter 3: Advvanced Mortggage Conceptts
7
79
Su
uccess Tip – Paymen
nt frequenccy
Th
he majority off consumers believe
b
that simply
s
changiing the paymeent frequency will save
them thousand
ds of dollars over
o
the life of
o their mortggage. By know
wing that thiss is not the
caase and why, you
y can explaain this to you
ur client. Thiss is simply mo
ore proof thaat you are thee
mortgage profe
essional and that
t
you can truly advise tthem on how to save significant
am
mounts of mo
oney over the
e life of their mortgage!
m
Risks
 Cash Flow
easing the moortgage paym
ment. Since the payment
The effect of accelerating a mortgage is incre
amou
unt is increase
ed, there is a decrease in the borrower’’s cash flow. This must bee examined
before increasing the
t payment amount to en
nsure that thee borrower w
will not be neggatively
impaccted.
c) Lump
L
Su m Payme
ents
This option
o
allows the borrower to make a lu
ump sum payyment which is applied directly to the
principal amount of
o the mortgaage. This, in addition
a
to th e payment in
ncrease discussed
previo
ously, can significantly incrrease the savvings over tim
me by decreassing the amou
unt of interest
payab
ble. As is the case with periodic payment increases, the effect off making a lum
mp sum
payment will be most
m significan
nt the earlier it is made. Thhe following chart uses the same
mp sum paym
ment (10% of tthe original lo
oan amount)
example as above,, but applies a $20,000 lum
at diffferent times during
d
the loaan life cycle to illustrate thhe effects of ssuch a paymeent. The Totaal
Amou
unt Repaid inccludes the lum
mp sum paym
ment of $20,0000.
Figure 15 – Effect of Making
M
a 10% ($2
20,000) One Tim
me Lump Sum Paayment
80
Chapter 3: Advvanced Mortggage Conceptts
Analyysis
By comparing the effect
e
of makking a one‐tim
me lump sum payment witth the effect o
of an
increaased mortgagge payment, the
t best scenaario for a borrrower, if his o
or her cash flow permits,
would
d be to increaase his or her monthly payments througghout the lifee of the mortggage. If he orr
she iss unable or un
nwilling to do this, the nexxt best scenarrio would be tto make a lum
mp sum
payment directly to the principal of his or he
er mortgage aas soon as po
ossible. If the borrower
could combine the
ese scenarios,, the total savvings would bbe substantiallly increased.
d) Extended
E
Amortiza
ation
As pro
operty valuess have increassed substantially over timee in comparisson with incomes, the
marke
et has respon
nded by develloping creativve options to assist borrow
wers in keepin
ng their
mortggage payments affordable. One such option is the eextended amo
ortization.
o
allows the mortgage
e to be amorttized for a peeriod longer than 25 years. For
This option
example, in today’s market a bo
orrower migh
ht qualify for aan extended amortization
n of 30 years.
Increaasing the amo
ortization hass the effect off lowering thee mortgage p
payment or allowing the
borro
ower to borrow an increase
ed amount off funds.
ollowing exam
mple illustrate
es the effectss of extendingg an amortizaation period.
The fo
Example
Let’s use
u the same
e example thaat we used earlier in this chhapter. Our cclient is borro
owing
$200,000. This mo
ortgage has a 25‐year amo
ortization, a raate of 6% com
mpounded seemi‐annually,
not in
n advance and
d monthly payyments.
Under this scenario
o, the payme
ent would be $1,279.62. A
As discussed eearlier, this paayment would
d
resultt in the borrower repayingg a total of $383,886 over 225 years.
a
to
t 30 years, the monthly ppayment is reduced to $1,1
189.65. This
By exttending the amortization
mightt be beneficiaal to the borro
ower if he or she can’t quaalify for a mortgage paymeent of
$1,27
79.62; howeve
er it does com
me at a price.
Under this 30 yearr amortization
n scenario, th
he borrower w
would be makking 360 paym
ments of
$1,18
89.65. That means
m
that the
e borrower would
w
be repaaying:
Total Repaiid = 360 X $1,,189.65
Total Re
epaid = $428, 274
By savving $89.97 per
p month the
e borrower en
nds up repayiing an additio
onal $44,388.. While this
option may allow the
t borrowerr to borrow th
he amount off funds requirred for their p
purposes, for
example to purchaase a home, itt is necessaryy to advise theem of the add
ditional intereest that is
repayyable using this option.
To mitigate the efffect of this op
ption the borrrower can re‐‐amortize thee mortgage to
o a shorter
amou
unt once they can afford th
he increased payment.
p
The extended amo
ortization can also increase
e the amountt that the borrrower can bo
orrow.
Chapter 3: Advvanced Mortggage Conceptts
8
81
e borrower caan qualify for the mortgagee payment off $1,279.62 th
hey can applyy
For exxample, if the
this payment over 30 years with
h the result being
b
that insttead of borro
owing $200,00
00 they can
now borrow
b
$215,126, an incre
ease of $15,12
26 over its 255‐year counteerpart.
This has
h the effect of allowing the
t borrower to “purchasee more housee” for the sam
me payment. It
can be argued thatt the introducction of this repayment
r
opption, along w
with the interest only
option, has allowed property vaalues to remaain high or inccrease with litttle impact on borrowers’
abilityy to qualify fo
or these increased housingg values.
It mayy be of intere
est to learn th
hat our marke
et is not the oonly one with increased am
mortization
options. This has been
b
available in the Unite
ed States for several yearss. Many home buyers in
Japan
n resorted to using
u
100‐yeaar amortizatio
on options too be able to affford housingg at the peak
of the
e real estate bubble,
b
allow
wing the market to continu e its rise.
3. C ash Back
k Option
In thiss type of option, the borro
ower receivess an amount oof cash, on clo
osing (the tim
me that the
mortggage funds), that
t
represen
nts a percentaage of the tottal loan amou
unt. The amo
ount of the
Cash Back option can
c range from 1% to 7%, depending onn the lender aand the product.
Beneffits
 Cash on Closingg
me home buyeers, invest all of their money as a down
n
Since many home buyers, especcially first tim
e beneficial to receive funds on closingg that could b e used to purrchase
payment, it may be
appliaances, finance
e renovationss, replenish bank accountss, etc.
Risks
 Higgher Rate
Most Cash Back Op
ptions come with
w a higher rate of intereest on the mo
ortgage. Thiss is designed
o advancing additional
a
mo
onies that do not have to b
be repaid by the borrowerr.
to offfset the cost of
 Reepayment of the
t Cash Backk
If the borrower decides to refin
nance their mortgage durinng the term, tthey will be required to
repayy a portion of the amount that
t
was rece
eived under thhis option. Fo
or example, if a borrower
receivved a 5% Cash
h Back on a $200,000 morttgage with a 5 year term aand decided tto refinance
with a different len
nder on the 3rd anniversary of the term
m, the followin
ng calculation
n would be
used to
t determine
e the amount repayable to the lender.
Amou
unt Repayable
e = Number of
o full or partial months re maining in th
he term
Number of months in th e term
= 5%
5 x $200,000
0 x (60 month
h term – 36 m
months alread
dy paid) / 60
= $10
0,000 x 24 / 6 0
= $10,000 x 0.4
= $4,000
Th
herefore, the amount the borrower wo
ould be requirred to repay w
would be $4,000.
82
Chapter 3: Advvanced Mortggage Conceptts
4. C ombined or Bundlled Optio
on
For ou
ur purposes, a “Combined or Bundled Option”
O
is onee that includees a standard
d mortgage
along with another type of debtt, such as a line of credit. Scotiabank ccurrently offers this option
n
in the
e form of the STEP mortgagge. If, for exaample, a borrrower were to
o take out a $
$200,000
mortggage he or she could have that split into
o both a stan dard mortgagge and a line of credit. If
the mortgage
m
amo
ount was for $199,999
$
and
d the line of crredit began aat $1, then evvery payment,,
as the
e principal on the mortgagge was reduce
ed, would inc rease the am
mount available under the
line of credit. In esssence, the amount that the property i s encumbereed by (the amount of debt
that iss registered on
o title) remains at $200,0
000, but the ppercentage made up of thee mortgage
and line of credit changes
c
over time.
The fo
ollowing charrt provides an
n example of a $200,000 a mount borrowed, with a $
$199,999
mortggage component, amortize
ed over 25 ye
ears with a ratte of 6% compounded sem
mi‐annually,
not in
n advance and
d monthly payyments, along with a $1 linne of credit ccomponent. O
Over time, ass
the mortgage
m
amo
ount owed decreases, the available
a
linee of credit incrreases.
Figure 16 – Blended Op
ption Mortgagee with a Mortga
age and Line of CCredit
Beneffits
 Fleexibility
This type of option
n allows the borrower
b
to have access too the equity o
of his or her p
property at
any time by way off the line of credit,
c
withou
ut having to reeapply to borrrow addition
n funds.
Risks
 Reegistered Debt
The fu
ull amount off the $200,000 Bundle is allways registe red against th
he title of thee property.
Wherreas in a stand
dard mortgagge, the amoun
nt registered against the p
property decrreases as the
Chapter 3: Advvanced Mortggage Conceptts
8
83
d
the amount of the Bundle re
emains consttant at the tottal amount originally
debt decreases,
appro
oved. This is due
d to the facct that the bo
orrower has aaccess to the ffunds, wheth
her or not he
or she
e has actuallyy borrowed th
hem.
5. Po
ortability Option
The Portability Opttion, also refe
erred to as po
orting, allowss the current homeowner tto effectivelyy
h or her current mortgagge to his or he
er new home.. Under a typ
pical scenario, the
take his
borro
ower would be
e selling the current
c
home
e and purchassing a new on
ne. If the morrtgage is
defau
ult insured and he or she was
w porting it within two yeears, he or sh
he would be eeligible for a
premium credit fro
om the mortggage default insurer. Afterr two years th
hat credit no longer appliees
and th
he full insurance premium
m (for example
e, through CM
MHC) would aapply to eitheer the entire
mortggage (if it is in
ncreased) or the
t top‐up po
ortion (the am
mount increassed). Since different
premiums apply un
nder both sce
enarios, it is necessary
n
to ddetermine wh
hich option iss best suited tto
the bo
orrower. The
e borrower co
ould then take
e this mortgaage to his or h
her new homee. There are
three options:
nt loan in the exact amoun
nt that is outsstanding provvided that thee Loan to
 Take the curren
eeded
Value of the oriiginal mortgage is not exce
nt loan in a re
educed amount that does nnot exceed th
he original Lo
oan to
 Take the curren
Value
nt loan to the new propertty and increasse the amoun
nt by having tthe
 Take the curren
nder blend the current rate charged on a new mortggage with thee borrower’s ccurrent rate.
len
Beneffits
 Rate Protectionn
es are currenttly higher than the borrow
wer’s contractted interest raate on the mo
ortgage, he o
or
If rate
she caan benefit by keeping the lower rate an
nd porting it tto the new ho
ome
Risks
 Lim
mited Application
This feature can be
e fantastic wh
hen current market
m
intere st rates are h
higher than th
he borrower’ss
contraacted rate, bu
ut in an era with
w consisten
ntly low rates , the applicattion of this op
ption is
limite
ed.
6. As
ssumabil ity Optio n
An Asssumable Opttion allows a purchaser
p
to assume or taake over the ccurrent homeeowner’s debtt
on the
e property be
eing purchase
ed. For the cu
urrent borrow
wer to be releeased from th
heir covenantt
with the
t lender, th
he purchaser must be apprroved by the lender and co
omplete an A
Assumption
Agree
ement.
Beneffits
 Rate Protectionn
r
are currrently higher than the ratee of the existing, assumablle mortgage, it
If marrket interest rates
may be
b beneficial for
f the purch
haser to assum
me the currennt mortgage.
84
Chapter 3: Advanced Mortgage Concepts
Risks
 Limited Application
This feature can also be very beneficial when current market interest rates are higher than the
borrower’s contracted rate, but in an era with consistently low rates, the application of this
option is limited.
Chapter 3: Advanced Mortgage Concepts
85
Key Terms and Definitions
Accelerated Mortgage Payment
A mortgage payment larger than required to retire the mortgage over the contracted
amortization, having the effect of repaying the amount borrowed sooner and saving the
borrower interest
Amortization
The total amount of time contracted to repay a mortgage
Assumability Options
This option allows a purchaser the ability to take over the current homeowner’s mortgage
Balloon Payment
The amount repayable at the end of the term
Basis Point
1/100th of one percent
Blended Payment
A payment that includes a combination of interest and principal
Bundled Option
Also referred to as a Combination Option, this option combines a mortgage and a line of credit.
Capped Variable Rate Mortgage
A variable rate mortgage that cannot exceed a preset interest rate
Cash Back Option
An option whereby on closing of the mortgage, a percentage of the mortgage loan is paid to the
borrower by the lender
Closed Mortgage
A mortgage with no option to repay the outstanding principal balance unless the property is sold
to an arm’s length purchaser
Compounding Frequency
The number of times per year in which an interest rate is charged. Typical compounding
frequencies include semi‐annually and monthly.
Constant Payment
A payment that remains the same throughout the term of the mortgage
Default
The failure to meet the obligations of a contract. In a mortgage contract default typically refers
to the failure to make the regular periodic mortgage payments
Equity
The difference, in dollars between the value of the property and the amount of financing
86
Chapter 3: Advanced Mortgage Concepts
currently on the property. Value – Financing = Equity
Extended Amortization
An amortization that exceeds the standard amortization of 25 years
Face Value of the Mortgage
The amount repayable by the borrower
Fixed Rate
An interest rate that remains the same throughout the term of the mortgage
Fully Open Mortgage
An option allowing early repayment of the mortgage principal without penalty or notice
Graduated Payment Mortgage
A mortgage repayment plan whereby the mortgage payments are initially small but grow over
time. The initial payments may not be enough to pay the principal and accrued interest for the
period.
High Ratio Mortgage
A mortgage in excess of 80% loan to value
Home Equity Line of Credit (HELOC)
A line of credit secured by a property
Interest Accruing Mortgage
A mortgage with a term whereby no repayments of interest or principal are made. The principal
and compound interest are repayable at the end of the term.
Interest Only Mortgage
A mortgage with a term and a constant mortgage payment consisting of only interest payable
for the payment period. At the end of the term, the principal amount is repayable.
Interest Rate Differential
The difference between a borrower’s current contracted mortgage rate and the lender’s current
available rate for a similar term
Line of Credit
A debt with a credit limit that allows the borrower to withdraw funds up to that credit limit.
Repayments are based on a percentage of the outstanding balance and interest is charged only
on the amount of the credit limit that is actually used.
Loan to Value
The amount of a loan to the value of the property expressed as a percentage.
Loan to Value (%) = Loan / Property Value
Lump Sum Payment
A payment of money applied directly to the principal of a mortgage
Chapter 3: Advanced Mortgage Concepts
87
Mortgage Default Insurance
An insurance policy which protects the insured (the lender) against losses suffered by the
default of the borrower
Mortgage Rank
The position of a mortgage registered on title of a property in relation to the timing of other
registered mortgages. The first mortgage registered on title is considered a 1st mortgage. The
next mortgage registered after the 1st is considered a 2nd mortgage, and so on.
Negative Amortization
A scenario in which the periodic payment is not sufficient to pay the accumulated interest and
the principal for the payment period. This causes the amortization to extend beyond the
amount contracted.
Open Mortgage
A mortgage that allows the borrower to repay the entire principal balance or portion thereof
without penalty (fully open mortgage) or with an interest rate differential or 3 month’s interest
penalty (partially open mortgage)
Outstanding Balance
The amount of the mortgage remaining to be repaid at a given time
Partially Amortized
A mortgage contract that has a term
Partially Amortized, Blended Constant Payment Mortgage – Fixed Rate
A mortgage with a term and a repayment plan consisting of a fixed interest rate and the same
periodic payment made up of a combination of interest and principal throughout the term.
Partially Amortized, Blended Constant Payment Mortgage – Variable Rate
A mortgage with a term and a repayment plan consisting of a variable interest rate that changes
whenever the lender’s prime rate changes and the same periodic payment made up of a
fluctuating combination of interest and principal throughout the term
Partially Amortized, Blended Variable Payment Mortgage – Variable Rate
A mortgage with a term and a repayment plan consisting of a variable interest rate and a
fluctuating periodic payment that both change whenever the lender’s prime rate changes. The
payment consists of a fluctuating combination of interest and principal throughout the term
Portability Option
This option allows the borrower to take the mortgage with him or her to his or her new home
Power of Sale
A process that allows the lender to commence a proceeding against the borrower without using
the courts and sell the property. This can be a quick and fairly inexpensive remedy available to
lenders upon default by the borrower
Prepayment Options
Options available to the borrower to prepay a part of his or her mortgage. These options may or
88
Chapter 3: Advanced Mortgage Concepts
may not include a penalty for this right.
Prepayment Penalty
A penalty charged by a lender to a borrower for early prepayment of the mortgage
Principal
The amount of money advanced on a mortgage loan, excluding interest or any other costs
Property Insurance
Insurance that protects the insured against losses to the property due to fire and other covered
perils
Purchaser
The buyer of a property
Quiet Possession
The right of the borrower to enjoy the property without interference by the lender unless there
is a default by the borrower
Reverse Mortgage
An interest accruing mortgage typically reserved for seniors. The mortgage is usually only
repayable upon the death of the surviving homeowner or sale of the property.
Straight Line Principal Reduction Mortgage
A mortgage repayment plan whereby equal payments of principal are made throughout the
term in addition to the interest payable for that period
Term
A period after which the mortgage must be fully repaid or renegotiated
Variable Rate
An interest rate that fluctuates based on a lender’s prime rate
Vendor
The seller of a property
Chapter 3: Advvanced Mortggage Conceptts
3.4
8
89
Review
w Questio
ons
Answers to the Revview Questio
ons are found at www.REM
MIC.ca
Sho
ort Answe
er Questio
ons
1. Wh
hat are the fivve financial components that are requi red to calculaate a mortgagge payment?
een acceleratting a mortga ge and using the increased payment
2. Disscuss the difference betwe
op
ption to pay th
he mortgage off more quicckly.
3. Disscuss the difference betwe
een an open mortgage
m
andd a closed mo
ortgage.
hy might a co
onsumer be co
onfused as to
o the differen ces between an open and
d closed
4. Wh
mo
ortgage?
5. Un
nder what circcumstances would
w
a prepaayment pena lty be charged?
escribe a scen
nario under which
w
a 3 mon
nth interest peenalty would be charged.
6. De
7. De
escribe a scen
nario under which
w
an interest differenti al penalty wo
ould be chargged.
8. Wh
hat is a bundlled mortgage
e? Name and describe thee lenders thatt currently offfer bundled
mo
ortgages in Ontario. This will
w require yo
ou to compleete outside invvestigation.
9. Wh
hat is the most common tyype of mortgage repaymeent plan in On
ntario today?
10. A borrower haas asked you for
f options re
egarding repaaying his morttgage more q
quickly.
Explain the optiions available
e to him and under
u
what ccircumstancess you would aadvise him to
use
e these optio
ons.
90
hapter 4: Property Ownersship in Ontario
Ch
Chaptter 4: Property
P
y Owneership in Onttario
Lea
arning Outccomes
Succcessful undersstanding of th
he concepts presented
p
in tthis chapter w
will enable the learner to:
 Distinguish
D
between person
nal and real property
p
 Explain the meeaning of property ownersship
 Explain estates in land
 Discuss the various types off encumbrancces and the eeffects each hhas on properrty ownershipp
 Explain the typpes of co‐ownnership of reaal property
 Discuss
D
the im
mpact of judgm
ments on reall property
4.1
Properrty
Rea
al Propertty
Prope
erty can be claassified in two distinct wayys: personal aand real. Reaal property caan be defined
d
as the
e land and eve
erything affixxed to it. It is in a fixed loccation and is p
permanent, remaining, to
one extent
e
or anotther, long afte
er the current owners havve relinquisheed their rightss to it.
Pers
sonal Pro
operty
In con
ntrast, person
nal property is defined as everything
e
th at is not real property. Th
hat includes
chatte
els and other goods. Perso
onal propertyy is typically nnot fixed in itss location and
d normally haas
a shorter useful life
e expectancyy than real pro
operty.
4.2
Owners
ship
Owne
ership of real property is co
ommonly tho
ought of as ow
wning the lan
nd and everything affixed tto
it. Ho
owever in a le
egal sense this is not the caase. The currrent owner off a piece of reeal property
actually owns the right to use th
he land. The only owner oof the land is the Crown. IInitially the
Crown
n provided grrants to indiviiduals allowin
ng them to usse the land. EEvery piece off real propertty
that iss owned by anyone other than the Crow
wn or Aborig inal peoples iin Canada has an original
grant.
The re
esult of this iss that individu
uals own diffe
erent rights t o the real pro
operty. Thesee rights are
determined by the
e type of ownership, referrred to as the Doctrine of EEstates. The m
most common
formss of estates in
n Ontario todaay are fee sim
mple estates aand leasehold
d estates. Another type off
estate
e, a life estate
e, is becomingg more popular in Ontarioo and while otther estates eexist, these
three common forms will be exxplored in thiss chapter.
4.3
Estates
s in Land
d
Fee Simple Estate
E
The fe
ee simple estate is the mo
ost common fo
orm of owne rship in Ontario and provides the holdeer
with the
t widest breadth of rights available. Fee refers to the fact thatt the estate m
may be
Ch
hapter 4: Property Ownersship in Ontario
9
91
mple refers to
o the fact thatt there are noo prohibitionss against who
o may inherit
inheriited while sim
it.
The owner of this estate
e
is in co
ontrol of the real
r propertyy for as long as he or she has it, subject
to payying the prop
perty taxes an
nd other municipal obligatiions and subjject to any intterests in thee
prope
erty that may be registered
d against the property’s tittle. This indivvidual may trransfer his or
her in
nterest in the property durring his or herr lifetime or ddictate who w
will inherit thee fee simple
intere
est upon his or
o her death. In addition, he
h or she mayy mortgage the interest, p
pledge it as
security for a loan such as throu
ugh a secured
d line or crediit, and so on.
If the fee simple ow
wner dies witthout a will an
nd there are no heirs, the fee simple in
nterest is
terminated and the property will escheat or revert back tto the Crown.
Lea sehold E state
The le
easehold estaate, commonly referred to as a lease, iss an interest in land createed by a
landlo
ord and tenan
nt, most commonly by a le
ease. This inteerest in land is created forr a fixed
period
d of time, succh as a month
h, year, or mo
ore. There is no limit on th
he time that a leasehold
estate
e may be in effect.
A leassehold estate provides the
e owner of thiis estate the rright to exclu
usive use and possession o
of
the prroperty, subje
ect to contracctual limits co
ontained in thhe terms of th
he lease.
Life Estate / Life Lea
ase
A life estate is defined as the rigght to use or occupy real pproperty for tthe duration o
of one’s life.
At the
e end of that person’s life, the life estatte is over andd the fee simp
ple ownership
p goes to the
remaiinderman. A remainderman is the indivvidual who iss on the deed as the next in line to own
n
the prroperty.
Example
John owns
o
a house
e. He is a wid
dower and has a six year o ld daughter aand his motheer is still alivee.
John wants
w
to ensu
ure that if anyything happens to him his mother can live in his hou
use for the
rest of
o her life. Ho
owever, once she passes aw
way he wishees the house tto go to his d
daughter. In
this sccenario John can create a life estate forr his mother, and name his daughter ass
remaiinderman.
Anoth
her form of liffe estate is co
ommonly refe
erred to as a ““life lease”. TThis is typically seen in
senior’s developments where the senior purrchases the ri ght to live in a house until death. Full
owne
ership of the house
h
then re
everts to the corporation
c
( typically a no
on‐profit) that owns and
manages the proje
ect. In 2007 CMHC
C
reporte
ed that there were at leastt 135 life leasse
developments in Ontario
O
containing more th
han 8,600 uniits.
It is im
mportant to note
n
that the holder of a liffe estate will find it difficu
ult to obtain a mortgage
due to
o the difficultty that the len
nder will have
e in recoverinng their moneey upon defau
ult. Howeverr,
some lenders are willing
w
to finaance life lease
es if the projeect has a guarranteed buy‐b
back program
m.
This area
a
is conside
ered to be a niche
n
market because appproximately 90% of life lease owners
purch
hase the life le
ease from the
e proceeds off selling their previous hom
me, which ressults in
virtuaally no deman
nd for life leasse purchase financing.
f
92
Ch
hapter 4: Property Ownersship in Ontario
Su
uccess Tip – Life Esta
ate / Life Leease
Mo
ortgage agents must be aw
ware of these
e types of estaates and ensu
ure that if thee mortgage iss
forr a life estate or life lease that
t
the application clearlyy indicates th
his. In addition the agent
mu
ust be sure th
hat the appliccation is subm
mitted to a lennder that has a product for this type of
ow
wnership, and
d that the app
plicant meets the product requirements. Failure to do so could
ressult in wasted
d time and money for both
h the agent a nd the appliccant.
4.4
Condom
minium Ownershi
O
ip
Condo
ominiums com
mbine fee sim
mple ownersh
hip of individuual units, refeerred to as strrata lots,
includ
ding all of the
e rights attach
hed to that ow
wnership, witth a combined
d ownership of common
areas, referred to as
a common elements.
e
The
ese common elements incclude the hallways,
recreaational facilities, elevatorss, lobby, and so
s on. Each uunit pays a co
ondominium m
maintenance
fee on
n a monthly basis
b
to the co
ondominium corporation. The condom
minium corporation is a
corpo
oration create
ed under the Condominium
m Act that is ccharged with managing the
condo
ominium, inclluding its asse
ets, and main
ntaining and rrepairing the common elem
ments. It is
managed by a Board of Directors consisting of unit owne rs who are elected by the other unit
owne
ers on a regulaar basis.
4.5
Encum
mbrances
An en
ncumbrance iss an interest in property th
hat has the efffect of limiting the rights of fee simplee
owne
ership of real property. Typical encumb
brances are m
mortgages, easements, and
d restrictive
coven
nants.
Morrtgages
A morrtgage is regisstered on title and has con
ntractual obli gations that prohibit the ffee simple
owne
er from havingg full control of his or her property.
p
Eas ements
Easem
ments are righ
hts acquired for
f the beneffit of real propperty, grantin
ng rights to usse another
prope
erty. The land
d giving the riight is called the
t servient ttenement wh
hile the land rreceiving the
right is
i called the dominant
d
ten
nement, wherre the term teenement simp
ply refers to tthe real
prope
erty.
An eaasement is an interest in laand that passe
es from one oowner to ano
other or as is ccommonly
referrred to, “runs with
w the land
d.” Unlike a fe
ee simple inteerest that maay be transferrred by the
current owner, an easement cannot be extin
nguished by tthe owner of tthe servient ttenement.
t owner of the dominan
nt and servien
nt tenement m
must agree to
o remove an easement.
Both the
Example
Adam
m owns a cottaage that frontts onto a lake
e. Immediateely behind Adam’s propertty is Mary’s
cottagge. Her cottaage does not have
h
direct access to the l ake. To imprrove Mary’s p
property,
Adam
m and Mary haave agreed to
o create and allow
a
the use of a three fo
oot wide strip of land on
the faar right of Adaam’s propertyy as a path fro
om Mary’s coottage to the lake. This haas the effect o
of
Ch
hapter 4: Property Ownersship in Ontario
9
93
v Adam’s prroperty. As ssuch, this creaates an
granting Mary’s prroperty access to the lake via
easem
ment which iss registered on title.
mportant to note
n
that an easement
e
must benefit thee property, no
ot simply thee property
It is im
owne
er. In this example, Mary’ss property hass gained lake access and h
has therefore improved the
prope
erty. If it simp
ply benefited Mary, it wou
uld only be coonsidered a co
ontract, not aan easement.
In add
dition to standard easeme
ents between dominant annd servient teenements, pro
ovincial
legislaation has creaated special types of easem
ments where a dominant ttenement is n
not required.
These
e easements, referred to as statutory rights of way, aare normally provided to p
public utilities,
allowing the utilityy to run, for example, hydrro lines throu gh a propertyy.
Res
strictive Covenant
C
s
A resttrictive coven
nant is a restriction of use placed on titlle of the servient tenemen
nt for the
beneffit of the dom
minant tenement. As with an easementt, a restrictivee covenant ru
uns with the
land and
a can only be extinguish
hed through the agreemennt of both currrent owners of the
domin
nant and servvient tenements.
Example
Adam
m owns two paarcels of land
d. One fronts a lake while the other is d
directly behin
nd that parcell.
Adam
m is going to build
b
a new tw
wo‐storey hom
me on the pa rcel behind the lakefront parcel and seell
the lakefront parce
el. When sellling the lakefrront parcel, A
Adam wishes to ensure thaat the new
owne
er does not co
onstruct a building higher than
t
one storrey, since thiss would impede Adam’s
prope
erty’s view of the lake. In so
s doing, Adaam and the puurchaser of th
he lakefront llot have
agree
ed to place a restrictive
r
covvenant on titlle that prohibbits the construction of a b
building higheer
than one
o storey. In this scenariio Adam would also requeest an easemeent granting h
his parcel of
land access
a
to the lake.
Buil ding Sch
hemes
A buillding scheme is a group off restrictive co
ovenants regiistered againsst several pro
operties in a
development plan that is bindin
ng on all purcchasers of a p roperty withiin that develo
opment. Thiss
has th
he effect of ensuring that all
a propertiess in the develoopment confo
orm to a set o
of
prede
etermined policies for thatt developmen
nt. An exampple of this form
m of restrictivve covenant
mightt be to limit th
he colour variations of pro
operty exterioors in a new ssub‐division, llimit the
numb
ber of stories of propertiess in a new sub
b‐division, andd so on.
4.6
Co-Ow
wnership of
o Real Prroperty
Prope
erty can be ow
wned by an in
ndividual or by
b several ind ividuals, referred to as co‐‐ownership.
Co‐ow
wnership occu
urs in one of two
t ways: byy a tenancy in common or tthrough a joint tenancy.
The major
m
differen
nce between the
t two cente
ers around thhe right of surrvivorship, wh
hich refers to
o
how ownership
o
is transferred
t
on
o the death of
o one of the co‐owners.
Ten ancy in Common
C
A tenaancy in comm
mon is a type of co‐ownersship of real prroperty typicaally used by p
parties who
wish to
t own individ
dual shares in
n a property. For examplee, two businesss partners w
would like to
purch
hase an office building. On
ne is providingg sixty percennt of the purcchase price w
while the otheer
partner is investingg forty percen
nt. To reflectt this arrange ment, the ow
wnership of th
he property iss
94
hapter 4: Property Ownersship in Ontario
Ch
enting a sixty percent own
nership with tthe other
being divided into two portionss, one represe
representing a fortty percent ow
wnership.
Eitherr party can se
ell, mortgage, or will his orr her interest in the properrty, although most lenderss
would
d require all owners
o
to sign
n on any morrtgage placed on the propeerty. This is d
due to the facct
that, if the borrow
wer defaults, the lender wo
ould have a diifficult time selling a portio
on of an officce
building.
If one
e party decide
ed to sell his or
o her interesst in the prop erty, the otheer party woulld become the
new tenant
t
in com
mmon.
Join
nt Tenanc
cy
A join
nt tenancy is a type of co‐o
ownership of real propertyy typically useed by spousess purchasing a
matrimonial home
e. Unlike a tenancy in com
mmon, where each owner o
owns a divideed share of
the prroperty, jointt tenants own
n an undivided
d interest in tthe property.. In other wo
ords, both own
one hundred
h
perce
ent of the pro
operty togeth
her. If one co ‐owner dies, the propertyy then
becom
mes the surviving owner’s property without having tto go through
h the probatee process.
Some
e parents will add a child or children on title as joint tenants so th
hat, on the deeath of the
survivving parent, the property becomes
b
the child’s witho ut going thro
ough the proccess and
paying the costs off probate. Ho
owever, there
e may be incoome tax impliications involved in this
ess since, whe
en property other than a principal
p
residdence is transsferred to a no
on‐spouse, a
proce
disposition is deem
med to occur at fair market value. The result is that any accrued gain is taxable
in the
e year of dispo
osition which may result in
n tax payablee that exceedss the amountt that would
have been payable
e in probate fees.
4.7
Judgments and
d Liens
Jud gments
A judggment, as it relates to a de
ebt, is a judge
e’s decision thhat a debt is o
owed by a deebtor to a
credittor. In Ontariio a creditor can,
c after obttaining a judggment, file a W
Writ of Seizurre and Sale off
land against
a
a debttor in any cou
unty or districct in which thhe debtor own
ns land. The writ will
encum
mber any currently owned
d land in any county
c
or disttrict, or land w
which is purcchased in the
future
e by the debtor, by way off placing a lien
n against the property. It should be no
oted that, eveen
thouggh a creditor has
h obtained a judgment, he or she doees not have to file a Writ o
of Seizure and
d
Sale, and
a can wait until he or sh
he knows thatt the debtor oowns land.
n lend on a property unttil this debt iss paid, unless,, with certain
n lenders, the
Most lenders will not
debt is
i being paid from the proceeds.
Four months
m
after filing of the writ
w with the enforcementt office, a creditor can direect the
enforcement office
e, through the sheriff, to seize
s
and sell the land. Thee actual sale of the land
canno
ot take place until after the
e writ has bee
en on file for six months.
The writ
w expires sixx years from the date it is issued and m
may then be reenewed for aanother six‐
year period.
p
Ch
hapter 4: Property Ownersship in Ontario
9
95
Lien
ns
A lien is security aggainst a prope
erty, either re
eal or person al, for a debt. Legislation allows for the
placin
ng of a lien on
n a property for
f construction costs not paid, which iss commonly rreferred to ass
a mecchanic’s lien. Under the Peersonal Propeerty Security A
Act (also refeerred to as thee PPSA), a lien
n
can be registered against
a
perso
onal property such as for a car loan. A lien does not force the salee
of pro
operty but sim
mply uses that property ass security for a debt.
96
4.8
Chapter 4: Property Ownership in Ontario
Key Terms and Definitions
Building Scheme
A group of restrictive covenants registered against several properties in a development plan that
is binding on all purchasers of a property within that development
Chattel
Personal property, movable property and other property not deemed to be fixtures
Condominium
The whole collection of individual home units along with the land upon which they sit. Individual
home ownership is composed only of the air‐space within the boundaries of the home, as
defined by a document known as a Declaration, filed on record with the local governing
authority.
Dominant Tenement
A property receiving a benefit
Easement
A right for the benefit of the dominant tenement over that of the servient tenement that is
normally registered on title and that runs with the land
Encumbrance
An interest in property that has the effect of limiting the rights of fee simple ownership of real
property. Typical encumbrances are mortgages, easements and restrictive covenants.
Fee Simple Estate
The most common form of ownership in Ontario and provides the holder with the widest
breadth of rights available. Fee refers to the fact that the estate may be inherited while simple
refers to the fact that there are no prohibitions against who may inherit it.
The owner of this estate is in control of the real property for as long as he or she has it, subject
to paying the property taxes and other municipal obligations. This individual may transfer his or
her interest in the property during his or her lifetime or dictate who will inherit the fee simple
interest upon his or her death, mortgage the interest, and so on.
Joint Tenancy
A type of co‐ownership of real property whereby all owners own an undivided interest in the
property
Judgment
A final court ruling resolving the key questions in a lawsuit and determining the rights and
obligations of the opposing parties, such as the awarding of monies to an injured party
Leasehold Estate
An interest in land created by a landlord and tenant, most commonly by a lease. This interest in
land is created for a fixed period of time, such as a month, year, or more. There is no limit on
the time that a leasehold estate may be in effect. A leasehold estate provides the owner of this
estate the right to exclusive use and possession of the property, subject to contractual limits
contained in the terms of the lease
Chapter 4: Property Ownership in Ontario
97
Lien
Security against a property, either real or personal, for a debt
Personal property
Everything one owns that is not real property. That includes chattels and other goods. Personal
property is typically not fixed in its location and normally has a shorter useful life expectancy
than real property.
Real Property
Land and everything affixed to it. It is in a fixed location and is permanent, remaining, to one
extent or another, long after the current owners have relinquished their rights to it.
Restrictive Covenant
A restriction of use placed on title of the servient tenement for the benefit of the dominant
tenement
Runs with the land
Means that an interest in property, such as an easement or restrictive covenant, transfers from
owner to owner
Servient Tenement
A property giving up a benefit
Tenancy in Common
A type of co‐ownership of real property typically used by parties who wish to own individual
shares in a property
98
4.9
hapter 4: Property Ownersship in Ontario
Ch
Review
w Questio
ons
Answers to the Revview Questio
ons are found at www.REM
MIC.ca
Sho
ort Answe
er Questio
ons
1. De
escribe the diffferences bettween real an
nd personal p roperty.
hat does a ho
omeowner actually own in relation to hhis or her prop
perty?
2. Wh
3. De
escribe the term “Fee Simp
ple” and discu
uss the rights of the fee sim
mple holder.
4. De
escribe the term “Leaseholld Estate” and
d discuss the rights of a ho
older of this type of estatee.
5. Wh
hat makes co
ondominium ownership
o
un
nique?
6. Wh
hat impact on
n property ow
wnership do encumbrance
e
es have?
hat is an ease
ement and wh
hat are its impacts on propperty rights?
7. Wh
8. Wh
hat is a restrictive covenan
nt and what are
a its impactts on propertyy rights?
9. De
escribe the diffference betw
ween a buildin
ng scheme annd a restrictivve covenant.
10. Discuss the maain difference
e between joint tenancy annd tenancy in
n common.
11. Exxplain the impact of a judggment on pro
operty ownersship.
Chapter 5: Regulation
R
andd Legislation
9
99
Chaapter 5: Regullation aand Leggislatioon
Lea
arning Outccomes
Succcessful undersstanding of th
he concepts presented
p
in tthis chapter w
will enable the learner to:
 Describe the roole and organnizational struucture of the regulator, thhe Financial Seervices
Commission off Ontario (FSC
CO)
 Iddentify activitties that are subject
s
to reggulation
 Iddentify the four licenses caaptured by the Act and Reggulations, resstrictions, exeemptions,
how they are issued, registe
ered, suspend
ded, revoked and enforced
 Innterpret the Act
A and Regullations (includ
ding Standardds of Practicee) that govern
n mortgage
brokerages
 Innterpret the Act
A and Regullations that govern
g
mortgaage agents
 Innterpret the Act
A and Regullations that govern
g
mortgaage brokers
 Innterpret the Act
A and Regullations that govern
g
princippal brokers
 Correctly interrpret and use terminology related to thhe mortgage bbrokerage inddustry’s
egulatory envvironment
re
Intro
oduction
Note: This chapterr contains info
ormation abo
out and interppretations of legislation. N
Neither the
autho
or nor the pub
blisher is a law
wyer and in no
n way does aany information contained
d in this text
constitute legal advice. Legal and other decisions relatedd to financial or any other type of
transaaction should
d be complete
ed only after seeking
s
advicce from a com
mpetent profeessional and
should not be base
ed on informaation contained herein. N either the pu
ublisher nor th
he author is
engagged in rendering legal or other professional advice.
The mortgage
m
brokkerage industtry is now higghly regulatedd, although it was not alwaays. The
Mortg
gage agents Act,
A dating baack to the late
e 1960s, was not substanttially updated
d for 30 years.
Origin
nally, the Real Estate and Business
B
Brokkers Act, also referred to as REBBA, (thee legislation
that regulates
r
real estate broke
ers), regulated
d mortgage aagents, until the Mortgagee agents Act
took effect
e
which separated
s
mo
ortgage broke
ering from reaal estate brokkering. With the creation
of the
e Mortgage agents Act, reaal estate brokkers were deeemed mortgaage agents. H
However the
new legislation thaat was enacte
ed in July 2008 removed thhat provision..
The fo
ocus of the le
egislation enacted in 2008 is to ensure tthat the Ontaario consumer is protected
d
and provided
p
with necessary disclosure to make
m
an inform
med decision
n regarding th
he potential
transaaction. The Financial
F
Services Commisssion of Ontariio (FSCO) enfforces the leggislation and
regulaates the morttgage brokeraage industry as
a well as sevveral others.
Pa
ause for cllarification
n – Disclosure
Th
he act of reve
ealing someth
hing, or makin
ng something evident. Sevveral types off disclosure
arre required un
nder the MBLLAA and Regu
ulations.
100
Chapter 5: Regulation
R
andd Legislation
mportant for a mortgage agent
a
to unde
erstand the leegislation andd its impact, eespecially
It is im
given that licensed
d brokers can be in the possition of man aging licensed mortgage aagents for
whom
m brokers havve some respo
onsibility. Furthermore a licensed brokker can also h
hold the
position of principal broker, the
e Chief Compliance Officerr of a brokeraage – in otherr words, the
perso
on within the brokerage wh
ho is responsible to FSCO ffor compliancce. A mortgaage agent
must have sufficient understanding of the le
egislation to eensure that hee or she is maaking
inform
med decisionss on his or he
er actions as well
w as those of the brokerrage and to quickly and
successfully locate
e legislative in
nformation on
n a day‐to‐dayy basis as req
quired. Failurre to know an
nd
apply the relevant legislation caan put the bro
okerage and tthe broker’s license in jeopardy.
The Financial Serviices Commisssion of Ontario (FSCO) is reesponsible for enforcing th
he current
legislaation and regulating the mortgage
m
brokkerage industtry, among otthers.
Pa
ause for cla
arification
n – Regulatte
To
o govern or diirect accordin
ng to rule, to make
m
regulatiions for or conncerning an industry.
m have a clear
c
understaanding of FSCCO’s mandatee as well as th
he means by
Mortggage agents must
which
h FSCO accom
mplishes its ro
ole as regulato
or of all activiities related tto dealing and
d trading in
mortggages as well as lending in the province
e of Ontario.
c
will exxamine, in de
etail, the man
nner in which mortgage aggents and the mortgage
This chapter
broke
erage industryy are regulate
ed in Ontario..
5.1
The Re
egulator: FSCO
The Financial Serviices Commisssion of Ontario (FSCO) is thhe regulator ffor the mortggage
broke
erage industryy in Ontario. FSCO was cre
eated on July 1, 1998 as an
n arm’s length agency of
the Ministry
M
of Finance. Integraating the ope
erations of thee former Ontario Insurancce
Comm
mission, Pension Commissiion of Ontario
o and Depositt Institutions Division of th
he Ministry of
Finance, FSCO com
mprises three key parts:
The Commis
ssion
The purpose of the
e Commission
n includes pro
oviding regulaatory servicess and making
recom
mmendations to the Ministter of Finance
e on matters affecting thee regulated seectors.
Fina
ancial Se
ervices Trribunal (T
Tribunal)
This iss an independ
dent, adjudicaative body that hears appeeals of regulaatory decision
ns by the
Superrintendent. The
T Tribunal has
h exclusive jurisdiction too exercise thee powers con
nferred underr
the Fiinancial Services Commissiion of Ontario
o Act, 1997 annd other Actss that confer powers on orr
assign
n duties to the Tribunal.
The Superin tendent and
a
Stafff
The Superintenden
nt of Financiaal Services is responsible
r
foor issuing and
d revoking liceenses, as well
as forr enforcing co
ompliance, all of which are
e designed to protect the p
public. All FSC
CO staff
Chapter 5: Regulation
R
andd Legislation
10
01
reporrt directly or indirectly to the Superintendent. The sstaff, who aree civil servantss appointed
underr the Public Seervices Act, perform FSCO’s day‐to‐dayy work.
han the mortgage brokeraage industry. Following is a summary o
of
FSCO is concerned with more th
1
the re
egulated elem
ments of FSCO
O’s day‐to‐dayy concerns ass of Decembeer 3 1, 2015 :
 1,1196 licensed mortgage
m
bro
okerages (1,0
075 in Feb, 20015 and 1,1699 in 2012)
 2,6696 mortgagee agents (2,6000 in Feb 2015 and 2,466 i n 2012)
 10,977 mortgagge agents (9,7703 in Februaary, 2015 and 8,134 in 2012)
 143 licensed moortgage admiinistrators (1330 in Februarry, 2015 and 995 in 2012)
 327 insurance companies
c
(3
332 in February, 2015 and 350 in 2012)
 7,0059 pension plans
p
(7,234 in February, 2015
2
and 7,6007 in 2012)
 110 credit unions and caissees populaires (118 in Februuary, 2015 annd 157 in 2012)
 51 loan and trust companiess (52 in Februuary, 2015 annd 58 in 2012))
 1,8800 co‐operattive corporations (1,788 in February, 22015 and 1,6994 in 2012)
 51,324 insurancce agents (488,928 in Februuary, 2015 annd 46,222 in 22012)
 5,5511 corporatee insurance agencies (5,2884 in Februaryy, 2015 and 44,632 in 2012)), and
 1,5510 insurancee adjusters (11,588 in Februuary, 2015 annd 1,657 in 20012)
F
websitte at www.fsco.gov.on.ca
More information may be found by visiting FSCO’s
In 200
04, due to the
e increase in the
t popularity of mortgag e agents and the growth in the
mortggage industryy, The Ministry of Finance began
b
the proocess of revieewing the Mo
ortgage agentts
Act, the legislation
n in place at th
he time. The stated goals of the review
w were to enssure that the
ed safeguards for the public while givingg mortgage agents fair and
d effective
legislaation provide
rules that encourage industry growth
g
and innovation.
This process
p
began
n with a consu
ultation pape
er entitled “Im
mproving the Mortgage ag
gents Act” thaat
put fo
orward ideas for new legislation and promoted indu stry involvem
ment in the prrocess. The
resultt was, through Bill C‐65, th
hat the Mortg
gage agents A
Act was repeaaled and replaaced by the
Mortg
gage Brokera
ages, lenders and
a Administtrators Act, 20006 (MBLAA). The Ministeer of Finance
includ
ded provisions that one or more person
ns be appointted to review the operatio
on of the
MBLA
AA and its Reg
gulations every five years.
Sum
mmary of the Act and
a
Regu
ulations
The mortgage
m
brokkerage industtry is regulate
ed by one prinncipal Act and
d its correspo
onding
Regullations (includ
ding one that addresses Sttandards of P ractice). Stan
ndards of Praactice are
found
d in many industries and dictate the bussiness rules bby which that particular ind
dustry
operaates.
In Onttario, legislation is passed when a Bill (w
which has a nnumber) is inttroduced to tthe legislaturee,
goes through
t
several phases called “readings,” and if afteer the Third reeading there are enough
votes, it receives what’s
w
called “Royal Assent” by the Lieuutenant Goveernor. At this stage it
becom
mes an Act orr Statute.
1
http:://fsco.gov.on.ca/en/about/P
Pages/default.aspx
102
Chapter 5: Regulation and Legislation
The following is a summary of the Act and Regulations that are currently in place for the
mortgage brokerage industry. Each piece of legislation has a name and, in the case of the
Regulations, a number, by which it is referred. The applicable sections of the Act and
Regulations will be described in detail in a subsequent chapter as they relate to the brokerage,
the mortgage agent, the mortgage broker, the principal broker and the mortgage administrator.
The MBLAA
 The Mortgage Brokerages, lenders and Administrators Act, 2006 (MBLAA) is the principal
legislation governing this industry. It is commonly referred to simply as the “MBLAA” or “the
Act.”
The Regulations
 Mortgage Brokerages
408/07 Mortgage Brokerages: Licensing
188/08 Mortgage Brokerages: Standards of Practice
 Principal Brokers
410/07 Principal Brokers: Eligibility, Powers and Duties
 Mortgage agents and Agents
409/07 Mortgage agents and Agents: Licensing
187/08 Mortgage agents and Agents: Standards of Practice
 Cost of Borrowing and Disclosure
191/08 Cost Of Borrowing and Disclosure to borrowers
 Mortgage Administrators (note: this is not covered on the exam as it does not apply to
mortgage agents)
406/07 Regulated Activities: Additional Prescribed Activities
411/07 Mortgage Administrators: Licensing
189/08 Mortgage Administrators: Standards of Practice
 Licensing Exemptions
407/07 Exemptions from the Requirement to be Licensed
 Reporting Requirements
193/08 Reporting Requirements for Licensees
 General
190/08 General
 Penalties
192/08 Administrative Penalties
5.2
Activities that are Regulated
The MBLAA regulates the following activities:
 dealing in mortgages in Ontario
Chapter 5: Regulation
R
andd Legislation
10
03
 traading in mortggages in Ontaario
 carrrying on business as a len
nder in Ontariio, and
 carrrying on the business of administering
a
g mortgages inn Ontario
Regulated activitie
es are set out in MBLAA, se
ections 2 to 66. These sectiions, which reefer
t
“dealin
ng” and “trading in mortgaages”, as well as “lending”, which were
speciffically to the terms
includ
ded in the old
d Mortgage ag
gents Act butt never defineed, are now cclearly explain
ned. Those
dealin
ng or trading in mortgagess, as well as th
hose lending on real estatee (unless exempted) mustt
have a broker’s or agent’s license.
For th
he purposes of
o the legislation, the defin
nition of the tterm “dealingg in mortgagees” is defined
as anyyone who solicits another person or bu
usiness to buyy, sell or exchange mortgages, or who
does so on his/herr own behalf or
o on behalf of
o another (thhat is, who so
olicits a perso
on or entity,
such as
a a business or corporatio
on, to borrow
w or lend monney on the security of real estate). In
additiion, if a perso
on or businesss assesses a borrower,
b
whhich would incclude underw
writing a
mortggage application, provides information to a lender oor negotiates or arranges a mortgage on
n
behalf of another person
p
or bussiness is deem
med to be “deealing in morttgages.”
Regarrding lending activities, the
e MBLAA stattes that anyonne who lendss money in On
ntario on real
prope
erty is deemed to be a lend
der. In this caase the persoon or businesss must be liceensed as a
mortggage brokeragge, unless it iss exempt. Tyypically a busiiness would b
be exempt if iit was licensed
underr other legislaation, such ass the Bank Actt or the Trustt and Loan Co
ompanies Act,, or if the
perso
on’s or busine
ess’s lending activities
a
were
e done solelyy through a m
mortgage brokkerage or
other regulated len
nder.
mmission of O
Ontario Act, 19
997 as well as
Severral changes were made to the Financiall Services Com
the Liicence Appeall Tribunal Actt, 1999 to refllect the changges to legislattion, resultingg in the
MBLA
AA. One that is of particulaar interest is paragraph 5 oof subsection
n 35.2 of the Securities Act,
which
h states: “Sub
bject to the re
egulations, re
egistration is nnot required to trade in th
he following
securities: Mortgagges or other encumbrance
e
es upon real oor personal property, otheer than
er encumbran
nces contained in or secureed by a bond,, debenture o
or similar
mortggages or othe
obligaation or in a trust deed or other instrum
ment to securre bonds or debentures orr similar
obligaations, if such
h mortgages or
o other encumbrances aree offered for sale by a person or
comp
pany licensed,, or exempted
d from the requirement too have a licence, under thee Mortgage
Brokeerages, lenderrs and Administrators Act, 2006.”
The MBLAA
M
introduced a new liicensing requ
uirement for tthose adminisstering mortggages. This
activitty is defined as
a being any individual or business thatt receives mo
ortgage paym
ments on behaalf
of ano
other. If engaaged in this activity the ind
dividual or buusiness must have a Mortggage
Admin
nistrator’s license.
5.3
Licensu
ure
Pau
use for cla
arification – Licensuree
Lice
ensure can be
e defined as permission
p
graanted by an aagency of govvernment to aan individual
or entity
e
to engaage in a given profession or occupation..
104
Chapter 5: Regulation
R
andd Legislation
Fou r License
es
In ord
der to regulate, the MBLAA
A provides for four types oof licenses to be issued by the
Superrintendent of Financial Serrvices: a brokerage licensee, a mortgage broker’s license, a
mortggage agent’s license
l
and a mortgage ad
dministrator’ss license. Eacch is described
d in the Act,
sectio
ons 7 – 12 and
d discussed in
n more detail later in this cchapter.
enses are issuued to individ
duals. Corporrations,
Mortggage brokers’’ and mortgagge agents’ lice
partnerships, sole proprietorships and presccribed entitiess that carry o
on the businesss of dealing in
mortggages, tradingg in mortgage
es or lending money on thee security of real propertyy are required
d
to havve a brokeragge license or a Mortgage Administrator
A
r’s license.
Pa
ause for cllarification
n – Corpora
ations, parrtnershipss and sole
prroprietorsh
hips
A corporation is a legal business entity crreated under federal or prrovincial statu
utes.
A partnership is a type of bu
usiness entityy in which parrtners (ownerrs) share with
h each other
the profits or lo
osses of the business
b
unde
ertaking in whhich all have iinvested.
A sole proprietorship consissts of a sole owner, also caalled a proprieetor, of an un
nincorporated
d
usiness.
bu
The MBLAA
M
states that, to enfo
orce compensation for anyy of its licenseed activities, tthe person orr
business must be licensed. Sim
mply stated, if a person arraanges a mortgage for anotther party and
expeccts to be compensated by a lender, thatt lender may refuse to do so if the persson is not
appro
opriately licen
nsed at the tim
me of the transaction and the person w
would not be able to sue
the le
ender for paym
ment.
Res
strictions
The MBLAA
M
restriccts the use of the titles “mortgage brokerage,” “morrtgage brokerr,” “mortgagee
agentt,” “mortgage
e administrattor” and theirr French equivvalents to persons and enttities licensed
d
as succh under the MBLAA. Thiss prohibition includes usinng abbreviatio
ons such as m
mtg. broker, o
or
their equivalents in
n another lan
nguage.
Exe mptions to Licens
sure
Regullation 407/07
7 details the circumstances
c
s under whichh certain people or entities are exemptt
from obtaining a license under the MBLAA. Exemptions ffrom obtainin
ng a license under the Act
are in
ndicated in various circumsstances and fo
or various enntities which aare spelled ou
ut in detail in
the Reegulation (sim
mple referralss, lawyers, an
nd so on). Folllowing is a su
ummary.
A simple referral (d
described in sections
s
1 – 2 of the Regullation) is a term used to deescribe the acct
of refferring a potential borrowe
er to a potenttial lender, orr vice versa, iff the referrerr informs the
other party, in writting, that a fe
ee will be rece
eived for the referral, the nature of thee relationship
p
betwe
een the partie
es, and as lon
ng as the onlyy other inform
mation provid
ded is the nam
me, address,
teleph
hone numberr, fax numberr, email addre
ess or websitee address of tthe individual being
referrred. In addition, if no fee is
i payable, a person
p
or enttity does not have to be liccensed.
Chapter 5: Regulation
R
andd Legislation
10
05
uld be a real estate
e
salespperson who reefers a client tto a bank
An exxample of thiss situation cou
mortggage rep. In this
t case, if th
he real estate salesperson abides by theese rules, he or she does
not haave to be lice
ensed under the MBLAA.
A lawyer (as per se
ections 3 – 5) is exempt from prescribeed activities iff he or she is acting solely
on be
ehalf of his or her client and is not holdiing him or he rself out to b
be trading, dealing or
admin
nistering morrtgages to the
e general public.
An exxample of thiss scenario cou
uld be a divorrce lawyer whho has a client who requirees a mortgage
to payy his spouse a settlement. In this case it would be leegal for this laawyer to arraange this
financcing for that client
c
withoutt being licenssed under thee MBLAA. However, this laawyer could
not ad
dvertise, for example
e
in a newspaper, that
t
he brokeers mortgagess.
Otherr exemptions from licensin
ng include tru
ustees in bankkruptcy, thosee acting undeer a court
orderr, statutory co
orporations, a personal corrporation of a broker or aggent, motor vvehicle
dealership financin
ng companiess, directors an
nd employeess of Crown aggencies or oth
her exempted
d
perso
ons or entitiess. As per secttion 11 of Reg
gulation 407//07, consumer reporting aggencies are
exempt if they are only providin
ng informatio
on on prospecctive borroweers to prospective lenders
and are not otherw
wise dealing in mortgages..
Registtered real esttate brokeragges, brokers or
o agents are exempt when
n they are arrranging or
attem
mpting to arraange a vendorr take‐back mortgage
m
for a client, as lon
ng as they aree not holdingg
themsselves out to the public ass dealing in mortgages.
Pa
ause for cla
arification
n – Vendorr take‐backk
A vendor
v
take‐b
back, also kno
own as a VTB, is where thee seller of thee property pro
ovides all or
some of the financing to the
e purchaser in
n order to selll the propertyy.
A person or entity registered un
nder the Secu
urities Act is eexempt, as peer sections 12
2 – 14, under
certaiin circumstan
nces, as long as
a they are no
ot holding theemselves out to the publicc as trading in
n
mortggages. In add
dition, those involved in the securitizati on of mortgaages are also eexempt.
If a pe
erson or entitty only lends through
t
a mo
ortgage brokeerage or otheer exempt perrson or entityy,
they are
a not requirred to have a mortgage brrokerage licennse (section 115 on Mortgaage Lending).
ed to have a Mortgage
M
Administrator’s license if theey are
A person or entity is not require
admin
nistering morrtgages on behalf of the Crrown, a financcial institution, a collection agency
registtered under the Collection Agencies Actt, or if they arre only admin
nistering morttgages that
constitute mortgagge backed seccurities as per sections 16 – 19, Exempttions for Adm
ministering
Mortggages.
Gettting and Keeping a Licens
se
Sectio
ons 13 to 22 of
o the Act stattes that any party
p
wishingg to apply for a license musst complete
the ap
ppropriate ap
pplication and
d forms, alongg with the ap plicable fee tto the Superin
ntendent,
using the process laid
l out in the
e applicable Regulation.
R
TThe licensing p
process for a mortgage
broke
erage is contaained in Regullation 408/07
7; the licensinng process forr mortgage aggents and
agentts is contained
d in Regulatio
on 409/07 and the licensinng process forr Mortgage A
Administratorss
106
Chapter 5: Regulation
R
andd Legislation
ntained in Reg
gulation 411//07. The actual forms usedd to process aan application
n for licensingg
is con
may change
c
from time
t
to time, with current forms being available on FSCO’s website or by
contacting the regulator directly.
The Superintenden
nt has the right to refuse to
t issue or rennew a licensee, suspend a liicense or
propo
ose to impose
e conditions on
o a licensee, if it is believeed that the ap
pplicant doess not meet the
requirrements for licensing. In such
s
cases the
e applicant haas the right to
o request a hearing by thee
Tribun
nal, as long as that requesst is made witthin 15 days oof receiving notice from th
he
Superrintendent regarding his or her license application.
Hav
ving a Lic
cense Iss ued by FSCO
F
The Superintenden
nt of FSCO is empowered
e
to:
t
t issue a lice
ense
 issue or refuse to
nd conditionss on a license, and
 impose or amen
 ren
new or refuse
e to renew a license
l
FSC
CO's Pub lic Regis try
Regullation 190/08
8 created the requirement of a public reegistry for liceensees (brokeerages and
Admin
nistrators) wh
hich maintain
ns the following informatioon:
 each name in which
w
it is licen
nsed and its licence numbber
 the
e type of licen
nce that it ho
olds and whetther the licen ce is in good standing or iss suspended
 its mailing addrress in Ontario
o as it appearrs in the reco rds maintaineed by the Sup
perintendent
 its telephone nu
umber as it appears in the
e records mai ntained by th
he Superinten
ndent
 any conditions that
t
apply to the licence
 forr a brokerage
e, the name off its principal broker
For tw
wo years afte
er a brokeragge or Mortgage Administrrator ceases tto be licensed, the registeer
must contain the following
f
info
ormation abou
ut the formerr brokerage o
or Mortgage A
Administratorr:
w
it was licensed and itts former lice nce number
 each name in which
e type of licen
nce that it held
 the
 the
e date on which it ceased to be licensed
d
 wh
hether the lice
ence was surrendered or revoked
r
Similaarly, the public register of
o mortgage agents and aagents that iis to be maintained undeer
subse
ection 28 (1) of the Act must
m
contain
n the followinng informatio
on about eacch broker an
nd
agentt:
 the
e name in wh
hich he or she
e is licensed and the licenc e number
 the
e type of licen
nce that he or she holds, itts expiry datee and whetheer the licence is in good
staanding or is su
uspended
 the
e name of the
e brokerage on
o whose beh
half he or shee is authorized
d to deal or trrade in
mo
ortgages
 any conditions that
t
apply to the licence, other
o
than coonditions relaating to educaational
quirements
req
Again, if a brokerr or agent ceases
c
to be licensed, thhe register m
must contain the followin
ng
inform
mation about the former broker
b
or agent:
 the
e name in wh
hich he or she
e was licensed
d and his or h er former liceence numberr
Chapter 5: Regulation
R
andd Legislation
10
07
 the
e type of licen
nce that he or she held
 the
e name of the
e brokerage on
o whose beh
half he or shee was authorizzed to deal orr trade in
mo
ortgages imm
mediately befo
ore ceasing to
o be licensed
 the
e date on which he or she ceased to be
e licensed
 wh
hether the lice
ence expired,, renewal of the
t licence w as refused, th
he licence waas surrendered
or the licence was
w revoked
The in
nformation re
equired must be kept on th
he register unntil two yearss after the exp
piry date of
the in
ndividual’s lice
ence or, if the
e licence was surrendered or revoked b
before the expiry date,
until two
t years after the date on which the licence wouldd have expired
d if it had nott been
surren
ndered or revvoked.
Proh
hibited Activities
A
The MBLAA
M
(sectio
ons 43 – 50) clearly
c
lays ou
ut what are coonsidered to be prohibited
d activities
underr the legislatio
on. These incclude a prohib
bition on:
 counselling or advising
a
anyone to give false or deceptiive informatio
on in a transaaction
 ob
bstructing the Superintendent from performing his oor her duties o
or withholdin
ng anything
rellevant to an inquiry
 pro
oviding false or misleadingg information
n to the Superrintendent
 a person
p
or bussiness taking adverse
a
emplloyment actioon against an employee beecause the
em
mployee proviided informattion or docum
ments to the SSuperintendeent.
Pa
ause for cla
arification
n – Prohibited activitties
Th
he Mortgage Brokerages,
B
lenders and Administratorss Act, 2006 an
nd Regulation
ns, prohibit:
 Trading or dealing in moortgages withhout a licencee: As of July 11, 2008, all mortgage
a agents m
must be licensed with FSCO
O to carry on
brokeragess, administrators, brokers and
business in Ontario, unle
ess an exemp
ption applies.
 Using an un
nauthorized name:
n
You caan only use thhe name in which you are licensed.
Com
mpliance and Enfo
orcementt
The MBLAA
M
specifiically states what
w
is required of a licenssee and how ffailure to com
mply will be
enforced.
Sectio
ons 28 – 42, for example, creates
c
the re
equirement thhat licensees provide inforrmation as
requirred under Regulations. Th
he legislation provides the Superintend
dent or a persson designateed
by the
e Superintend
dent the rightt to enter (without using fforce) and insspect a licenseee’s premisess
(but not
n areas thatt are deemed
d to be dwellin
ngs, unless thhe occupant cconsents), exaamine moneyy,
valuables, docume
ents and records of the lice
ensee, requiree employees or those app
pearing to be
emplo
oyees to answ
wer questionss, produce do
ocuments or rrecords, inclu
uding data sto
orage systemss
and re
emove any ite
em that may be relevant to
t the inquiryy or examination (receipts for all items
removved must be provided).
If the Superintende
ent or its designee is refussed entry or itt is believed tthat they will be refused
entry,, an order maay be obtained from a justice of the peaace, which may be enforceed through
the usse of force byy police office
ers, if that force is reasona bly necessaryy to execute tthe order.
108
Chapter 5: Regulation
R
andd Legislation
s
tools tto enforce co
ompliance witth licensing
Under the MBLAA,, the Superinttendent has several
requirrements and conditions. The
T Superinte
endent, if he or she believes that someething the
licenssee is doing co
ontravenes th
he MBLAA, may
m issue a Coompliance Ord
der to correctt the issue.
The licensee has th
he right to ap
ppeal this decision to the TTribunal within 15 days of receiving the
Superrintendent’s proposal
p
conttained in the Compliance O
Order, in which case the C
Compliance
Orderr will be on ho
old until the hearing
h
occurrs. If, howeveer, in the opin
nion of the
Superrintendent, it is in the public’s interest to
t immediateely implement the Compliaance Order,
the Su
uperintenden
nt has the righ
ht to do so. The
T licensee’ss rights to req
quest a hearin
ng within 15
days of
o being notiffied of the Co
ompliance Ord
der still rema in in effect.
Furthermore, the Superintende
S
ent has the rigght to issue oorders to freezze assets or ttrust funds if
necesssary to prote
ect the public,, and may maake applicatioon to the courrt to appoint a receiver orr
truste
ee. Section 36
6.8 of the MB
BLAA allows fo
or the individ ual to preven
nt the Superin
ntendent from
m
doingg so if he or sh
he provides th
he Superinten
ndent with a bond in the aamount and m
manner
requirred by the Superintendentt.
Pa
ause for cla
arification
n – Trust fu
unds
Tru
ust funds are those monie
es received byy a brokeragee or Administrrator on behaalf of or
paayable to anotther party.
The MBLAA
M
(sectio
ons 43 – 50) gives
g
FSCO tw
wo types of ennforcement to
ools: adminisstrative
penalties and charrges under the
e legislation.
Pa
ause for cla
arification
n – Adminisstrative peenalties
Th
his is a penaltyy assessed byy the Superinttendent for leess serious co
ontraventionss of or failures
to comply with the MBLAA.
Regullation 192/08
8 spells out ru
ules and proce
edures relateed to administtrative penaltties. This
Regullation (section
ns 1 – 4) proh
hibits the Sup
perintendent ffrom imposin
ng penalties o
on those
coverred in section 46 of the MB
BLAA (which prohibits
p
reprrisals against those who provide
inform
mation to the
e Superintend
dent).
Admin
nistrative pen
nalties are eitther “general”” or “summarry” and are co
overed in dettail in
Regullation 192/08
8 sections 1 – 6. The same timeframes apply to both
h. The Superintendent
may impose admin
nistrative pen
nalties for con
ntraventions oof or failures to comply wiith the MBLAA
mined in accordance with the
t Regulatioons. If the Sup
perintendentt proposes to
in amounts determ
imposse an adminisstrative penallty, the affectted party mayy request a heearing beforee the Financiaal
Servicces Tribunal. A summary process
p
is pro
ovided for adm
ministrative p
penalties imp
posed on
licenssees who fail to
t provide infformation to the Superinteendent in acccordance with
h the
Regullations. An ad
dministrative penalty mayy not exceed $$10,000 in the case of a co
ontravention
or faillure to complly by a mortgage agent or agent or $255,000 in the caase of a contrravention or
failure
e to comply by
b a brokeragge, Mortgage Administratoor or any otheer person or eentity, or such
h
lowerr amounts as may be presccribed.
The MBLAA
M
empow
wers the Supe
erintendent to
t impose adm
ministrative p
penalties to p
promote
comp
pliance with th
he MBLAA up
p to a maximu
um of $25,0000 for a brokerrage or Administrator, up
R
andd Legislation
Chapter 5: Regulation
10
09
0,000 for a brroker or agen
nt and up to $25,000
$
for annyone else. Iff the Superinttendent
to $10
propo
oses to imposse an administrative penalty the licenseee has the right to appeal tthis proposal
to the
e Tribunal witthin 15 days of
o receiving itt. If the pena lty is not paid
d, it is consideered a debt to
o
the Crrown and can
n be enforced
d as such.
Those
e assessed a penalty
p
must pay the penaalty within thiirty days of beeing assessed
d the penalty
or oncce a hearing has
h been conducted, or longer if providded for in thee penalty or order made
from the hearing.
Beyon
nd administraative penaltie
es, the MBLAA
A allows the SSuperintendent to charge individuals orr
businesses with an
n offence und
der the legislaation. Anyonee who contravenes any of the sections
as listted in section 48 of the MB
BLAA is consid
dered to be gguilty of an offfence.
e offences incclude contravening any one of the follow
wing:
These
 subsection 2.2 or
o 2.3, Dealin
ng in Mortgagges
 subsection 3.2 or
o 3.3, Tradin
ng in Mortgagges
 subsection 4.2, Mortgage Leending
 subsection 5.2, Administerinng Mortgages
 secction 27, Prohhibition re Dissclosure in Addvertising
 secction 30.6, Inquiries and Examinations
 subsection 43.11 or 43.2, Prohibition re Faalse or Decepttive Informattion
 subsection 44.11 or 44.2, Prohibition re Obbstruction
 subsection 45.11 or 45.2, Prohibition re Faalse or Mislea ding Informaation, and
 secction 46, Prohhibition re Reeprisals
Individuals charged
d with an offe
ence are liable to a fine upp to $100,0000, imprisonmeent for up to
one year, or both while
w
corporaations are liab
ble to a fine oof up to $200,,000. It is imp
portant to
note that
t
directorss and officers of a corporation that has committed aan offence aree also liable.
Sectio
on 48.2 of the
e MBLAA also
o dictates thatt any contravventions of ap
pplicable Stan
ndards of
Practiice are an offence under the MBLAA an
nd liable to thhe fines as preeviously discu
ussed.
Hav
ving a Lic
cense Sus
spended or Revokked by F SCO
The Superintenden
nt is empowe
ered to:
nd conditionss on a license
 impose or amen
new or refuse
e to renew a license
l
 ren
 susspend or revo
oke a license
 allow or refuse to allow the surrender of a license, andd
 impose conditio
ons on the surrender of a license
l
As per the Act, secctions 13 – 22
2, the Superintendent has tthe right, without giving n
notice, to
autom
matically susp
pend a license
e under severral circumstannces. A mortggage brokeraage’s license
will be
e automatically suspended
d if it fails to have
h
at least one licensed mortgage aggent. A
mortggage broker’ss and mortgagge agent’s lice
ense will be aautomaticallyy suspended iff the
broke
erage’s license
e is lost or suspended, or if
i that brokerrage no longeer authorizes tthe broker orr
agentt to deal in mo
ortgages on its behalf, which in effect i s when the b
brokerage term
minates the
broke
er’s or agent’ss employment. In other words,
w
only whhen employed by a brokerrage is a
mortggage agent orr broker licensed.
110
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Chapter 5: Regulation
o these suspe
ensions will be automaticaally revoked iff the reason ffor the suspen
nsion is
Any of
rectifiied. For exam
mple, if the brroker’s license is suspendeed due to the brokerage’s suspension,
the brroker’s license will be reinstated as soo
on as the brokkerage’s licen
nse is no longer suspended
d.
If the broker or age
ent is terminaated, as soon as he or she is employed by another b
brokerage his
or herr license will be reinstated
d.
The Superintenden
nt must first give
g notice off his or her prroposal and give the appliccant or
licenssee an opporttunity to requ
uest a hearingg on the propposal before the Financial SServices
Tribun
nal. If it is in the
t public interest to act im
mmediately, tthe Superinteendent may ssuspend a
licensse before a he
earing can be held before the
t Tribunal.
If an applicant
a
or liicensee fails to
t pay a fee or
o administrattive penalty u
under the MB
BLAA or if an
appliccant does nott give the Sup
perintendent information oor documentss required un
nder the
MBLA
AA, for examp
ple, the Superrintendent maay revoke or refuse to issu
ue or renew a license
witho
out making a proposal
p
firstt or giving the
e licensee or aapplicant an o
opportunity tto request a
hearin
ng.
The Superintenden
nt may also su
uspend or revvoke a licensee due to unpaaid fees or ad
dministrative
penalties, the failu
ure to provide
e the Superinttendent with information or documentts required to
o
be submitted, or fo
or other reaso
ons which maay be prescribbed in the futture.
Sectio
on 4.1 of Regu
ulation 408/0
07, entitled Su
urrender of Liicense, detaills the criteria which the
Superrintendent must use to dettermine whetther a brokerrage is alloweed to surrender its license..
The re
emainder of this
t chapter will
w provide a detailed exp lanation of eaach of the fou
ur licenses,
along with the requirements for obtaining and keeping eaach one.
5.4
The Mo
ortgage Brokerage
B
e License
e
The MBLAA
M
has cre
eated a licensse not previously seen in O
Ontario. Prior to the MBLA
AA a licensed
d
mortggage agent would be emplloyed by a company, oftenn referred to as a brokeragge, and in so
doingg the companyy would be alllowed to deaal or trade in mortgages.
Under the MBLAA the corporation, partnership or sole prroprietorship must obtain its own
broke
erage license. This license allows the liccensee to deaal or trade in mortgages, aas well as carrry
on bu
usiness as a le
ender. This liccense is subje
ect to meetingg certain eligibility requireements and
other terms and co
onditions as prescribed
p
byy Regulation 4408/07 and 1888/08, Mortg
gage
Brokeerages: Standards of Practiice.
Lice
ensing Re
equireme
ents (Sec tions 1 – 3, Regu
ulation 40
08/07)
A brokerage licensse may be issu
ued to a corporation, partnnership or so
ole proprietorrship if it
meetss all of the following requirements:
 In the case of a corporation, it was incorp
porated in anyy jurisdiction of Canada,
 In the case of a partnership, it was forme
ed under the llaw in any jurrisdiction of C
Canada,
 In the case of a sole propriettorship, the proprietor
p
is a resident of C
Canada.
 In all cases, it haas a mailing address
a
that is not a post ooffice box and
d that is suitaable to permitt
serrvice by registered mail.
Chapter 5: Regulation
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11
11
 In all cases, it haas Errors and Omissions in
nsurance withh at least $1 m
million of coverage per
year, and a minimum of $500,000 of cove
erage per occcurrence. It m
must also include a
pro
ovision for loss resulting frrom fraudulent acts.
Pa
ause for cla
arification
n – Errors and
a omissiions insura
ance (E & O
O)
Errrors and Omissions insurance, often refferred to as E & O, is insurrance that pro
ovides
coverage for errrors or omisssions made byy a brokeragee, broker, ageent or adminisstrator. This
inssurance mustt contain a provision for fraaud.
 In the case of a corporation or partnershiip, the applicaation includes the particullars of the
priincipal brokerr, who must meet
m
eligibilitty requiremennts as found in section 7.7
7 of the
MB
BLAA. In the case of a sole
e proprietorship the sole pproprietor is aalso the princcipal broker.
Pa
ause for cla
arification
n – Principa
al broker
Th
he position of Principal Bro
oker is a licenssed mortgagee broker who is responsiblle for
en
nsuring that th
he brokerage, and all of itss brokers andd agents, com
mply with the requirementss
of the MBLAA, including enssuring that an
ny contraventtions of the Act are dealt w
with, and thatt
the
e brokerage has
h the prope
er policies and
d proceduress in place to eensure that all brokers and
d
agents are adeq
quately superrvised and thaat they compply with everyy requirementt under the
MB
BLAA.
Suittability fo
or Licensiing (Secttions 1 – 3, Regullation 40 8/07)
A corp
poration, partnership or so
ole proprietorship must bee found suitable for licenssing as a
mortggage brokeragge. This is de
etermined by a four part teest which aim
ms to establish
h lack of
suitab
bility:
 Whhether havingg regard to itss financial position, the coorporation, paartnership or sole
pro
oprietorship cannot
c
reasonably be expe
ected to be fiinancially responsible in th
he conduct off
its business.
 Whhether the paast conduct, in the case of a corporatio n, of any direector or officeer of the
corporation affo
ords reasonable grounds for
f belief thatt the businesss of the corpo
oration will
no
ot be carried on
o in accordance with the law and withh integrity and
d honesty. In
n the case of a
partnership thiss applies to th
he conduct off a partner; inn the case of tthe sole prop
prietorship,
t proprietor him/herselff.
thiis applies to the
 Whhether the coorporation, paartnership or sole propriettorship is carrrying on activvities that
contravene or will
w contraven
ne the Act or the Regulatioons if a licens e is granted.
 Whhether in the case of a corrporation a diirector or offiicer of the corporation hass made a falsee
staatement or haas provided faalse informattion to the Su perintendentt with respect to the
application for a license. In the
t case of a partnership tthis would ap
pply to a partn
ner. In the
casse of a sole proprietorship
p, this would apply
a
to the pproprietor him
m/herself.
A licensed brokeraage may obtaiin a license in
n either its leggal name or b
both its legal n
name and a
name
e registered under the Busiiness Names Act
A as per Se ction 4 of Reggulation 408//07. Whetheer
the naame is legal or
o not, the Superintendentt can refuse t o issue a licen
nse in that naame if the
Superrintendent reasonably beliieves that the
e name mightt confuse the public with aanother
licenssed brokerage
e or that the name
n
might be
b objectionaable on any public groundss. If a
112
Chapter 5: Regulation
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andd Legislation
erage carries on
o any other business, as per Regulatioon 188/08 Secctions 56 – 60
0, it must
broke
ensurre that it doessn’t allow the
e other busine
ess to “jeoparrdize its integgrity, indepen
ndence or
comp
petence when
n carrying on the
t business of dealing or trading in mo
ortgages or carrying on
business as a morttgage lender.””
Stan
ndards off Practice
e (Regula
ation 188
8/08)
Stand
dards of Practice contain th
he business ru
ules that a brrokerage musst follow, in addition to
other rules as set out
o by the MB
BLAA and its Regulations.
R
Contraventio
on of the Stan
ndards of
Practiice as set out in Regulation
n 188/08 is an
n offence undder the MBLA
AA’s section 4
48.2 and is
subject to the fines outlined in section 49 off the MBLAA. The followin
ng will providee a detailed
explanation of the different secctions found in the Standa rds of Practicce for mortgage
broke
erages.
Pub
blic Relat ions
Sectio
ons 5 ‐ 9 of Reegulation 188
8/08 define public relationns materials aas any advertisement by th
he
broke
erage in connection with
h its business as a brok erage that is published, circulated o
or
broad
dcast by any means, or any
a material that a brokeerage makes available to
o the public in
conne
ection with itss business as a brokerage.
A brokerage must use its authorized name when
w
conductting any busin
ness, and it m
must
prominently includ
de its authorizzed name and
d license num
mber in all of its public relaations
materrials. If the brokerage is a franchise, it must state thhat it is independently own
ned and
operaated.
If an individual’s naame is included in the matterial, his or hher title (i.e., broker or ageent) must be
includ
ded. For exam
mple, if Bob Smith
S
is a morrtgage agent and his namee is used in an
n
adverrtisement, he must include
e the words, “mortgage
“
brroker” or “bro
oker” beside his name,
resultting in “Bob Smith, Mortgaage Broker,” or
o “Bob Smithh, Broker.” A
Abbreviations may also be
used.
A brokerage must also provide the license in
nformation, iff requested, tto a person w
who requests
it. This does not mean
m
that a brokerage is re
equired to proovide a list off all of its brokers or
agentts, just those specifically re
equested by a person.
Com
mplaints Process
P
The brokerage must have a com
mplaints process so that if an individuall makes a com
mplaint to thee
broke
erage in writin
ng, the brokerage must resspond in writting, also indicating that if the
comp
plainant believves that the brokerage
b
hass contravenedd the MBLAA
A he or she maay refer the
comp
plaint to the Superintenden
nt. All complaints must bee documented and handleed by one or
more authorized in
ndividuals.
Cus
stomer Re
elations
Sectio
ons 10 – 17 off Regulation 188/08
1
require the brokerrage to verify the identity of the
borro
owers, lenderss and Investo
ors involved in
n a mortgage transaction. If it is unablee to do so it
must advise the otther parties in
n the transacttion. A brokeerage cannot complete anyy transaction
Chapter 5: Regulation
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andd Legislation
11
13
nformation provided to thhe brokerage is suspicious,, the
that itt feels is unlawful. If the in
broke
erage must inform any and
d all lenders in
nvolved in thee transaction
n as soon as p
possible.
If a brrokerage arraanges a mortggage through an investor oor lender of any type, it cannot make a
guaraantee to that investor or le
ender in respe
ect to the moortgage. For eexample, a brrokerage
canno
ot guarantee a specific rate
e of return to
o an investor, nor can it gu
uarantee that all paymentss
will be
e made by the borrower.
Retu
urn of Do
ocuments
s (Section
n 17, Reg
gulation 188/08)
A brokerage is required to returrn any deed, instrument oor other document to its ow
wner
regard
dless of whetther the broke
erage has bee
en asked to r eturn these d
documents, and must do sso
promptly and with
hout charge when
w
requeste
ed in writing.
A brokerage may only
o use inforrmation gathe
ered for the ppurposes for w
which it was o
obtained. An
ny
other use requires the written consent
c
of the person or eentity who is tthe subject o
of the
inform
mation.
Info rmation about
a
the
e Brokera
age
Sectio
ons 18 and 19
9 of Regulatio
on 188/08 req
quire the brokkerage to discclose specific information
to pro
ospective borrrowers. Certtain informatiion must be ddisclosed to aall prospectivee borrowers
while other inform
mation need only
o be disclossed when reqquested.
In all cases, a brokerage must disclose,
d
in wrriting, if it is a cting solely o
on behalf of eeither the
lende
er or the borro
ower, or if it is
i acting on behalf of bothh without show
wing preference to either
(except in cases where the brokkerage is the lender). The brokerage m
must also discllose, in
writin
ng, the numbe
er of lenders on whose behalf the brokkerage acted aas a represen
ntative duringg
the prrevious fiscal year and if itt was a lenderr.
When
n requested by
b the borrow
wer, the broke
erage must diisclose, in wriiting, when th
he brokerage
was the lender for more than fifty percent of
o the total nuumber of morrtgages (including
renew
wals), and if and when the brokerage ussed only one lender, and tthat lender’s name, for
more than fifty percent of the total
t
number of mortgagess (including reenewals) during the
previo
ous fiscal year.
Fee s and Pa
ayments
The MBLAA
M
and Reegulations speak to severaal topics relat ed to fees an
nd other paym
ments:
representation of fees
f
and costts, disclosure of fees in wriiting to a borrrower, disclosure of the
o borrowing (see Chapter 11: Consume
er Protection:: Disclosure) aand acceptingg payments.
cost of
Each is
i described below.
b
Sectio
ons 20 – 23 off Regulation 188/08
1
speciffy that a brokkerage is not aallowed to make any form
m
of rep
presentation that
t
any fees or costs payaable to the brrokerage in co
onnection with carrying on
the bu
usiness of deaaling or tradin
ng in mortgagges or acting as a mortgagge lender are set or
appro
oved by any government
g
authority, unle
ess they are i n respect to d
disbursements to register
or dep
posit instrum
ments under th
he Land Titless Act or the R
Registry Act.
114
Chapter 5: Regulation
R
andd Legislation
w
to a bo
orrower if thee brokerage, broker or ageent may or
A brokerage must disclose, in writing,
will re
eceive a fee or
o other remu
uneration in connection wiith the mortggage or a morrtgage
renew
wal, from who
om it may or will be receivved and the bbasis for calcuulating the am
mount. The
borro
ower must ackknowledge in writing that he or she hass received thiis disclosure. The same
disclo
osure applies if the brokeraage may or will
w pay any fe e or other remuneration tto another
perso
on or entity in connection with
w the morttgage or morrtgage renewaal.
Pa
ause for cla
arification
n – Remuneeration
Re
emuneration is
i the total co
ompensation that is receivved in exchange for the serrvice that hass
be
een provided. Mortgage aggents and age
ents typicallyy receive remu
uneration in tthe form of
mo
oney, most offten as comm
mission, but caan also receivve non‐cash rremuneration
n such as
rew
ward points, trips, etc.
ulation 188/08
8, a brokeragge cannot acceept an advance payment
As per Sections 37 – 39 of Regu
from the borrowerr on transactions where th
he principal a mount of thee mortgage is $400,000 (ass
of Jan
brokerage cannot accept
nuary 1, 2016; it was previo
ously $300,00
00) or less. Inn addition, a b
fundss from a lende
er or investorr unless in reggards to a speecific mortgagge. In other w
words, a
broke
erage cannot accept funds from a lende
er or investor to be held on
n deposit or in trust unlesss
those
e funds are for a specific mortgage.
m
If fund
ds are receive
ed and are co
onsidered dee
emed trust fuunds (funds th
hat are payab
ble to anotherr
party)) the brokerage must provvide a written
n statement too the person or entity providing the
fundss.
Dutiies in Pa rticular Transacti
T
ons
Sectio
ons 24 – 32 off Regulation 188/08
1
require the brokerrage to “ensure that any m
mortgage or
investtment in a mo
ortgage that it
i presents fo
or the consideeration of a borrower, lend
der or
investtor, as the casse may be, is suitable for the
t borrowerr, lender or investor havingg regard to th
he
needss and circumsstances of the
e borrower, le
ender or inveestor.”
In add
dition, the bro
okerage mustt inform the borrower,
b
lennder or investtor, in writingg, as to the
“mate
erial risks of each
e
mortgagge or investme
ent in a morttgage that thee brokerage p
presents for
the co
onsideration of the borrow
wer, lender orr investor,” a nd obtain written acknow
wledgment thaat
this disclosure has been made. Neither of th
hese requirem
ments appliess to lenders o
or investors
that are
a members of a designatted class of le
enders and invvestors, as deefined in the Interpretation
sectio
on of this Regulation.
Disc
closure
The MBLAA
M
is explicit about req
quirements re
elated to discclosure. Furth
her to those aalready
mentioned are oth
her disclosure
e obligations such
s
as discloosure of the b
brokerage’s reelationships,
poten
ntial conflicts of interest, mortgages
m
prreviously in deefault and of the cost of borrowing, thee
latter disclosure be
eing very explicit. Disclosu
ure requirem ents are discu
ussed in detaail in a later
chaptter.
Chapter 5: Regulation
R
andd Legislation
11
15
Poli cies and Procedu
ures
Sectio
ons 40 and 41
1 of Regulatio
on 188/08 dettail the policiees and proced
dures that a b
brokerage
must have in place
e. These policcies and proce
edures must address the ffollowing:
e description of the role off the brokerage in relationn to borrowerrs and lenders and its
 the
dissclosure to bo
orrowers and lenders as re
equired by thiis Regulation
 the
e verification of the identitty of borrowe
ers, lenders aand investors in the circum
mstances
req
quired by thiss Regulation
 the
e determination of the suitability of a mortgage
m
or i nvestment in
n a mortgage for a
bo
orrower, lende
er or investorr, as the case may be
 the
e identificatio
on of the matterial risks of a mortgage oor investmentt in a mortgagge for a
bo
orrower, lende
er or investorr, as the case may be, and their disclosu
ure to the borrower, lendeer
or investor, as the
t case may be, as required by this Re gulation
e identificatio
on of potentiaal conflicts off interest betw
ween the bro
okerage or anyy broker or
 the
agent authorize
ed to deal or trade
t
in morttgages on its bbehalf and a borrower, len
nder or
invvestor who is represented by the broke
erage, and theeir disclosuree to the borrower, lender o
or
invvestor, as the case may be
e, as required by this Regullation
 the
e provision off incentives other
o
than mo
oney for dealiing or tradingg in mortgagees to its
bro
okers and age
ents by otherr persons and entities, if thhe brokerage permits any of its brokerss
or agents to recceive such inccentives
e provision off incentives other
o
than mo
oney for dealiing or tradingg in mortgagees to brokers
 the
and agents who
o are authorizzed by anothe
er brokerage to deal or traade in mortgaages on the
oth
her brokerage
e’s behalf, if the
t brokerage
e provides inccentives to an
ny brokers orr agents of the
oth
her brokerage
e
Rec
cord Keep
ping
A brokerage must retain all reco
ords as follow
ws:
 reccords that relate to a morttgage or morttgage renewaal agreement, as the case may be, for aat
le
east six years after the exp
piry of the term of the morrtgage or reneewal or otherr expiry of thee
mortgage
m
transaction
 all records that relate to a pu
urchase, sale or trade in a mortgage for at least six yyears after th
he
traade completio
on date or oth
her expiry of the transacti on O. Reg. 1888/08, s. 48 ((2)
 forr at least six years
y
all other records thatt are requiredd by subsectio
on 46 (1) or tthat the
bro
okerage is oth
herwise required to create
e or maintain under the Acct. O. Reg. 18
88/08,
s. 48
4 (3)
Pause forr clarificatiion – Tradee completiion date
Regulation 188/08
1
define
es the trade completion
c
daate as the earrlier of:
a) the date on
o which an investor, or a brokerage onn behalf of an
n investor, en
nters into an
agreement to
t trade in the
e mortgage, or
o
b) the date on
o which the trade in the mortgage
m
is ccompleted.
e kept at its principal
p
place
e of business in Ontario, iff any, or, if the brokerage
 reccords must be
has notified th
he Superinten
ndent that it keeps
k
recordss at other speecified premisses in Ontario
o,
att those premiises O. Reg. 188/08,
1
s. 48 (4)
 Re
ecords may be
e kept electro
onically in anyy location as llong as they ccan be retrievved promptlyy,
if requested.
116
Chapter 5: Regulation
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p a written record of all deeemed trust fu
unds that it receives and aall
A brokerage is required to keep
transaactions relatin
ng to the funds as per Reg
gulation 188/0
/08 sections 449 ‐ 55. Thesee records musst
be recconciled mon
nthly and signed by the principal brokerr certifying th
hat they are accurate. If
there are any shorrtfalls the brokerage must immediately notify FSCO. Within ninetty days of thee
end of
o the brokeraage’s fiscal year it must pre
epare and subbmit an annu
ual reconciliattion to FSCO.
A brokerage must also:
 maaintain a mailing address in Ontario thaat is suitable tto permit servvice by registtered mail
 maaintain an em
mail address
 ensure that only the currentt versions of approved
a
form
ms are used b
by its brokerss and agents
Rev
verse Morrtgages
Sectio
on 29 of Regu
ulation 188/08
8 requires bo
orrowers invoolved in a reveerse mortgage to obtain
indep
pendent legal advice. This section also details
d
the deefinition of a reverse morttgage under
the Reegulation.
Com
mpliance Review
A brokerage is resp
ponsible for ensuring
e
that all completedd mortgage ffiles in a given
n transaction
are re
eviewed to en
nsure compliaance with the
e Act and Reg ulations.
5.5
The Mo
ortgage Agent
A
License
Regullation 409/07
7 deals with who
w is suitable
e to be a licennsed mortgagge agent (as w
well as brokerr)
and th
he requireme
ents for licenssing. Licensess are issued w
when approveed, and are th
hen renewed
everyy two years on
n a fixed date
e. For examplle, March 31, 2012 and each two year p
period
thereafter.
Licensses for agentss are renewed
d as long as the agent sati sfies all of the original liceensing
requirrements and if they meet any continuin
ng education requirementts that may bee instituted b
by
FSCO from time to
o time.
To become a licenssed mortgage
e agent an ind
dividual mustt:
 be at least 18 ye
ears old
 be a resident off Canada
 have a mailing address
a
in On
ntario that is not
n a post offfice box and tthat is suitablle to permit
serrvices by registered mail
 be authorized by
b a brokerage to deal or trade in mortggages on its b
behalf
d an approved
d education pprogram for m
mortgage agents within
 have successfullly completed
wo years beforre he or she applies
a
for the
e license
tw
A person is deeme
ed to have me
et the educatiion and expe rience requirrements if thee
Superrintendent is satisfied thatt the individuaal has a combbination of ed
ducation and experience
equivalent to the requirements
r
s. The individual may also be exempted
d from the required
educaation and exp
perience requirements if he
e or she was licensed as a mortgage aggent at any
time during
d
the 24
4 months befo
ore applying for
f the licensee.
R
andd Legislation
Chapter 5: Regulation
11
17
eemed unsuittable for a license (as will a broker) if:
An aggent will be de
 the
e individual’s past conductt affords reassonable grounnds for belief that he or sh
he will not deal
or trade in morttgages in acco
ordance with
h the law and with integrityy and honesty
e individual iss carrying on activities thatt contravene or will contraavene the MB
BLAA or its
 the
Reegulations
 the
e individual has
h made a false statement in his or herr application ffor a license
Individuals who are remunerate
ed for dealingg in mortgagees or trading iin mortgages in Ontario, aas
emplo
oyees or othe
erwise, are re
equired to havve either a m ortgage brokker’s or mortggage agent’s
licensse.
The mortgage
m
agen
nt license allo
ows the licenssee to deal orr trade mortggages on behaalf of one
licenssed mortgage brokerage in
n Ontario, “un
nder the supeervision of a m
mortgage bro
oker” (section
n
9, sub
bsection 5). The
T MBLAA do
oes not define what this teerm means in
n regards to tthe number o
of
agentts allowed to be supervised
d by a brokerr. However, FFSCO’s mortggage agent Qu
ualifying
Stand
dards (MBQS), a documentt that details the
t knowledgge that a morrtgage agent must have to
o
obtain
n a license, in
ncludes such items
i
as application overs ight as well aas other itemss related to
the management
m
of
o agents. In addition, in itts webinar, FSSCO clearly sttated that thee desired
outco
ome of supervvision is the high
h standards of ethical coonduct and business practtices and
includ
des hiring the
e right people, establishingg effective po licies and pro
ocedures, traiining brokers
and agents and mo
onitoring brokers and agen
nts. Furtherm
more, the MB
BLAA does nott deem real
estate
e brokers to be
b licensed.
With regards to bo
orrower disclo
osure, the mo
ortgage brokeerage is respo
onsible for all disclosure
obligaations as per the
t Act and Regulations.
R
The
T mortgagee agent is ressponsible for following
broke
erage procedu
ures in this re
egard.
Stan
ndards off Practice
e
The mortgage
m
agen
nt is responsiible for meetiing the Standdards of Practtice outlined in Regulation
187/0
08. These Staandards of Praactice apply equally
e
to moortgage agentts and are listed below.
First and
a foremostt, neither a liccensed brokerr nor a licenseed agent mayy do anythingg that
jeopardizes the bro
okerage’s lice
ense. Section
ns 4 and 5 of R
Regulation 1887/08 restrictt how a brokeer
or age
ent may be paaid. A brokerr or agent mu
ust be paid dirrectly by the brokerage fo
or any activityy
relate
ed to dealing or trading in mortgages. An
A exception applies to no
on‐monetary incentives,
which
h may be paid
d directly to th
he broker or agent.
Regarrding advertissing and public relations materials,
m
a brroker or agent is not allow
wed to use anyy
other name other than his or he
er licensee naame and musst include his or her brokerrage’s name
and license numbe
ers, prominen
ntly displayed
d, and if the b rokerage is a franchise, th
he materials
must clearly indicaate that the brokerage is in
ndependentlyy owned and operated. A broker or
agentt must also su
upply this info
ormation to anyone who reequests it.
Materials can not contain
c
false,, misleading or
o deceptive iinformation aand only the ttitle
“Morttgage Broker,,” “Broker,” “Mortgage
“
Aggent” or “Age nt” (or an abbreviation) m
may be used.
hat a broker or
o agent mustt maintain a m
mailing addreess suitable fo
or
Finallyy, the Regulation states th
registtered mail, an
nd must maintain an email address.
118
5.6
Chapter 5: Regulation and Legislation
The Mortgage Broker License
Regulation 409/07 addresses who is suitable to be a licensed mortgage agent and the
requirements for licensing. As with the mortgage agent license, a licenses is issued when
approved, and is then renewed every two years on a fixed date. For example, March 31, 2012
and each two year period thereafter.
Licenses are renewed as long as the broker satisfies all of the original licensing requirements and
meets any continuing education requirements that may be instituted by FSCO from time to
time.
Just like an agent, a broker will be deemed unsuitable for a license if:
 the individual’s past conduct affords reasonable grounds for belief that he or she will not deal
or trade in mortgages in accordance with the law and with integrity and honesty
 the individual is carrying on activities that contravene or will contravene the MBLAA or its
Regulations
 the individual has made a false statement in his or her application for a license
To become a licensed mortgage agent an individual must:
 be at least 18 years old
 be a resident of Canada
 have a mailing address in Ontario that is not a post office box and that is suitable to permit
services by registered mail
 be authorized by a brokerage to deal or trade in mortgages on its behalf
 have successfully completed an approved education program for mortgage agents
 have been licensed as a mortgage agent for at least 24 of the 36 months immediately before
he or she applies for the license
 have successfully completed an approved education program for mortgage agents and
passed the approved qualifying exam within three years before applying for the license
A person is deemed to have met the education and experience requirements if the
Superintendent is satisfied that the individual has a combination of education and experience
equivalent to the requirements.
The individual may also be exempted from the required education and experience requirements
if he or she was licensed as a mortgage agent at any time during the 24 months before applying
for the license.
This license allows the licensee to deal or trade mortgages on behalf of only one licensed
mortgage brokerage in Ontario. A mortgage agent must work for only one specified brokerage,
and that brokerage must be licensed.
Just like the agent, a mortgage agent is responsible for adhering to the brokerage’s procedures
related to compliance and for adhering to the Standards of Practice already described for
mortgage agents.
Chapter 5: Regulation and Legislation
5.7
119
The Principal Broker
A principal broker is not a separately licensed position, but is a licensed mortgage agent who is
designated by the brokerage to be its chief compliance officer. Under the MBLAA, the
brokerage is licensed and it must have one licensed mortgage agent designated as the principal
broker. This person is responsible for activities as outlined in Regulation 410/07, which defines
the role of the principal broker, who is eligible to hold this position and the duties of the
principal broker.
To be eligible to be the principal broker for a brokerage, the individual must be authorized by
the brokerage to deal or trade in mortgages on its behalf and must have the following status in
relation to the brokerage:
 if the brokerage is a corporation, he or she must be a director or officer of the corporation
 if the brokerage is a partnership, other than a limited partnership, he or she must be a
partner
 if the brokerage is a limited partnership, he or she must be a general partner or a director or
officer of a corporation that is a limited partner
 if the brokerage is a sole proprietorship, he or she must be the sole proprietor
The position of principal broker is responsible for ensuring that the brokerage, and all brokers
and agents, comply with the requirements of the MBLAA, including ensuring that any
contraventions of the Act are dealt with, and that the brokerage has the proper policies and
procedures in place to ensure that all brokers and agents are adequately supervised and that
they comply with every requirement under the MBLAA.
5.8
The Mortgage Administrator License
Those involved in the administration of mortgages as defined in the MBLAA and Regulation
406/07 must have a Mortgage Administrator’s license. The MBLAA itself is vague on what
constitutes administering a mortgage; however Regulation 406/07, section 1, subsection 1
states that the activity that constitutes administering mortgages is “taking steps, on behalf of
another person or entity, to enforce payment by a borrower under a mortgage.”
The requirements for obtaining a Mortgage Administrator’s license are defined in Regulation
411/07, while the obligations to maintain that license are reflected in Regulation 189/08,
Mortgage Administrators: Standards of Practice.
Corporations, partnerships and sole proprietorships wishing to be licensed as a Mortgage
Administrator must meet licensing requirements and must pass tests of suitability as per
Regulation 411/07. Mortgage Administrators have exactly the same licensing eligibility
requirements as mortgage agents and brokers and must pass the same tests of suitability with
only one additional requirement: that the corporation, partnership or sole proprietorship have a
financial guarantee in an amount equal to $25,000. This may be unimpaired working capital or
something else acceptable to FSCO.
Standards of Practice for Mortgage Administrators are stated separately in the Regulations but
parallel those of mortgage brokerages. Naturally, the Standards of Practice of a brokerage refer
120
Chapter 5: Regulation and Legislation
also to responsibilities related to mortgage agents and mortgage agents. No such references are
found in the Regulations for mortgage administrators.
5.9
Summary
The MBLAA and its Regulations have significant regulatory oversight of the brokerage industry
and require brokerages, brokers and agents to be fully aware of their regulatory responsibilities.
The principal broker, a position mandated by legislation, requires unprecedented oversight over
a brokerage’s operations. This individual must institute policies and procedures that will ensure
compliance with the MBLAA and its Regulations, as well as take corrective measures as
necessary to modify non‐compliant policies and procedures. To effectively achieve these tasks
requires an in‐depth understanding of the regulatory environment, the MBLAA and its
Regulations.
5.10 External Resources
Financial Services Commission of Ontario
The regulator for the mortgage brokerage industry
Website: www.fsco.gov.on.ca
E‐laws
Database of Ontario’s statutes and regulations
Website: www.e‐laws.gov.on.ca
Chapter 5: Regulation and Legislation
121
5.11 Key Terms and Definitions
Administrative Penalties
A penalty assessed by the Superintendent for less serious contraventions of or failures to
comply with the MBLAA
Authorized Name
The name authorized to be used by FSCO. Typically this is the name found on a licensee’s
license
Borrower
The individual responsible for the receipt and repayment of mortgage proceeds
Complaint
A disagreement or statement of dissatisfaction with a brokerage or Administrator. Both must
have policies and procedures in place to deal with complaints.
Compliance
Conforming to the MBLAA and its Regulations
Corporation
A legal business entity created under federal or provincial statutes
Cost of Borrowing
The MBLAA defines the cost of borrowing as “the interest or discount applicable to the
mortgage; any amount charged in connection with the mortgage that is payable by the
borrower to the brokerage or lender; any amount charged in connection with the mortgage that
is payable by the borrower to a person other than the brokerage or lender, where the amount is
chargeable, directly or indirectly, by the person to the brokerage or lender, and; any charge
prescribed as included in the cost of borrowing, but does not include any charge prescribed as
excluded from the cost of borrowing. It must be disclosed as either a percentage or in dollars
and cents depending on the disclosure requirements of the Regulations.”
Deemed Trust Funds (also see trust funds)
Funds that are deemed to be payable to another party. These funds must be kept in a separate
trust account.
Designated Class of Lenders and Investors
A term used to describe specific lenders and investors that may be exempt from certain
requirements under Regulation 188/08, section 2.(1) which states,
“2. (1) For the purposes of this Regulation, a person or entity is a member of a designated
class of lenders and investors if the person or entity is a member of any of the following
classes:
1. The Crown in right of Ontario, Canada or any province or territory of Canada.
2. A brokerage acting on its own behalf.
3. A financial institution.
4. A corporation that is a subsidiary of a person or entity described in paragraph 1, 2 or 3.
5. A corporation that is an approved lender under the National Housing Act (Canada).
6. An administrator or trustee of a registered pension plan within the meaning of
122
7.
8.
9.
10.
11.
12.
13.
Chapter 5: Regulation and Legislation
subsection 248 (1) of the Income Tax Act (Canada).
A person or entity who is registered as an adviser or dealer under the Securities Act
when the person or entity is acting as a principal or as an agent or trustee for accounts
that are fully managed by the person or entity.
A person or entity who is registered under securities legislation in another province or
territory of Canada with a status comparable to that described in paragraph 7 when the
person or entity is acting as a principal or as an agent or trustee for accounts that are
fully managed by the person or entity.
A person or entity, other than an individual, who has net assets of at least $5 million as
reflected in its most recently‐prepared financial statements and who provides written
confirmation of this to the brokerage.
An individual who, alone or together with his or her spouse, has net assets of at least $5
million and who provides written confirmation of this to the brokerage.
An individual who, alone or together with his or her spouse, beneficially owns financial
assets (being cash, securities within the meaning of the Securities Act, the cash
surrender value of a life insurance contract, a deposit or evidence of a deposit) that
have an aggregate realizable value that, before taxes but net of any related liabilities,
exceeds $1 million and who provides written confirmation of this to the brokerage.
An individual whose net income before taxes in each of the two most recent years
exceeded $200,000 or whose net income before taxes in each of those years combined
with that of his or her spouse in each of those years exceeded $300,000, who has a
reasonable expectation of exceeding the same net income or combined net income, as
the case may be, in the current year and who provides written confirmation of this to
the brokerage.
A person or entity in respect of which all of the owners of interests, other than the
owners of voting securities required by law to be owned by directors, are persons or
entities described in paragraphs 1 to 12. O. Reg. 188/08, s. 2 (1).”
Disclosure
The act of making something evident. There are several disclosure requirements mandated by
the MBLAA and its Regulations with relation to a mortgage being recommended to a borrower,
investor or lender by a brokerage.
Disclosure Form
A form, prescribed or otherwise, used to provide disclosure to a borrower, lender or investor, as
the case may be, in accordance with the MBLAA and its Regulations
Errors and Omissions Insurance
Insurance that provides coverage for errors or omissions made by a brokerage, broker, agent or
Administrator. This insurance must contain a provision for fraud.
Financial Guarantee
A requirement under the MBLAA in regards to Mortgage Administrators requiring licensees to
have at least $25,000 in unimpaired working capital or in another form as approved by FSCO.
Financial Services Tribunal
An independent, adjudicative body that hears appeals of regulatory decisions by the
Superintendent
Chapter 5: Regulation and Legislation
123
FSCO
The Financial Services Commission of Ontario. This is the regulatory body that oversees the
mortgage brokerage industry and enforces the Mortgage Brokerages, lenders and
Administrators Act, 2006 (formerly the Mortgage agents Act), as well as several other industries
and Acts.
Guarantees
In regards to the MBLAA, a promise to pay. Guarantees are prohibited under several
circumstances including a brokerage, broker, agent or Administrator guaranteeing payment
from a borrower to an investor.
Investor (also see lender)
An individual or entity lending money on the security of a mortgage
lender (also see Investor)
An individual or entity lending money on the security of a mortgage
Licensure
Permission granted by an agency of government to an individual to engage in a given profession
or occupation
Limited Partnership
An association of two or more partners formed to conduct a business jointly and in which one or
more of the partners is liable only to the extent of the amount of money they have invested
MBLAA
The abbreviation of The Mortgage Brokerages, lenders and Administrators Act, 2006, the
legislation regulating the activities of mortgage brokerages, lenders and Administrators
Mortgage Administrator
An individual or entity that enforces payments by borrowers on behalf of lenders or investors.
Mortgage Administrators must be licensed.
Mortgage Agent
Individuals who are remunerated for dealing in mortgages or trading in mortgages in Ontario, as
employees or otherwise. Mortgage agents are restricted in their abilities by the MBLAA and its
Regulations and must be supervised by a licensed Mortgage agent. Mortgage agents must be
licensed.
Mortgage Broker
Individuals who are remunerated for dealing in mortgages or trading in mortgages in Ontario, as
employees or otherwise. A mortgage broker may hold the position of principal broker and may
supervise licensed mortgage agents. Mortgage brokers must be licensed.
Mortgage Brokerage
Corporations, partnerships, sole proprietorships and prescribed entities that carry on the
business of dealing in mortgages, trading in mortgages or lending money on the security of real
property
124
Chapter 5: Regulation and Legislation
Partnership
A type of business entity in which partners (owners) share with each other the profits or losses
of the business undertaking in which all have invested
Policies and Procedures
A policy is a plan or course of action, while a procedure is a step by step process on how to
perform a certain task. Under the MBLAA, brokerages and Administrators must have a set of
documents that describe an organization's policies for operation and regulatory compliance, and
the procedures necessary to fulfill the policies
Principal Broker
A title held by the licensed mortgage agent responsible for ensuring that the brokerage, and all
brokers and agents comply with the requirements of the MBLAA, including ensuring that any
contraventions of the Act are dealt with, and that the brokerage has the proper policies and
procedures in place to ensure that all brokers and agents are adequately supervised and that
they comply with every requirement under the MBLAA. There may be only one principal broker
per brokerage who must be identified to FSCO.
Proprietor
A sole owner of an unincorporated business, also called a sole proprietor
Public Register of Licensees
A registry required to be maintained by FSCO that provides access to licensee information
Public Relations
As defined in Regulation 188/08, any advertisement by the brokerage in connection with its
business as a brokerage that is published, circulated or broadcast by any means, or any material
that a brokerage makes available to the public in connection with its business as a brokerage.
Regulated activities
As defined by the MBLAA, any activities that require a license which are currently listed as
dealing or trading in mortgages and mortgage lending
Simple Referral
A term used to describe the act of referring a potential borrower to a potential lender, or vice
versa, if the referrer informs the other party, in writing, that a fee will be received for the
referral, the nature of the relationship between the parties, and as long as the only other
information provided is the name, address, telephone number, fax number, email address or
website address of the individual being referred
Sole Proprietorship (also see Proprietor)
A sole owner of an unincorporated business, also called a proprietor
Standards of Practice
Regulation 188/08, which applies to mortgage brokerages, Regulation 187/07, which applies to
mortgage agents and agents, and Regulation 189/08, which applies to mortgage administrators
constitute the Standards of Practice under the MBLAA. These Regulations detail the business
rules that licensees must follow to comply with the MBLAA and its Regulations.
Chapter 5: Regulation and Legislation
125
Superintendent
The Superintendent of Financial Services is a position responsible for issuing and revoking
licenses, as well as for enforcing compliance, all of which are designed to protect the public. All
FSCO staff report directly or indirectly to the Superintendent.
Trade Completion Date
Regulation 188/08 defines the trade completion date as the earlier of:
a) the date on which an investor, or a brokerage on behalf of an investor, enters into an
agreement to trade in the mortgage, or
b) the date on which the trade in the mortgage is completed.
Trust Account
A bank account held by a brokerage or Administrator for the purposes of keeping money held on
behalf of clients separate from the funds of the professional or her business
Trust Fund (or Account) Reconciliation
A written record of all deemed trust funds received and all transactions relating to the funds,
summarized and checked for accuracy.
Trust Funds (also see deemed trust funds)
Funds that are deemed to be payable to another party. These funds must be kept in a separate
trust account.
Vendor Take‐Back (VTB)
Where the seller of the property provides all or some of the financing to the purchaser in order
to sell the property. The arranging of a VTB by a real estate salesperson is an exempted activity
under the MBLAA as long as certain conditions are met.
126
Chapter 5: Regulation
R
andd Legislation
5.12
2 Review
w Questio
ons
Answers to the Revview Questio
ons are found at www.REM
MIC.ca
True
e or Fals e Questi ons
1. As of January 20
009, a brokerrage must disclose to a bo rrower if onee of its agentss will receive a
fee
e from a lender in connecttion with the mortgage rennewal.
orrowers are entitled
e
to the following in
nformation, oonly if they assk: brokeragee name and
2. Bo
lice
ense numberr.
3. It is a good ideaa for a brokerage to have a complaints process but tthis is not req
quired by law..
4. The Superintendent of FSCO
O has the auth
hority to refusse to grant a license to a b
brokerage if
the
e Superintend
dent thinks th
he name migh
ht confuse th e public with
h another exissting
bro
okerage.
5. A sole
s proprieto
orship must establish
e
its eligibility for li censure as a mortgage bro
okerage
wh
hereas a corporation does not.
6. Un
nder certain circumstances
c
s, the Superin
ntendent of F SCO may suspend a brokeer’s license
witthout warning.
o changes may be made to
o the Regulatiions without ggoing through the formal process of
7. No
recceiving Royal Assent.
8. The Financial Se
ervices Comm
mission is onlyy concerned w
with one secttor, the mortggage
bro
okerage industry.
9. Staandards of Prractice are guiding principles that busin esses are enccouraged to implement.
10. Regulatory deccisions by the
e Superintend
dent of FSCO are final, based on the powers
conferred upon
n the position.
11. As per the MBLAA, there arre currently th
hree differen t licenses in tthe mortgagee brokerage
ind
dustry.
12. Th
he Superinten
ndent of FSCO
O (or his/her designate) m
may visit a bro
okerage within the FSCO
reggistry to exam
mine documents and recorrds.
13. Th
he principal broker
b
designation was cre
eated by the M
MBLAA to address compliance issues
witthin the brokkerage.
he role of the
e brokerage may
m be define
ed as “taking steps, on beh
half of anotheer person or
14. Th
entity, to enforce payment by
b a borrower under a mo rtgage.”
15. A mortgage aggent may worrk only for one
e brokerage w
whereas a mo
ortgage agent may be
em
mployed by se
everal brokeraages at the saame time.
Chapter 5: Regulation
R
andd Legislation
12
27
Sho
ort Answe
er Questio
ons
1. Wh
hat are the ed
ducational requirements to
t obtain a m ortgage agen
nt’s license?
2. Wh
hat is/are the
e difference(ss) between a mortgage
m
ageent and mortgage broker??
3. De
escribe the du
uties and resp
ponsibilities of
o the principaal broker.
4. Wh
hat administrrative penalties may be im
mposed on a bbrokerage, bro
oker or agentt?
5. Wh
hat is the diffference betwe
een an offencce under the MBLAA and aan administraative penalty??
dual would bee deemed unssuitable to bee granted a
6. Lisst the circumsstances in which an individ
mortgage
m
brokker’s license.
7. De
escribe the co
omplaints poliicy that a bro
okerage must have to comply with the M
MBLAA and itts
Regulations.
8. Wh
hat information must be in
ncluded in evvery public rellations item??
9. Lisst the items th
hat must be disclosed
d
to a borrower in a disclosure d
document.
10. What
W
amount of errors and
d omissions in
nsurance musst a brokeragee have to com
mply with thee
MBLAA?
M
11. What
W
is the am
mount of time
e that recordss of a mortgagge transactio
on are requireed to be kept
byy the brokeraage?
12. What
W
types of funds must be
b deposited into a trust a ccount?
13. What
W
informattion must be provided to a potential prrivate lender before he or she can
co
ommit to funding a mortgage?
14. What
W
titles (i.e
e., broker, age
ent, etc.) musst/can be useed by brokers and agents in
n advertising
materials?
m
128
Chapter 5: Regulation and Legislation
Appendix 1: FSCO Organization Chart as of November 23, 2015
Figure 17 – FSCO Organization Chart as of November 23, 20152
2
http://fsco.gov.on.ca/en/about/Documents/2015‐orgchart‐nov23.pdf
Chapter 6: Transaction Overview
129
Chapter 6: Transaction Overview
Learning Outcomes
Successful understanding of the concepts presented in this chapter will enable the learner to:
 Explain who the clients are in a brokered transaction
 Discuss the role of the agent as advisor
 Explain the expectations that are made by the borrower and lender
 Summarize the steps in a brokered transaction
Introduction
Brokering a mortgage in Ontario can be both financially and personally rewarding, when done
properly. The mortgage agent will obtain the appreciation of the borrower and receive
handsome remuneration at the completion of the transaction.
However, like any profession, ours has a set of standard procedures that must be followed to
achieve successful completion of a transaction. This chapter will discuss the mortgage agent’s
role in the process and the basic steps in the transaction. Regardless of whether you are a
licensed mortgage agent or licensed mortgage agent, the process of brokering a mortgage is the
same.
6.1
Who is the Client?
Brokering a mortgage transaction involves several key participants in the mortgage industry.
Before the process of brokering a mortgage transaction can be examined, it is important to
answer a basic question: Who is the client?
Let us begin answering this question by revisiting the definition of a mortgage agent as
discussed previously.
Mortgage agent / Agent
A practicing professional who assesses a borrower’s financial goals with respect to real estate
financing and after detailed analysis provides solutions to meet those goals by acting as an
intermediary with the appropriate lending source. In determining the “appropriate lending
source,” two facts are assumed: one, that the client is appropriate for the lender and two, that
the lender is appropriate for the client.
Therefore, by this definition a mortgage agent has two clients: the borrower and the lender.
Let’s explore this further by describing in more detail why the lender and borrower are both
clients.
Borrower
A mortgage agent finds the appropriate lender for his or her borrower; therefore the borrower
is obviously a client. Mortgage agents promote that they will obtain the best mortgage for a
borrower, implying that they work for the borrower. While in some cases a mortgage agent will
charge a fee directly to the borrower, in the vast majority of cases agents are compensated by
130
Chapter 6: Transaction Overview
ender in the fo
orm of a finde
er’s fee or commission. Thhis could poteentially resultt in a
the le
mortggage agent ge
etting a borro
ower a mortgaage with a lennder becausee the lender p
pays a higher
finderr’s fee and no
ot because it is
i in the best interests of tthe borrower.
If, how
wever, the mortgage agen
nt follows the definition off a mortgage aagent illustraated above ass
well as
a adheres to the four borrrower expectations in the section entittled, “The Role of the
Mortggage Agent ass Advisor,” th
he mortgage agent
a
will unddoubtedly actt in the best iinterests of
the bo
orrower in alll cases.
Lende
er
or his or her borrower, thee
Once a mortgage agent
a
has deccided on the most
m approprriate lender fo
nes. In otherr words, the
agentt must ensure
e that the borrrower meetss all of the lennder’s guidelin
agentt must ensure
e that the borrrower is apprropriate for t hat lender. TTherefore, sin
nce the agentt
has a duty to the le
ender, the len
nder is also th
he client, wheether or not tthe lender is p
paying the
agentt a finder’s fee
e or commisssion, or the aggent is chargi ng a fee direcctly to the bo
orrower.
6.2
The Ro
ole of the Mortgag
ge Agent a
as Adviso
or
Why do
d lenders de
eal with mortgage agents??
m
think th
hat since the mortgage
m
age
ent finds the bborrower, thee lender doessn’t have to
You might
pay th
he costs assocciated with obtaining that borrower, suuch as advertising and marketing,
having branch officces, etc., and therefore de
ealing with moortgage agen
nts is more profitable for a
lende
er. While thatt is certainly the
t case, it is only true wh en mortgage agents meett the following
set off basic expecttations. If a broker
b
fails to meet these eexpectations,, then the len
nder will mostt
likely stop dealing with that bro
oker since the
e brokered traansactions wiill become un
nprofitable.
Len der Expe
ectations
These
e expectations can be summarized as:
1. Provide borrrowers who are suitable for
f the lenderr
2. Provide app
propriate protection again
nst fraud
3. Facilitate th
he transaction
n to its successsful complettion (funding)).
These
e three expectations form the cornersto
one of the rellationship bettween the len
nder and the
broke
erage community.
The best way to en
nsure that the
ese expectations are consiistently met is to adopt them as core
values or philosophies that are applied to evvery transacti on.
To me
eet these exp
pectations the
ey must first be
b explained..
1. Pro
oviding borro
owers that are
e suitable forr the lender
The le
ender’s first expectation
e
iss that the morrtgage agent will only send
d an application on behalff
of a borrower
b
thatt fits the lende
er’s lending criteria.
c
Lendding criteria in
nclude such th
hings as
incom
me and emplo
oyment requirrements, property requireements, credit requiremen
nts and so on..
This means
m
that th
he mortgage agent
a
must kn
now and und erstand the leender’s lending criteria
and be
b able to accurately assess the borrower to determ ine if they meeet those critteria.
Chapter 6: Transaction Overview
13
31
t
some moortgage agen
nts send them
m applicationss
Unforrtunately, a tyypical lender complaint is that
for prroducts that they
t
do not have. This typ
pe of error cann erode the cconfidence that lenders
have in the brokerrage commun
nity.
2. Pro
oviding appro
opriate prote
ection againstt fraud
Lende
ers have been
n suffering fro
om an increasse in mortgagge fraud over the past seveeral years.
Although not techn
nically a morttgage agent’ss legal responnsibility, it is a mortgage aggent’s ethical
and moral
m
responssibility to makke reasonable
e attempts too protect the llender from ffraud.
In many brokerage
es’ set of Bestt Practices it is deemed neecessary for th
he mortgage agent to
review
w all documentation receivved from the borrower fo r accuracy an
nd consistency. This mean
ns
identiifying any sign
ns of potentiaal fraud, such
h as poorly wrritten or typeed income verrification as
well as
a verifying income and ide
entity.
More information on fraud prevvention can be
b found in thhe chapter, M
Mortgage Frau
ud.
3. Facilitating the transaction to
t its successsful completio
on
A lend
der expects th
hat a mortgagge agent has submitted ann application to that lendeer because hee
or she
e has determined that lend
der to be the most approppriate for the borrower. In
n addition, the
lende
er expects thaat, if approved
d, the mortgaage transactioon will close. That requirees the
mortggage agent to
o ensure that the borrower is committeed to completting the transsaction and
underrstands what is required of him or her to
t conclude itt.
der also expects that a mo
ortgage agentt will be availaable to assist in ensuring tthe transactio
on
A lend
closess if there is an
nything that the
t mortgage
e agent is requuired to accomplish such aas meeting
outstaanding condittions.
m
agen
nt’s other clie
ent, the borro
ower, also be gins by havin
ng a set of exp
pectations in
The mortgage
regard
ds to the morrtgage agent.
Borrrower Ex pectation
ns
These
e expectations can be summarized as:
1. Act in the borrower’s
b
be
est interests
2. Completelyy analyze the borrower’s needs
3. Make appro
opriate recom
mmendations based on thee borrower’s needs
4. Facilitate th
he transaction
n to its successsful complettion (funding)).
These
e four expectaations form th
he cornerston
ne of the trannsaction. By eensuring thatt these
expecctations are met,
m the morttgage agent will
w develop a strong relatio
onship with tthe borrower
and ensure that th
he industry ass a whole is well
w representted.
The best way to en
nsure that the
ese expectations are consiistently met is to adopt them as core
values or philosophies that are applied to evvery transacti on.
To me
eet these exp
pectations the
ey must first be
b explained..
132
Chapter 6: Transaction Overview
1. Act in the borrower’s best interests
The borrower’s first expectation is that the mortgage agent will at all times act in the best
interests of the borrower. This expectation is key to the borrower and is vital to the success of
the transaction. Acting in the best interests of the borrower can best be defined as putting the
borrower’s needs and concerns first and foremost above others involved in the transaction,
limited only by ethical, moral and legal restrictions.
This has the effect of ensuring that the mortgage obtained for the borrower is both financially
best for them and suits their other needs and goals, such as providing prepayment privileges
that the client believes are important to them, a term that that best reflects their goals, and so
on.
The philosophy of always doing what is best for the client differs from always doing what is
suitable for the client. For example, mortgage agents have made the case that if a borrower has
poor credit they may deserve a mortgage; however they may not deserve the best rates.
Example
Brian was referred to a mortgage agent, Cynthia, by a past client who felt that Cynthia had
provided excellent service and advice. Brian has explained to Cynthia that he has had credit
problems in the recent past. After taking Brian’s application and performing the required
analysis, Cynthia has determined that she can obtain a mortgage for Brian from two different
sources.
The first source will offer Brian a 5‐year fixed rate mortgage with a rate of 6.5% compounded
semi‐annually over a 25 year amortization with monthly payments. The finder’s fee to Cynthia
would be 50 bps.
The second source will offer Brian a 5‐year fixed rate mortgage with a rate of 6.55% (.05% higher
than the first option) compounded semi‐annually over a 25 year amortization with monthly
payments. The finder’s fee to Cynthia would be 75 bps. All other terms and conditions of these
two mortgage options are the same.
Cynthia now has a decision to make. Which option does she offer to Brian?
Cynthia may consider that for only a .05% increase in the rate she will earn an extra $500
compared to the lower rate option. She may further believe that Brian will accept either
suggestion that she makes since he was referred to her and has full trust in her.
What option should she provide to Brian?
Hopefully the decision is clear. Cynthia should offer Brian the lower rate mortgage even though
the finder’s fee she earns will be less because her interests must come second to Brian’s. That is
the core belief behind always acting in the borrower’s best interests.
This was a fairly simple, straight forward example but it is important to point out that there are
many products in the mortgage market today that will pay the mortgage agent a higher finder’s
fee if he or she is able to sell their client a higher rate. By subscribing to the philosophy that a
mortgage agent must always do what is in the best interests of the borrower the solution is
always obvious.
Chapter 6: Transaction Overview
13
33
Su
uccess Tip – Act in th
he best inteerests of th
he client
Byy always doingg what is in th
he best intere
est of the clieent, you will fiind that your referral
bu
usiness increaases over time
e. Even thouggh you may m
make less mo ney on a singgle
traansaction, you will grow yo
our business through
t
wordd of mouth reeferrals, resulting in
inccreased earniings in the futture. A practical reason foor doing the rright thing!
ompletely ana
alyze the borrower’s need
ds
2. Co
Takingg a mortgage
e application and
a finding th
he right lendeer and producct for the borrrower is not
possib
ble unless the
e mortgage aggent has detaailed knowleddge of a borro
ower’s needs. This is
different from simply asking the
e borrower what
w
type of m
mortgage theyy would like.
To completely analyze a borrow
wer’s needs re
equires that tthe mortgagee agent assist the borroweer
in dettermining what those need
ds are. That is
i an importa nt distinction
n from simplyy having the
borro
ower express what
w
they be
elieve their ne
eeds to be to the mortgagee agent.
The mortgage
m
agen
nt must deterrmine the oth
her factors thhat are importtant to the bo
orrower.
Some
e of these facttors will include:
 The borrower’s risk tolerancce. This can determine
d
whhether a variaable rate prod
duct is suitable
er.
forr the borrowe
 The borrower’s intentions with
w regards to
o how long thhey intend to live in this ho
ome. This can
ether a long or
o short term mortgage is suitable.
determine whe
her words, dooes the borrow
wer think theey may need
 The borrower’s debt expectaations. In oth
to take equity out
o of their prroperty in the
e future by reefinancing it? This can determine
wh
hether a close
ed or open mortgage is suiitable.
 The borrower’s saving habitss. This can de
etermine wheether the borrrower requirres more
agggressive prep
payment privileges.
Su
uccess Tip – Service is
i the key
Diffferentiate yo
ourself from your
y
competition by providding more seervice. Part off this service
maay include a full
f financial check‐up.
c
Havve you heardd of agents co
ompleting bud
dgets for their
bo
orrowers? Pro
obably not, and if you had you would m
most likely rem
member them
m. That is
tru
uly a differenttiator!
3. Ma
ake appropriate recomme
endations based on the bo
orrower’s neeeds
If the mortgage aggent embraces the above philosophies
p
tthen this borrrower expecttation is a
natural extension. By completing a full analyysis of their nneeds and beiing determineed to do whaat
is in their best inte
erests, the mo
ortgage agentt will make thhe appropriatte recommendation,
provid
ded that theyy have the req
quisite knowledge to dete rmine what tthat recommeendation
should be.
This means
m
that, to
o be able to make
m
an apprropriate recom
mmendation based on thee borrower’s
needss, the mortgage agent musst be fully verrsed on all of the lenders aavailable and their
produ
ucts.
Not only does the mortgage age
ent have to be
b aware of p roducts available to them,, but they
must also take reasonable steps to be aware
e of products offered through lenders n
not dealing
134
Chapter 6: Transaction Overview
t mortgage
e brokerage in
ndustry. This may include major banks or any otherr lender. Thiss
with the
is a crritical point be
ecause a morrtgage agent cannot makee an appropriaate recommeendation if
they are
a unaware of all of the mortgage
m
products availabble to the borrower.
Takingg reasonable steps to ensu
ure that the mortgage
m
ageent has this in
nformation may seem like
an overwhelming task,
t
but it sim
mply refers to
o ensuring thaat the mortgaage agent kno
ows productss
to wh
hich the borro
ower should have
h
reasonable access.
Su
uccess Tip – Stay up to date on
n lender’s p
products
Re
eview lender marketing
m
maaterials and communicatioons daily to ensure that yo
ou have the
mo
ost up to date
e information
n on lenders’ products andd attend tradee shows and llender
presentations whenever
w
posssible. By doiing so you wi ll be able to cconfidently reecommend
e borrower.
products to the
For in
nstance, if the
ere is a small credit
c
union that
t
doesn’t ddeal with mortgage agentss and only
servicces a small, lo
ocal communiity that has ju
ust lowered thheir rates for the next two
o weeks, a
mortggage agent might not be aware of this. Nor could thhey be expectted to be awaare of this.
b
that does not deal witth brokers haas done the saame, the
If, on the other hand, a major bank
mortggage agent sh
hould be aware of this. In this manner he or she can
n provide whaat they truly
believve to be the most
m appropriate recommendation to tthe borrower.
4. Facilitate the trransaction to
o successful co
ompletion
A borrower further expects, and
d has the righ
ht to expect t hat the mortgage agent w
will facilitate
the trransaction to a successful completion.
In other wordds, the mortggage agent wiill be by theirr
c
side until
u
the transsaction closess.
Succe
essful mortgagge agents will advise the client
c
of all off the steps in tthe transactio
on and stay in
n
touch
h with them th
hroughout, evven when the
e mortgage aggent is no lon
nger involved
d. For
example, once he or she has fulfilled the lender’s conditioons there is n
nothing else ffor the
mortggage agent to
o do except wait
w for the traansaction to cclose.
ever, successfful mortgage agents will fo
ollow up with the borroweer to ensure that required
Howe
appoiintments have been sched
duled and preparations havve been made. Not only w
will this
provid
de the borrow
wer with adde
ed security an
nd peace of m
mind but will ensure that tthe mortgagee
agentt is aware of any
a issues thaat arise, allow
wing him or heer to assist in solving the isssue before
the trransaction is jeopardized.
Conclusion
Some
e of the conce
epts discussed
d in this sectio
on may, uponn closer exam
mination of the brokerage
industry, seem to go
g beyond wh
hat many mo
ortgage agentts deem necesssary. Howevver, by going
beyon
nd what mostt are doing, a mortgage aggent is destineed to differen
ntiate themseelves from
their competition and
a exceed th
heir clients’ expectations.
e
That is truly the paath to successs in this indusstry.
Chapter 6: Transaction Overview
13
35
Su
uccess Tip – Adopt th
he four borrrower exp
pectationss
Ad
dopt the four borrower exp
pectations ass your four Coore Values or Philosophies and write
the
em down. Ke
eep them with you at all times and makke certain thaat your clientss know that
yo
ou subscribe to them. In so
o doing you will
w exceed yoour clients’ exxpectations in
n virtually
evvery transactio
on.
6.3 The Step
ps in a Brrokered Transacti
T
ion
A brokered mortgaage transactio
on has a set of
o typical stepps. We’ll begiin by listing th
hem and then
n
describe each one individually.
1. Attracting a client
2. First contacct
3. The initial consultation
c
4. File creation and management
5. Application analysis: Borrower incom
me and GDS/TTDS ratios
6. Application analysis: Borrower Creditt
7. Application analysis: The property an
nd LTV ratio ( includes ordeering an apprraisal if
applicable)
8. Choosing a lender
9. Submitting the applicatio
on
10. Obtaining the commitme
ent
11. Preparing disclosure
d
doccuments
12. Presenting the commitm
ment and disclosure docum
ments
13. Meeting conditions
14. Instructing the lawyer
15. The lawyer//client meetin
ng
16. Funding the
e transaction
17. File submisssion to the brrokerage
18. Receiving commissions
19. Record keeping
The fo
ollowing is a description
d
off each of thesse steps.
1. Atttracting a Client
Attraccting a client refers to any activity that results in a m
mortgage agent obtaining a potential
borro
ower. This can
n be achieved
d by marketin
ng, advertisingg, or referral..
2. Firrst Contact
This iss the first time that the po
otential borro
ower and the mortgage ageent have conttact, be it on
the ph
hone, through email or facce to face.
3. Th
he Initial Conssultation
The In
nitial Consultaation is the sttep in which the
t agent com
mpletes the b
borrower’s ap
pplication and
d
determines the ne
eeds of the bo
orrower. At this stage the agent has no
ot completed a detailed
analysis to determine the optio
ons available to
t the borrow
wer but has a firm understtanding of
what the borrower wishes to acccomplish.
136
Chapter 6: Transaction Overview
e Creation an
nd Manageme
ent
4. File
The mortgage
m
agen
nt creates the
e borrower’s file, typically in both papeer format and
d using his or
her orrigination sofftware.
Pa
ause for cla
arification
n‐ Originattion softwa
are
Orrigination Sofftware is the computer pro
ogram which the mortgagge agent uses to input the
bo
orrower’s app
plication. Thiss software is designed
d
to ccalculate requ
uired ratios, p
pull a credit
bu
ureau report, electronicallyy submit the application
a
too a lender, ass well as provide other
fun
nctions for th
he mortgage agent.
a
5. Ap
pplication Anaalysis: Borrow
wer Income and GDS/TDS Ratios
The mortgage
m
agen
nt analyses th
he borrower’ss income to ddetermine thee amount of tthe mortgagee
for wh
hich the borrower can quaalify based on
n the availablee borrower d
documentatio
on and the
incom
me ratios, the GDS and TDSS, both of whiich are explaiined in detail in a later chaapter.
6. Ap
pplication Anaalysis: Borrow
wer Credit
The mortgage
m
agen
nt will obtain a credit repo
ort using his oor her origination softwaree. The
industry jargon forr this is referrred to as “pulling a credit rreport”. The mortgage agent will then
analyze it. This analysis will dettermine which lenders maay approve the application.
7. Ap
pplication Anaalysis: The Prroperty and LTTV Ratio
The mortgage
m
agen
nt begins a prreliminary analysis of the pproperty to d
determine wh
hich lender wiill
accep
pt this propertty type and th
he maximum loan amountt that can be approved based on the
value of the prope
erty, referred to as the loan
n to value or LTV. The LTV
V is explained
d in detail in a
later chapter.
c
Dep
pending on th
he type of the
e transaction, an appraisal (a valuation of the
prope
erty to be mortgaged) mayy be required.
Pa
ause for cla
arification
n ‐ Appraisal
An
n appraisal is a report creaated by a certified appraiseer (the individ
dual conductiing the
ap
ppraisal) to de
etermine a do
ollar value of the property and describee its condition
n.
der
8. Choosing a lend
Based
d on the analyysis complete
ed so far, the mortgage ageent will now decide on an appropriate
lende
er to which to submit the application.
a
The
T mortgagee agent requirres significantt knowledge
regard
ding the num
merous lenderrs’ guidelines to determinee the approprriate lender fo
or the
borro
ower.
9. Submitting the Application
Usingg the Originatiion Software,, the mortgagge agent electtronically sub
bmits the app
plication. If
the le
ender cannot accept electrronic submisssions, the morrtgage agent may be required to print
the ap
pplication using the Origin
nation Software and fax it tto the lenderr. There is no
o legal
requirrement on ho
ow an applicaation is submiitted to a lendder. It is soleely up to the lender on how
w
it will accept a mortgage application: by emaail, fax, paperr format or electronically vvia the
origin
nation software.
Chapter 6: Transaction Overview
13
37
O
the Commitmentt
10. Obtaining
If app
proved, the lender will send the mortgaage agent a coommitment leetter. A commitment
letterr is an offer from the lende
er to the borrower to fundd the mortgagge based on the borrower’’s
abilityy to meet certain condition
ns that are lissted in the coommitment leetter.
11. Preparing Discclosure Docum
ments
In eve
ery brokered transaction in
n Ontario, the
e mortgage a gent must prrovide the borrower with a
borro
ower disclosurre. This docu
ument discloses the terms of the mortggage as well as the
associated costs in
nvolved in it being
b
obtained. Typically tthis documen
nt is produced
d by the
Origin
nation Softwaare based on the
t lender’s commitment
c
letter in addition to otherr information
from the borrowerr’s application
n.
12. Presenting the
e Commitmen
nt and Disclossure Documennts
The mortgage
letter, borro
m
agen
nt must then present the commitment
c
ower disclosurre, and an
amorttization sched
dule to the bo
orrower for signing. The m
mortgage ageent must leavee a copy of
both the
t amortizattion schedule
e and signed borrower
b
discclosure with tthe borrowerr. Once
comp
plete, the sign
ned commitment letter is sent
s
by the m
mortgage agen
nt to the lend
der.
Pa
ause for cla
arification
n – Amortizzation scheedule
An
n amortization schedule iss a printout off all of the moortgage paym
ments during tthe term,
inccluding the am
mount of inte
erest and prin
ncipal per payyment and the outstandingg mortgage
baalance after eaach payment is made.
13. Meeting
M
Conditions
In the
e lender’s com
mmitment letter there will be a list of coonditions thaat must be meet before the
mortggage can be funded. One of
o the many conditions
c
maay be to provvide the lendeer with
appro
opriate incom
me verification
n. The commitment letterr will typicallyy describe what
docum
mentation is considered
c
accceptable to the
t lender. Itt is up to the mortgage agent to advisee
the bo
orrower of th
he conditions and assist the borrower inn meeting thee conditions tto ensure thaat
the mortgage
m
is funded.
nstructing the
e Lawyer
14. In
Once satisfied thatt all of the conditions have
e been met, t he lender willl send instrucctions to the
lawye
er who is closing the transaaction on beh
half of the lennder. Certain lenders will d
dictate the
lawye
er who will be
e used to close the transacction while otthers will allow
w the borrow
wer to choosee
his orr her own law
wyer. It is imp
portant to notte that while tthe borrowerr pays the law
wyer’s fee, the
lawye
er is actually working
w
primaarily on behalf of the lend er.
15. Th
he Lawyer/Bo
orrower Meetting
The laawyer will con
ntact the borrower and arrange for an appointmentt for the borro
ower to sign
the closing documents at the laawyer’s office
e. The lawyerr will also info
orm the borro
ower of the
ments require
ed to be brou
ught with the borrower to this meeting. Once the laawyer has
docum
comp
pleted the app
propriate taskks, funds will be requestedd from the len
nder for depo
osit into the
lawye
er’s trust acco
ount.
138
Chapter 6: Transaction Overview
16. Funding the Transaction
Once the lawyer has completed the appropriate tasks, the mortgage will be registered and the
funds will be disbursed by the lawyer from the lawyer’s trust account.
17. File Submission to the Brokerage
Before an agent will receive his or her commission the completed mortgage file must be
submitted to the brokerage for a compliance review. This will ensure that the transaction
complied with applicable legislation and that all appropriate documents are in the file. The
brokerage will then store this file. Based on legislation the regulator has the right to inspect
these files for compliance.
18. Receiving Commissions
Upon receipt of the required documentation from the lawyer indicating that the transaction has
been successfully funded, the lender will forward the finder’s fee or commission to the
brokerage. In the case where there is no finder’s fee, the mortgage agent will have charged the
borrower a fee for arranging the mortgage. This fee is typically taken from the mortgage
advance on closing and is sent to the mortgage agent’s brokerage by the lawyer. The mortgage
agent’s brokerage will then pay the mortgage agent the finder’s fee based on the contract that
the mortgage agent has with the brokerage.
19. Record Keeping
By Regulation the brokerage is required to keep certain documentation on file for a set number
of years. These files may be periodically audited by FSCO. It’s also a good practice for the agent
to make electronic copies of the file documents and keep them securely stored in case needed
in the future.
Chapter 6: Transaction Overview
6.4
139
Key Terms and Definitions
Advertising
A paid, controlled message through a non‐personal medium. Types of advertising include
publicity, public relations, product placement, sponsorship, and sales promotion.
Advisor
An expert who provides objective advice. A mortgage agent, for example, acts as an advisor to a
borrower.
Application
A form used to record information about a potential borrower’s state of affairs, including
financial, credit and employment
Budget
An estimate of income and spending
Commission (from a lender)
A commission or fee paid to a mortgage brokerage by a lender. This fee is usually based on a
certain number of basis points multiplied by the mortgage amount.
Commission (from a brokerage)
The amount paid to the broker or mortgage agent who completed the transaction. This is
typically based on a percentage of the commission or finder’s fee paid by the lender to the
mortgage brokerage.
Commitment Letter
A document illustrating an offer by a lender to a borrower, including the terms and conditions of
that offer
Conditions (relating to a Commitment Letter)
These are the requirements of the lender that must be met before the mortgage will be funded
Disclosure Documents
These are the documents prescribed under the Mortgage Brokerages, lenders and
Administrators Act, 2006 (formerly the Mortgage Brokers Act) that must be provided to the
borrower (and the investor in the case of a private transaction) before the mortgage can be
funded. These documents include the Investor / Lender Disclosure for Brokered Transactions,
the Investor / Lender Disclosure Statement for Brokered Mortgages on Renewal, and the
borrower disclosure.
Finder’s Fee
A commission or fee paid to a mortgage brokerage by a lender. This fee is usually based on a
certain number of basis points multiplied by the mortgage amount.
Marketing
Presenting products or services to potential customers in a fashion that positively promotes the
product or service and makes customers eager to buy or use those products or services
140
Chapter 6: Transaction Overview
Referral
A client or customer who has been advised by a third party to use the product or service of
another
Remuneration
A payment or reward provided to someone for a product or service rendered
Chapter 6: Transaction Overview
6.5
Review
w Questio
ons
Answers to the Revview Questio
ons are found at www.REM
MIC.ca
Sho
ort Answe
er Questio
ons
1. Disscuss the expectations thaat lenders make regarding their businesss dealings wiith a
mortgage agen
nt.
2. Disscuss the expectations thaat borrowers make regardiing their expeectations of a mortgage
agent.
3. If a finder’s fee is 85 bps, how
w much would a lender paay the mortgaage brokeragge on a
$350,000 mortggage transacttion?
4. Disscuss the positives and neggatives of cre
eating a budg et for the borrrower.
5. Wh
hat step(s) in the mortgage transaction
n do you feel is/are the mo
ost importantt and why?
14
41
142
Chapter 7: Insuraance in the M
Mortgage Indu
ustry
Chapter
C
r 7: Insu
urance in the Mortggage Inddustry
Lea
arning Outccomes
Succcessful undersstanding of th
he concepts presented
p
in tthis chapter w
will enable the learner to:
 Explain the purpose and beenefits of morrtgage defaul t insurance
 Discuss
D
the hisstory of CMHC and the introduction of mortgage default insurance in Canada
 Describe
D
the current
c
prograams offered by
b default inssurers
 Discuss
D
the be
enefits of morrtgage credito
or and life inssurance
 Describe
D
the differences
d
be
etween mortggage creditorr life insurance and term liffe insurance
 Discuss
D
the be
enefits of and need for pro
operty insurannce
 Discuss
D
the be
enefits of title
e insurance
 Describe
D
the covered
c
and excluded
e
riskss of title insurrance
 Explain the purpose and beenefits of erroors and omisssions insurancce
Intro
oduction
Insuraance and the mortgage ind
dustry have never
n
had as ssignificant a rrelationship aas they do in
todayy’s mortgage market. Lend
ders are prote
ected by defaault and title iinsurance wh
hile borrowers
are prrotected by creditor/life in
nsurance as well
w as properrty and title in
nsurance. Mo
ortgage
agentts, brokers and brokeragess find their prrotection in e rrors and omissions insuraance.
While
e the several types
t
of insurrance provide
e far differentt coverage for their respecctive
policyyholders, it is a truism thatt insurance is providing siggnificant protection for a cchanging
marke
et, especially from the van
ntage point off the mortgagge borrower w
who is more p
prone to
mortggage fraud than ever beforre.
This chapter
c
will exxplore the various forms of
o insurance aavailable and their impact on the multi‐‐
billion
n dollar Canad
dian mortgagge industry.
7.1
Mortga
age Defau
ult Insurance
Wha
at is Morttgage De
efault Ins urance?
Mortggage default insurance
i
is an
a insurance policy
p
betweeen the insureer and the len
nder that will
comp
pensate the le
ender for losses suffered on an insured loan. It’s im
mportant to note that
mortggage default insurance
i
doe
es not compe
ensate the boorrower.
Bac kground
The Central
C
Mortgage and Houssing Corporattion, a Crownn Corporation
n now known as Canada
Mortggage and Hou
using Corporaation (CMHC) through the National Houusing Act, 195
54 (NHA,
1954)) established mortgage deffault insurancce in Canada in 1954. Thee overriding goal of the
NHA, 1954 was to increase the supply of mo
ortgage funds available in tthe mortgagee market,
becau
use, as of the end of the se
econd world war,
w there waas a significan
nt increase in family
formaation and imm
migration and
d therefore th
he need for neew housing. Previous legislation that
attem
mpted to meet this need was
w found to be
b insufficientt and in need
d of reform.
Chapter 7: Insuraance in the M
Mortgage Indu
ustry
14
43
e that CMHC created for default insura nce is still in use today.
The basic structure
In 196
63, the Mortggage Insurancce Company of
o Canada (M ICC), a private insurer, enttered the
Canad
dian market. The industryy continued its expansion i n 1973 with tthe formation
n of two otheer
comp
panies that evventually merged in 1978 to
t form the Innsmor Mortgaage Insurancee Company.
1981 saw the mergger of Insmorr and MICC, with
w the new ccompany retaaining the MIICC name. GEE
Capitaal Mortgage Insurance Can
nada entered
d the default iinsurance maarket in 1995 and in so
doingg acquired the
e mortgage in
nsurance porttfolio of MICCC, leaving the market with two insurerss:
CMHC
C and GE Capital Mortgage
e Insurance Canada, later rreferred to ass GEMIC. In 2
2005 GEMIC
underrwent structu
ural changes and
a was renamed Genworrth Financial M
Mortgage Insurance
Comp
pany of Canad
da, commonlyy referred to as simply Gennworth.
As of 2006, CMHC dominated th
he mortgage default insurrance market,, owning approximately
70% of
o it compared to 30% by Genworth
G
Fin
nancial. Also in 2006 the A
AIG United Gu
uaranty
Mortggage Insurancce Company Canada,
C
comm
monly referreed to as simply AIG, the largest generall
insuraance company in the Unite
ed States, enttered the Cannadian markeet. On April 16, 2010, a
Canad
dian private in
nvestor group
p, comprised of the Ontar io Teachers’ PPension Plan and Nationall
Mortggage Guarantty Holdings In
nc., acquired AIG
A United G uaranty Morttgage Insuran
nce Companyy
Canad
da. This transaction create
ed the only 10
00% Canadiann‐owned private mortgagee insurance
comp
pany, known as
a Canada Guaranty Mortggage Insurancce Company ((“Canada Guaaranty”)
How
w Mortgag
ge Defau
ult Insura nce Workks
As pre
eviously state
ed, mortgage default insurrance is a poliicy between tthe insurancee company,
CMHC
C, Genworth or
o Canada Gu
uaranty, and the
t lender. Itt is designed tto compensate the lenderr
if the lender sufferrs a loss on an
n insured mortgage. The i nsurance com
mpany chargees the
mortggage default insurance
i
pre
emium to the lender. How
wever, the len
nder typically passes that
premium on to the
e borrower. Normally
N
the lender will addd the premium to the tottal loan
amou
unt and the bo
orrower will pay
p it back to
o the lender oover the life of the mortgagge, however
the bo
orrower could
d also pay thaat amount in cash to the leender. This n
normally doessn’t happen
since the borrower is using all of
o their funds for the downn payment.
If the borrower goes into defau
ult (normally by
b failing to m
make his or heer mortgage payment), the
lende
er must underrtake steps to
o collect the defaulted
d
payyments. If thee lender fails to collect
these payments an
nd has to pow
wer of sale the
e property, o ne of two outcomes will o
occur. One
possib
ble outcome is if the lende
er sells the ho
ouse for moree than is owin
ng to it. In this scenario it
must give that profit to the hom
meowner. The homeowneer and the len
nder are then
n done with
one another.
The other possible
e outcome is if the lender sells
s
the housse for less thaan is owing to
o it. In this
scenaario the lende
er suffers a losss. Since the mortgage is ddefault insureed, the lendeer can now
make a claim to the insurance company
c
to recover that looss. The insu
urance compaany then payss
ender and the
erefore the lender has no longer suffereed a loss. In rreturn for payying the claim
m,
the le
the le
ender assigns any debts paayable to it byy the borroweer to the insurer. In other words, the
mone
ey that the len
nder was owe
ed by the borrower is now
w owed to thee insurance co
ompany. Thee
insure
er may then take
t
legal actiion against th
he borrower tto recover thee claim that itt paid to the
lende
er. If you everr happen to see CMHC, Ge
enworth or Caanada Guaran
nty as a creditor in a
bankrruptcy procee
eding or a con
nsumer propo
osal, it is mosst likely becau
use of this typ
pe of situation
n.
144
Chapter 7: Insuraance in the M
Mortgage Indu
ustry
nder
Beneffits to the len
Allow
ws the lender to
t make loans in excess off 80% loan to value and recover insured
d losses by
makin
ng a claim to the
t insurer.
Beneffits to the borrower
Allow
ws the borrow
wer to receive a high ratio mortgage
m
witth favourable terms and a favourable
intere
est rate.
Prog
grams
Please Note: Regu
ulatory changges enacted in
n July, 2012 hhave reduced the maximum
m LTV of
refinaances to 80%,, the maximum amortizatio
on to 25 yearrs, the maxim
mum GDS to 39% and the
maxim
mum TDS to 44%.
4
The following section
ns on CMHC, Genworth an
nd Canada Gu
uaranty detail
their current defau
ult insurance programs avaailable througgh today’s len
nders. While offered by
these insurers, nott all lenders offer
o
these inssured produccts. It is alwayys up to the leender if it
wishe
es to offer an insured product. The info
ormation provvided below iis directly from the
respective insurer..
CMH
HC
The fo
ollowing figurre illustrates the
t standard CMHC premiiums and is provided as saample
inform
mation only. Information is subject to change.
c
Speccific product iinformation ccan be found
at ww
ww.cmhc.ca
Figure 18 – CMHC Prem
miums as of Jan
nuary, 20161
Pre
emium on To
otal
Loan
Prem
mium on Incrrease to Loaan
Am
mount for Port or Refi
Up to
o and includiing 65%
0.60%
0.6%
%
Up to
o and includiing 75%
0.75%
2.6%
%
Up to
o and includiing 80%
1.25%
3.15%
%
Up to
o and includiing 85%
1.80%
4.00%
%
Up to
o and includiing 90%
2.40%
4.90%
%
Up to
o and includiing 95%
3.15%
5.65%
%
90.01
1% to 95% – Non‐Traditional
Down
n Payment
3.35%
Loan‐to‐Value Ratio
1
http:://www.cmhc‐schl.gc.ca/en/co/moloin/mo
oloin_005.cfm
Chapter 7: Insuraance in the M
Mortgage Indu
ustry
14
45
Su
uccess Tip – Purchasee plus imp
provementss program
m
Be
ecome familiaar with the Pu
urchase Plus Improvement
I
ts program. TThis program
m, offered by
all three insurers, can assist real estate saalespersons t o sell homes that need im
mmediate
repairs that buyyers might no
ot otherwise be
b interestedd in purchasin
ng. Help yourr real estate
salesperson sell more homes and he or she will help yyou fund more mortgages!!
Gen
nworth Fi nancial 2
The fo
ollowing figurre illustrates the
t standard Genworth prremiums and is provided aas sample
inform
mation only. Information is subject to change.
c
Speccific product iinformation ccan be found
at ww
ww.genworth.ca
Figure 19 – Genworth’’s Standard Prem
mium as of Janu
uary, 2016s3
Standard Premium Rate
R
Chart
Includes thee following p
products**
LTV
Prem
mium
Raate
op‐up
To
Pre
emium


Up
U to 65.00%*
*
0.6
60%
0.60%
0

65
5.01 ‐ 75.00%*
0.7
75%
2.60%
2
75
5.01 ‐ 80.00%*
1.2
25%
3.15%
3
80.01 ‐ 85.00%
%
1.8
80%
4.00%
4
85.01 ‐ 90.00%
%
2.4
40%
4.90%
4
90.01 ‐ 95.00%***
3.6
60%
5.65%
5





Homeb
buyer 95
Cash‐Out Refinance (max. 80%
LTV)
Cashback Equity Ow
wner‐
Occupaancy
Family Plan
Insured
d Progress Advance
New to Canada
Secondary Homes (TType A)
Purchasse Plus Impro
ovements
** FFor specific underw
writing guidelines related to the
aboove products, plea se refer to the app
plicable product
oveerview.
m
**** For Cashback Equuity Program the sstandard premium
ratee is 2.90% and thee premium for porttability/top‐up is
4.255%
* A .25% premium surchargge will be applied for everyy 5 years of a mortization b
beyond the
tradition
nal 25 ‐ year mortgage
m
am ortization peeriod
Can
nada Gua
aranty
The fo
ollowing figurre illustrates the
t standard Canada Guarranty premiums and is pro
ovided as
sample information only. Information is sub
bject to changge. Specific p
product inform
mation can bee
found
d at www.canadaguaranty.ca
2
3
Genw
worth Financiaal, www.genwo
orth.ca
http:://genworth.caa/en/lenders/p
premium‐rate‐table.aspx
146
Chapter 7: Insuraance in the M
Mortgage Indu
ustry
Figure 20 ‐ Canada Gu
uaranty Standard Premiums as of
o January, 201664
Canada
C
Guarranty Premiu ms
Standard Premium Chaart
Low‐Doc Advantage™
™
Rental Advaantage™
(Self‐eemployed)
Loan‐‐to‐Value Rattio
Single
Refi/Port
Top‐up
Single
Refi/Port
Top‐up
Single
Reefi/Port
TTop‐up
≤ 65%
%
0.60%
0.60%
0.80%
1.50%
1.25%
2
2.75%
65.01
1 ‐ 70%
0.65%
2.25%
1.00%
2.60%
1.75%
3
3.00%
70.01
1 ‐ 75%
0.65%
2.25%
1.00%
2.60%
1.75%
3
3.00%
75.01
1 ‐ 80%
1.00%
2.75%
1.64%
3.85%
2.50%
3
3.75%
80.01
1 ‐ 85%
1.75%
2.90%
5.50%
85.01
1 ‐ 90%
2.00%
4.75%
7.00%
90.01
1 ‐ 95%
2.75%
Flex 95
9 Advantage™
2.90%
NOTE:: Mortgage insurance premiu
ums are non‐re
efundable.
Defa
ault Man agement Program
ms (also kknown ass “workou
ut
opti ons”)
Both CMHC
C
and Ge
enworth Finaancial provide
e mortgage deefault management prograams that are
design
ned to assist borrowers who get into financial difficuulty and havee trouble makking their
sched
duled mortgagge payments..
ograms are provided throu
ugh the lendeer in conjuncttion with the insurer and
Typicaally, these pro
are de
esigned to provide a solution. These op
ptions can incclude:
 Special Paymen
nt Arrangements
A lender may make
m
arrangem
ments with th
he borrower tto recover paayment arrearrs over the
sho
ortest period, as long as itt is within the
e borrower’s ffinancial abilitty. For example, with a
CM
MHC policy a lender
l
may do this with am
mounts up too $10,000 withhout CMHC’s prior
approval.
eamortization
 Re
A lender may in
ncrease the am
mortization of
o a mortgagee when the deefault is due tto the
payments no lo
onger being afffordable for the borrowe r. For examp
ple, with a CM
MHC policy a
len
nder may exte
end the amorrtization up to
o 30 years wiithout CMHC’’s prior appro
oval.
 Capitalization
t amount oof arrears to the loan amou
unt. For
This procedure allows the lender to add the
exaample with a CMHC policyy, a lender maay increase thhe loan amou
unt up to $20,,000 one timee
during the borrower’s ownership withoutt CMHC’s prioor approval.
 Other options
4
http:://www.canadaguaranty.ca/d
downloads/CG
G_Premium%200Rates_handoout_EN.pdf
Chapter 7: Insuraance in the M
Mortgage Indu
ustry
14
47
Lenders may haave additional options thatt can be apprroved by the iinsurer before
implementation
n.
More information may be found on the insurers’ websitees or by contaacting them d
directly.
7.2
Mortga
age Crediitor and Life
L Insurrance
Wha
at is Morttgage Cre
editor Ins
surance?
?
There
e are two type
es of mortgagge creditor insurance.
 The first is typiccally a life insurance policyy provided to a borrower bby an institutiional lender.
 The second is a life insurancee policy proviided to a borrrower througgh a third partty, such as thhe
ortgage Prote
ection Plan (M
MPP), that is not
n affiliated with an instittutional lendeer
Mo
t
of morttgage credito
or insurance are designed tto pay the insstitutional len
nder upon
Both types
death
h of the insure
ed.
Lende
er’s Mortgage
e Creditor Inssurance
This type of insurance is obtained by the borrrower from tthe lender, ussually in the b
branch of thee
er when they apply for the mortgage. This
T type of poolicy is very cconvenient fo
or the
lende
borro
ower to obtain
n and the insu
urance premiium is usuallyy included in tthe mortgagee payment,
makin
ng it virtually invisible to th
he borrower.
This type of policy offered by le
enders is a gro
oup policy, m
meaning that aall borrowers are lumped
together in the sam
me category. For example
e, smokers annd non‐smokeers alike are ccombined in
the saame age categgory, often re
esulting in pre
emiums that may not accu
urately reflect the
condition of the bo
orrower’s heaalth.
In add
dition, this type of insurance is post und
derwritten, m
meaning that the borrowerr simply has tto
answe
er three basicc health questions in the application
a
fo r coverage. Iff the borroweer answers no
o
to all of the questions, he or she is typically approved.
a
If the borrower answers yess to any of the
questtions, he or sh
he must supply additional details along with the app
plication. Thee lender may
then decide
d
what steps,
s
if any, must be take
en for it to ap prove the borrower’s application for
insuraance.
If the
e borrower dies and a claim
m is made by the borrowe r’s spouse, esstate, etc., the insurance
comp
pany will then underwrite the
t applicatio
on. This meanns that the in
nsurance com
mpany will now
w
review
w how those three questio
ons were answ
wered and reesearch the borrower’s past medical
record
ds to ensure that
t
the answ
wers were ansswered accurrately. If theyy were not, th
he insurer maay
declin
ne to pay the claim.
If a bo
orrower decid
des to switch lenders at so
ome point, th e borrower w
will then havee to reapply fo
or
insuraance with the
e new lender. This could re
esult in higheer premiums d
due to the bo
orrower’s
increaased age and//or changes in his or her medical
m
condiition.
The co
overage provvided by morttgage creditor insurance iss also a factorr to consider. This type of
policyy is often refe
erred to as de
eclining term insurance.
i
Thhis means thaat the amoun
nt of the
coverrage declines as the outstaanding balancce of the morttgage is repaiid by the borrrower.
Howe
ever, the prem
miums remain
n constant.
148
Chapter 7: Insuraance in the M
Mortgage Indu
ustry
editor insurannce will typically expire wh
hen the
Regarrding continued coverage, mortgage cre
mortggage is paid off
o or when th
he borrower reaches
r
70 yeears of age, reesulting in a lo
oss of
coverrage for the policy holder.
Finallyy, mortgage creditor
c
insurrance has onlyy one beneficciary: the lend
der. This simply means
that whatever
w
the financial nee
eds of the survvivor(s), the iinsurance payys the lender,, not the
survivving family me
ember(s).
Third Party Insurance
In com
mparison, the
e Mortgage Protection Plan, which insuures over 110,,000 people ffor life
insuraance and in excess of 40,000 for disability insurance is portable, m
meaning thatt this policy
can be taken with the borrowerr to a new len
nder.
The Mortgage
M
Prottection Plan’ss characteristtics vary from
m typical morttgage creditorr insurance byy
includ
ding a total diisability optio
on, being inde
ependent of tthe lender, an
nd offering a 6
60 day refund
d
on pre
emiums if the
e policy holde
er decides to cancel his or her policy.
This type of plan iss only available through a mortgage ageent, so the avverage borrow
wer does not
have access to it.
Wha
at is Life Insuranc
ce?
In thiss section, term
m life insuran
nce, which is a life insurancce policy thatt is in force fo
or a
contraacted numbe
er of years at which
w
time itt then comes up for renew
wal, will be refferred to as
life insurance. This type of insu
urance contrasts with who le life insuran
nce that requ
uires the
insure
ed to make paayments for a set number of years, how
wever the covverage contin
nues for the
entire
ety of the policyholder’s liffe. This insurance is often more expenssive than term
m insurance
and iss not similar enough
e
to mo
ortgage credittor insurancee for an accurate comparisson. Life
insuraance is a policcy purchased by an individ
dual that will ppay his or herr beneficiariees in the even
nt
of deaath of the insured. This tyype of policy is designed too replace the financial valu
ue of the
perso
on who passed
d away and coverage is no
ormally relateed to income, not debt. Liffe insurance
can only be obtained through a licensed life insurance br oker or agentt and part of the process is
determining the am
mount of covverage require
ed based on tthe individual’s unique sett of
circum
mstances. Th
his may result in the policyholder requirring more insurance than w
would
otherwise be provided by mortgage creditorr insurance.
nsurance is prre‐underwrittten, meaning that the indivvidual policy holder must go through a
Life in
health
h questionnaire that allow
ws the insurer to determinee if coverage is warranted and to set
the prremium based on the indivvidual, not a group.
g
This iss referred to as pre‐underrwriting as
oppossed to mortgaage creditor insurance thaat is post‐und erwritten. Th
he net result is that the
policyyholder can be assured thaat upon death
h the insurer will pay his o
or her claim quickly. In
essen
nce, a life insu
urance compaany has two years
y
from thee date of app
proval to dispute a
policyyholder’s claim
m on their inssurance application. If theey do not the insurance co
ompany no
longer has any recourse, meaniing that the in
nsurer cannott refuse to paay the insured
d’s claim.
Life in
nsurance has level premium
ms that are valid for the teerm of the po
olicy and the aamount of
coverrage remains constant. When the policy comes up foor renewal th
he premium w
will most likelly
increaase, unless th
he policyholde
er has improvved medicallyy. Normally th
his is not the case and eveen
if it were,
w
the policcyholder wou
uld now be old
der and requiire higher preemiums due tto age.
Chapter 7: Insuraance in the M
Mortgage Indu
ustry
14
49
Su
uccess Tip – Partner with a pro
ofessional
Paartner with a qualified
q
life insurance prrofessional annd make him or her your in
nsurance
representative.. Tell your client that “you
ur insurance rrepresentativve” will contacct them to
disscuss their inssurance need
ds. You will asssist your clieents and get rreferral business from your
inssurance repre
esentative. A great way to
o grow your bbusiness!
The fo
ollowing figurre provides a visual compaarison betweeen mortgage creditor insurance and
term life insurance
e.
Figure 21 – Mortgage Creditor vs. Terrm Life Insurancee
Term Life Insurance
Mortgage Creditor Insu
urance
Und
derwriting
Post‐underrwritten
Pre‐underwritten
Mayy require medical
inveestigation, len
ngthening thee
pro
ocess
Con
nvenience
Quick and easy
e
to qualiffy
Porrtability
None
Indeependent of a lender
Pre
emiums
Level
Levvel
Am
mount of Initia
al Coverage
Determined
d by the amoount of
the mortgaage
Dettermined by tthe insured
If the borro
ower defaultss or
cannot makke his or her
mortgage payment,
p
the
insurance will
w cease as tthe
insurance is tied to the
mortgage payment
p
As llong as the in
nsured can pay
the insurance prremium, the
insu
urance will co
ontinue,
regardless of wh
hether the
mortgage paymeent cannot bee
mad
de.
Decreases
Con
nstant
When the mortgage
m
is ppaid or
upon transfer to a new llender
At tthe end of thee term
Pro
otection on
deffault/illness
Am
mount of Conttinuing
Covverage
Exp
piry
150
Chapter 7: Insuraance in the M
Mortgage Indu
ustry
neficiaries
Ben
Num
mber of Deatth Benefits
Spe
eed of Claim Payment
P
Lender
One, the ou
utstanding baalance
of the morttgage
Can take up
p to several m
months
due to insu
urer investigattion
Nam
med by the in
nsured
If tw
wo homeown
ners are
insu
ured and therre is a
com
mmon disasteer where both
h
are killed, two death benefitss
are paid.
Paid
d within dayss
Wha
at insuran
nce is be
est for yo ur Clientt?
The general consensus is that te
erm life insurrance is a bettter option forr the borroweer than
mortggage creditor insurance for several of th
he reasons nooted above. However, bettter coveragee
is onlyy applicable when
w
the term
m insurance is in force. Onn average, on
nly about 20%
% of mortgagee
agentts’ clients actu
ually take mo
ortgage credittor insurance . Quite often
n, this is due tto the
borro
ower indicatin
ng that he or she
s currently has adequatte insurance o
or that he or sshe feels thatt
insuraance is not re
equired underr his or her cirrcumstances.. Since the m
mortgage agen
nt is not a
licenssed life insuraance represen
ntative he or she
s cannot deetermine wheether those sstatements arre
accurate.
In add
dition, even iff the borrowe
er indicates th
hat he or she will take term
m life insuran
nce instead off
mortggage creditor insurance, th
he borrower may
m not see a life insurancce agent quicckly enough to
o
ensurre that there is
i adequate in
nsurance in fo
orce as soon as the mortggage begins. IIn many casess
the bo
orrower simp
ply forgets or puts off seein
ng the life inssurance agentt and ends up
p not being
prope
erly insured.
One option
o
to ensu
ure that the client
c
is prope
erly protectedd is to suggesst that the borrower take
the in
nsurance provvided by the Mortgage
M
Pro
otection Plan or the credito
or life insuran
nce policy and
d
then meet
m
with a life insurance agent at his or her convennience. While this does not address th
he
issuess noted earlie
er regarding the difference
es in coveragee, it does ensure that the b
borrower is
coverred immediately. Another sound busine
ess practice iss to obtain th
he borrower’ss permission
to havve your insurance agent (aan insurance agent
a
that yoou know and ttrust) initiatee the contact
with the
t borrowerr. This reduce
es the potential of the bor rower forgettting or negleccting to
contact an insuran
nce agent on his
h or her own.
In add
dition, curren
nt legislation requires
r
that the mortgagee agent or broker offer inssurance to the
borro
ower. If the borrower declines, the agent or broker sshould have tthe borrowerr sign a waiveer
declin
ning the insurrance. This will
w protect the
e agent or brooker if at som
me point in the future therre
is a qu
uestion as to whether the insurance waas ever offereed. This can b
be especially important if a
home
eowner dies during
d
the mo
ortgage and a spouse or otther survivor sues the morrtgage agent
or bro
oker for not offering
o
insuraance during the applicatioon phase.
These
e steps are of vital importaance. They will ensure thaat, if the borro
ower dies, hiss or her family
will be
e adequately protected, which
w
should be
b an overridding concern ffor every morrtgage agent..
Chapter 7: Insuraance in the M
Mortgage Indu
ustry
7.3
15
51
Properrty Insura
ance
Wha
at is Prop
perty Insu
urance?
Prope
erty insurance
e is a policy of insurance th
hat provides ccoverage for the homeow
wner against
coverred risks.
Why
y is it nec
cessary?
Basic insurance to cover the rep
placement off the building (normally thee house) and other
structtures on the property
p
is vittal to lenderss and is a requuirement of the Standard Charge Terms.
This in
nsurance protects the insu
ured against loss, and by eextension protects the lend
der’s securityy
for the loan. Lenders require th
hat the insuraance policy haave a provisio
on that assign
ns the
eeds first to th
he lender. Th
he lender can then decide whether to replace the bu
uilding, which
h
proce
is typical, or use th
he proceeds to pay off the mortgage.
If the borrower fails to pay the insurance pre
emium the leender has the right to pay tthe premium
on the
e homeowne
er’s behalf or replace the policy
p
(some i nsurance com
mpanies will n
not accept a
premium paymentt from anyone
e but the insu
ured). The hoomeowner ow
wes the lendeer the costs
i
involvved in either instance.
Typ es of Ins urance
Home
e insurance
This type of policy is for the hom
meowner and
d is designed to protect no
ot only the ph
hysical
building, but all the
e things in the homeowne
er’s house as w
well. A stand
dard house in
nsurance policcy
will en
nsure that if something
s
likke fire, vandalism or theft ooccurs the ho
omeowner will be
protected and his or
o her valuab
bles will be replaced. It is aalso possible for a homeow
wner to be
eople have wh
hile on the prroperty which
h necessitatess the need fo
or
held liable for accidents that pe
liabilitty insurance.
Most home insurance policies carry
c
standard
d coverage. TThe followingg list summarizes this
coverrage.
 Buuilding Coveraage
Alll risk coveragee insures the building for the
t most com
mmon types o
of losses. When there is All
Rissk coverage in
n place, the building
b
is insu
ured for everyything, unless it is specificcally excluded
d
fro
om the policy (e.g., intentio
onal damage to the propeerty by the ow
wner would not be
covvered).
 Naamed‐Perils Coverage
This includes a list of the mo
ost common types of thinggs covered un
nder the insurrance policy.
Naamed‐Perils in
nclude fire, th
heft and wate
er damage. Evverything is liisted very cleearly in the
po
olicy contract so the policy owner has a complete an d thorough u
understandingg of what thee
inssurance policyy covers. Nam
med‐Perils bu
uilding coveraage is very rarre since it lim
mits the
am
mount of cove
erage.
 Coontents
Alll‐risk contentss coverage insures belongings inside thhe house for tthe most com
mmon types of
152
Chapter 7: Insurance in the Mortgage Industry
losses. When the policy owner has All Risk coverage, the contents are insured for everything,
unless it is specifically excluded from the policy.
A standard house policy provides for the Actual Cash Value (ACV) replacement of belongings.
This means that the policy owner only receives the value of the item, less depreciation. For
example, if the policy owner purchased a TV 5 years ago for $1,500, he or she might only get
$500 for it if it was destroyed in a fire. Even though it may cost $1,800 to replace that same TV
today, the insurance would still only give the policy owner $500.
Many people choose to add the Replacement Value option to their contents coverage.
Replacement value coverage means that the contents of the policy owner’s house are insured
for the amount it costs to replace them. When the owner replaces the item with a similar kind
and quality, within a specified time, the insurer will pay what it cost to replace the item, not
what it was actually worth in its used state. This means if a 5 year‐old TV was lost in a fire, the
owner would get the full amount it would cost to replace it, even if that is more than was
originally paid for the TV.
 Detached Private Structure
This type of coverage applies to structures that exist on the property but are not connected
to the primary residence. For example, a detached garage could be included under this
coverage.
 Additional Living Expenses
If the owner is forced to leave the house because of a loss, this coverage pays for reasonable
and necessary expenses to temporarily live away from home. Hotel and food costs are the
type of expenses that would be covered under such circumstances.
 Personal Liability
Liability is a legal responsibility. Liability Insurance provides protection from having to pay
damages to people, if the owner has been found responsible for unintentionally injuring
them or damaging their property.
Example
If someone is injured on the insured’s property, the owner may be responsible for damages. For
example, if someone slips on the front steps of this property, breaks an arm, and cannot go to
work, the owner could be held responsible for the person's lost wages. This insurance coverage
would pay the injured person those damages up to the policy’s maximum covered amounts.
Another benefit of liability insurance is that it protects the policy owner anywhere in the world.
For example, if the policy owner was golfing and his or her golf club accidentally flew out of his
or her hands, and struck and injured another player, liability insurance would cover this
accident.
 Voluntary Payments for Medical Expenses
This covers medical costs if someone accidentally injures him or herself as a result of your
personal activities or the way you have maintained your building. It also covers injuries
experienced by resident employees, such as nannies or housekeepers, while working for you.
You don't have to be found liable to make a claim under this coverage, but some limits do
apply and may be different from company to company.
Chapter 7: Insurance in the Mortgage Industry
153
 Voluntary Payments for Damage to Property
The accidental physical damage to the property of others is covered. This may occur as a
result of personal activities or the way the policy owner’s building is maintained or used.
Pets or animals that are owned or cared for by the policy owner may also cause damage.
This type of coverage would also include the intentional acts of other insured individuals
under a certain age (set by the individual provider).
 Rental Loss Insurance
In the case where the insured property is being used as a rental, it is prudent to obtain this
type of addition to the standard policy. This addition (or rider as it is referred to) will protect
the insured against loss of income due to covered perils. For example, if the home burns
down, the standard policy will cover its replacement. However if it was being used as a
rental, the standard policy will not cover replacing the lost income from the renter while the
property is being rebuilt. This insurance coverage does.
Condominium Insurance
When a purchaser buys a condominium, the purchaser owns the "unit" and a share in the
common areas of the condominium ‐‐ the roof, basement, elevator, heating room, lobby,
swimming pool, parking garage, etc. An owner may be held responsible for harm caused to any
part of the building or to others who live or visit the condominium complex. A condominium
insurance policy can remove some of the financial worries of condominium ownership.
This insurance policy provides coverage for the owner’s personal property, structural
improvements to the unit and additional living expenses if the owner is the victim of fire, theft,
or other disaster listed in the policy. The owner will get liability protection to protect him or her
from harm caused to any part of the building or to others who live in or visit the condominium
complex. An important feature of this insurance policy is loss assessment. The condominium
owner shares responsibility with others in the building for common property. Loss assessment
protects the owner from damage to these common areas.
A "master policy" is purchased and provided by the condominium board. This covers the
common areas shared with others in the building like the roof, basement, elevator, heating
room, lobby, swimming pool, parking garage, etc. for both liability and physical damage.
Sometimes the condominium corporation is responsible for insuring the individual condominium
as it was originally built, including standard fixtures. In this case, the condominium unit owner
would only be responsible for insuring personal property as well as any alterations the current
owner or a previous owner have made to the original structure of the condominium, like
remodelling the kitchen or bathtub. In other cases, the condominium corporation is responsible
for insuring only the bare walls, floor, and ceiling. The owner would be responsible for insuring
personal property plus things like the kitchen cabinets, built‐in appliances, plumbing, wiring and
bathroom fixtures.
Limitations In House Insurance, Condo Insurance or Tenants Insurance Policy Coverage
With standard house insurance, condo insurance or tenants insurance policies there are
limitations regarding theft coverage for jewellery, furs, silverware, business property, bicycles,
money, etc. If the homeowner owns any of these items he or she would be required to
purchase additional insurance to cover them.
154
Chapter 7: Insuraance in the M
Mortgage Indu
ustry
ng a House Inssurance, Condo Insurance
e, or Tenants Insurance Deeductible
Payin
When
n an insured makes
m
a claim
m, the homeowner always pays a small portion of the claim, whilee
the in
nsurance com
mpany pays the rest. The portion
p
paid bby the homeo
owner is called
d the
deducctible. The am
mount of the deductible affects the pri ce of the insu
urance policy. The higher
the de
eductible, the
e less the cost of the insurance premium
m.
7.4
Title Ins
surance
Wha
at is Title
e Insuran ce?
Title insurance is a policy of insu
urance that provides
p
coveerage for the ttitle‐related rrisks
associated with real estate tran
nsactions. It is designed too cover the un
npredictable or
undettectable issue
es such as forgery, fraud, missing
m
heirs, etc. that can
n affect rightss of ownership
p.
Becau
use it is insuraance, a title in
nsurance policy moves thee risk associatted with title from the
home
ebuyer, the le
ending instituttion or the law
wyer, to the ttitle insurer.
If there is a problem with title that
t
only beco
omes known after closing,, the title insu
urer may
rectifyy the problem
m or compenssate the title insurance poolicyholder, prrovided the tyype of
proble
em that surfaaces is covere
ed by the title
e insurance poolicy.
Typ es of Pollicies
Title Insurance policies can typically be broken down intoo two basic caategories:
 Lender Policy
ormally taken at the reque
est of the lendder upon clossing of a refinancing
This policy is no
traansaction. Th
hese policies may
m provide coverage
c
to bboth the lender and the ho
omeowner,
wh
hich is recomm
mended.
 Ho
omeowner’s Policy
P
This policy is no
ormally taken by the new homeowner
h
w
when purchassing a properrty; however
titlle insurance can
c be purchaased at any tiime during thhe homeowneer’s ownershiip of the
pro
operty.
A Title
e Insurance policy
p
typicallyy protects against the folloowing risks:
 Deefence of titlee
 Fraaud and forgeery (includingg title theft, thhe registratio n of a frauduulent mortgagge, etc)
 Unnenforceabilitty of the insurred mortgagee
 Deefects that woould have beeen revealed by
b an up to daate Survey
 Errrors in the Survey
 Leggal services, including lawyyer negligencce, lawyer fra ud, lawyer deeath, disbarm
ment or
rettirement
 Deefects in title such
s
as liens, executions, adverse
a
claim
ms, encroachm
ments, unregistered
easements, mortgages and other
o
encumb
brances
 Unnmarketabilityy of title
 Hyydro, tax, water and gas arrrears
 Exeecutions agaiinst prior ownners
 Coondominium status
s
certificcates
 Septic system violations
v
 Woork orders, noon‐conforminng zoning
Chapter 7: Insuraance in the M
Mortgage Indu
ustry




15
55
Re
estrictive cove
enants
Mu
unicipal workk orders and permits
p
Un
nregistered hyydro easemen
nts
Other risks cove
ered by the policy.
A Title
e Insurance policy
p
will typiically not pro
otect against tthe followingg risks:
 Tittle issues thatt arise after thhe policy datee that were nnot present beefore (other tthan fraud annd
oth
her covered risks)
r
 Tittle defects thaat the homeoowner was aw
ware of and too which the h
homeowner aagreed
 Tittle defects thaat the homeoowner was aw
ware of and abbout which th
he homeowner did not
infform the insurer
 Environmental hazards, unleess noted on title
t
 Leggality or rents
 Firre retrofit com
mpliance
 Coosts of movingg fences or booundary wallss
 Losses from failling to make a claim in a timely fashion
 Other exclusionns included in the policy.
Soli citor’s O pinion on
n Title vs
s. Title In surance – A Com
mparison
Pa
ause for cla
arification
n – “Solicito
or’s Opinio
on on Titlee”
A “Solicitor’s
“
Opinion on Title” is a reportt by the lendeer’s real estatte lawyer outlining the
condition of the
e title of the mortgaged
m
prroperty.
The
T Issue

The se
ervices
provid
ded by the
Solicittor




Soliciitor’s Opinion
n on Title
Perform
ms required searches
s
on
title
Facilitaates the closin
ng
Provide
es a Letter of Opinion on
title
Legal fe
ees
Disburssements
Costs
 Lawyerr’s Malpracticce Insurance
which typically
t
cove
ers lawyer
neglige
ence
Protection
Title Insuraance
 Appliees for a title innsurance
policy on behalf of the
homeo
owner




Legal ffees
Disburrsements
Title In
nsurance Policy
Total ccosts are typically less duee
to few
wer searches rrequired.
 Lawyeer negligence (depending
on thee policy)
 Title defects
 Fraud,, forgery
 Other protection ass described inn
Types of Policies seection above
156
Restriictions
Chapter 7: Insuraance in the M
Mortgage Indu
ustry
 Homeoowner must prove
p
lawyer’ss
 Refer tto Types of Policies section
neglige
ence
 Typical coverage maaximum is $1
million
abovee
 Coveraage maximum
m up to policyy
amoun
nt
 Typicallly only the hoomebuyer
 Homebuyer, buyer’’s spouse andd
Who is covered?
After Closing
Makin
ng a claim
 Solicitoor’s opinion coovers issues




Errorss not made
by the
e Solicitor
up to closing
Must show Solicitorr negligence
May haave to sue the
e Solicitor
Solicito
or must have valid
v
malpractice insurance for a claim
m
to be made
m
No coverage as Soliccitor’s
insuran
nce only covers him or herr
 No covverage
 Does nnot matter whho makes thee
error aas long as thee risk is
covereed
 Full retroactive covverage,
including fraud com
mmitted by
Solicitor
Fraud
d
Surve
eys
childreen, whomeveer receives
title upon homebuyyer’s death
 Based on policy covverage
includes items afteer closing
 Homebuyer makes a claim
directly to the insurer for
covereed risks
 Generaally an up to date
d
survey iss
 Generally no surveyy is required
require
ed for an Opin
nion on Title
The Cost of Title Insu
urance
Title Insurance typ
pically costs between $200
0 and $300, deepending on the type of p
policy, the
prope
erty type and the value of the property. This is a onee‐time premium.
Mak
king a Cla
aim on a Title Ins urance P
Policy
To maake a claim on
n a title insurance policy th
he insured (thhe homeown
ner) must com
mplete a
statem
ment of loss and
a submit it to the title in
nsurer prompptly. The titlee insurer will p
provide
assistance in comp
pleting the req
quired docum
mentation.
The History of Title I nsurance
e
The first title insurance compan
ny, the Law Prroperty Assurrance and Tru
ust Society, w
was formed in
n
Pennssylvania in 18
853. Title Insu
urance was de
eveloped in tthe United Staates and until the early
1990ss was not available in Canaada. Virtuallyy all real estatte transaction
ns in the Unitted States
currently carry title
e insurance, while
w
its popu
ularity is conttinuing to gro
ow in Canada..
As can
n be seen by the followingg figure, the popularity
p
of ttitle insurance has risen drramatically
over the
t past decaade, enjoying nearly a 1,40
00% increase in premiums.. However, as the
popullarity of title insurance
i
inccreases, so do
oes the percenntage of claim
ms, as is evideenced by nextt
Chapter 7: Insuraance in the M
Mortgage Indu
ustry
15
57
e. This Figure illustrates an
n increase fro
om an averagee of 10% in cllaims in 1998
8 to an averagge
figure
of neaarly 30% since
e 2004.
Figure 22 – Title Insura
ance – Net Prem
miums and Net Claims
C
Prov
viders of Title Ins
surance
In Onttario there arre currently several Insurance compani es licensed to
o provide titlee insurance5:
 Chicago Title Insurance Company
 Fiddelity Nationaal Title Insurance Companyy
 Firrst American Title
T
Insurancce Company
 Firrst Canadian Title
T
 Law
wPro
 Steewart Title Guuaranty Comppany
 Traavelers Guaraanty Companyy of Canada
Su
uccess Tip – Suggest title insurrance to yo
our clients
Every homeowner can benefit from the protection
p
thaat title insura
ance providess against
fraaud. Contact your past clie
ents and sugggest that theyy take out a p
policy. And do
on’t forget to
o
ask them aboutt their current financing ne
eeds; they maay need to reefinance theirr mortgage orr
consolidate deb
bt. Another way
w to increase your businness now!
5
FSCO
O
158
Chapter 7: Insuraance in the M
Mortgage Indu
ustry
Figure 23 – Title Insura
ance – Percenta
age of Claims to Premiums
7.5
Errors and Omis
ssions In
nsurance
Wha
at is Erro
ors and Omissions
O
s insuran ce (E&O )?
Errorss and Omissio
ons insurance
e is an insuran
nce policy thaat covers the professional from claims
made
e against him or her due to
o negligence in the form off errors comm
mitted in a traansaction.
Insuraance policies prior to 2008
8 did not have
e a fraud provvision. Thereefore, if the m
mortgage agen
nt
were to commit fraaud and the borrower
b
sufffer a loss he oor she could n
not receive co
ompensation
from the broker’s errors
e
and om
missions policcy.
Under the Mortgage Brokeragees, lenders and Administraators Act, 20006 it is mandatory that all
licenssed brokerage
es have a poliicy in place th
hat not only pprotects again
nst errors and
d omissions
but frraud as well. The purpose behind this requirement
r
iis to bring thee brokerage ccommunity in
n
line with
w other pro
ofessions and provide prottection for co nsumers.
h the insurer, and the brokkers and agen
nts working
The brokerage willl have a master policy with
for the brokerage will
w be covere
ed under this master policcy. In other w
words, individual brokers
and agents do not have their ow
wn policy rath
her they are ccovered undeer the brokeraage’s master
policyy.
Chapter 7: Insurance in the Mortgage Industry
7.6
159
Key Terms and Definitions
Approved lender
A lender approved by CMHC
Beneficiary
The person who receives the payment of the amount of insurance after the death of the insured
Business for Self
Another term for an individual who is self‐employed
Canadian Association of Accredited Mortgage Professionals (CAAMP)
The mortgage industry’s national trade association
Capitalization
The act of adding mortgage arrears or other costs associated with a mortgage to the principal
amount. For example, capitalizing a lender’s fee means that this fee would be added to the
mortgage principal and amortized.
Chattel Loan
A purchaser borrows funds for the purchase of movable personal property (the chattel) from the
lender. The lender then secures the loan with a mortgage against the chattel.
Claim
A legal action to obtain money, property or the enforcement of a right protected by law against
another party. An insurance claim is a claim made under the terms of the insurance contract.
CMHC
Canada Mortgage Housing Corporation
Common Areas
The areas of a condominium building that are common to all unit owners. For example, a
swimming pool, gym, etc.
Condominium
The whole collection of individual home units along with the land upon which they sit. Individual
home ownership is composed only of the air‐space within the boundaries of the home, as
defined by a document known as a Declaration, filed on record with the local governing
authority.
Condominium Corporation
A Corporation without share capital, created under the Condominium Act for the purposes of
administering the operation, maintenance and repair of the common elements and assets of the
condominium. The Corporation is guided by a Board of Directors consisting of homeowners.
Condominium Status Certificate
A document containing information regarding the operational, legal, and financial status of the
condominium corporation. This document can contain the declaration, by‐laws, rules and
regulations, insurance information, reserve fund balance, other financial disclosures, legal
160
Chapter 7: Insurance in the Mortgage Industry
description of the unit and management contract (if applicable). It may also include information
about any legal filings or judgments against the condominium. A buyer should always review
the status certificate.
Deductible
In relation to an insurance contract, this is the insured’s share of the claim. The insured pays the
deductible and the insurance company pays the remainder of the claim.
Default Management
Programs in place by mortgage default insurers that allow the lender to assist the borrower in
resolving mortgage arrears
Depreciation
Depreciation refers to the fact that certain assets, normally physical assets, can lose value over
time. The amount of depreciation is calculated based on an item’s original purchase price or
economic value, its anticipated life expectancy and its residual value at a future point in time.
Disbarment
A revocation of a lawyer's ability to practice law
Disbursements
Amounts payable. In mortgage financing, disbursements typically relate to amounts paid from
the mortgage proceeds
Down Payment
An amount of a purchaser’s money provided to the vendor from his or her own resources (not
included in a mortgage loan). Under certain programs this amount may be borrowed.
E&O or Errors and Omissions Insurance
Insurance that provides coverage for errors or omissions made by a brokerage, broker, agent or
Administrator. This insurance must contain a provision for fraud.
Easement
The right of use or passage over another person’s owned or leased property. Easements have
several legal requirements and will “run with the land,” or be passed from owner to owner.
Encroachments
When a piece of real property hangs from one property over the property line of another’s. The
structure that encroaches might be a tree, garage, fence, part of a building, or other fixture.
Environmental Hazards
Any situation or state of events which poses a threat to the surrounding environment. This may
be caused by chemicals leaking into the soil, ruptured gas tanks at a gas station, etc.
Executions
A “Writ of Execution” filed with the sheriff in the district in which the debtor lives or owns land.
This allows a plaintiff who has successfully obtained a judgment against a debtor in court to
enforce the judgment
Chapter 7: Insurance in the Mortgage Industry
161
Extended Amortization Period
An amortization that exceeds the original amortization period
Fire Retrofit
The Municipal Act and Planning Act permit one apartment in most detached houses, semi‐
detached houses and some types of row houses as long as minimum health and safety
requirements can be met. The requirements for fire safety in such units are regulated under one
of two provincial regulations, either the Building Code or Section 9.8 of the Fire Code. The
requirements for a legal second unit can be summed up with these four points: there must be a
fire separation between each unit; there has to be a way for occupants to escape from each
unit; each unit must have smoke alarms; the units must meet electrical safety standards
Grossing up Taxable Income
The process of adding deductions originally taken from an individual’s income back to that
income
Group Policy
An insurance policy that groups together certain policyholders based on general criteria
Home Buyers’ Plan (HBP)
A program that allows a first time home buyer to withdraw up to $25,000 in a calendar year
from his or her registered retirement savings plans (RRSPs) to buy or build a qualifying home. A
first time home buyer is considered to be an individual who has not owned real property within
four years prior to purchasing the current property.
Home Insurance
Insurance to protect the home owner against covered risks and perils
Independent Mortgage agents Association of Ontario (IMBA)
The provincial mortgage association in Ontario
Insurance policy
A policy that, in return for the payment of a premium or premiums, provides insurance coverage
to the insured
Liability
An obligation of an individual or other entity to compensate for past occurrences that have
caused injury or loss to another
Lien
Security against a property, either real or personal, for a debt
Life Insurance
A policy of insurance that provides financial compensation to a beneficiary upon the death of
the insured
Malpractice Insurance (Lawyer’s)
Insurance that provides coverage for acts of negligence or malpractice by a lawyer. This will
compensate the injured party.
162
Chapter 7: Insurance in the Mortgage Industry
Master Insurance Policy (Condominiums)
Typically found with condominium buildings, this policy outlines the coverage for the entire
building.
Mortgage Brokerages, lenders and Administrators Act, 2006
The legislation that governs the mortgage brokerage industry in Ontario. This legislation is
enforced by FSCO and replaces the previous Mortgage agents Act.
Mortgage agents Act
The legislation predating the Mortgage Brokerages, lenders and Administrators Act, 2006. This
legislation governed the mortgage brokerage industry in Ontario until July 1st, 2008 and was
enforced by FSCO.
Mortgage Creditor Insurance
Insurance that provides coverage to the insured so that, in the case of the insured’s death or
other covered risk, payment is made to the lender
Mortgage Creditor Life Insurance
Insurance that provides coverage to the insured so that, in the case of the insured’s death,
payment is made to the lender
Mortgage Default Insurance
An insurance policy which protects the insured (the lender) against losses suffered by the
default of the borrower
Mortgage Fraud
The deliberate omission of information, use of misstatements or misrepresentations to obtain,
purchase or fund a mortgage loan
National Housing Act
The legislation that created mortgage default insurance in 1954
Non Owner‐Occupied Property
A property that is rented
Non‐Permanent Resident
Refers to people from another country who had an employment authorization, a student
authorization, or a Minister's permit, or who were refugee claimants at the time of a census, as
well as family members living in the same dwelling
Owner‐Occupied Property
A property that is occupied by the owner
Portability
The ability to transfer something such as a mortgage or insurance to another property, or
transfer mortgage creditor insurance coverage to another lender
Premium
An amount paid in return for insurance coverage
Chapter 7: Insurance in the Mortgage Industry
163
Premium Surcharge
An additional premium paid to the insurer for additional coverage
Principal Residence
The place in which an individual normally resides
Private insurer
A non‐governmental insurance company
Property Insurance
Insurance that protects the insured against losses to the property due to fire and other covered
perils
Reamortization
The process of changing the amortization on a current mortgage
Refinance
The process of paying off a current mortgage and replacing it with another
Rental Property
A property used solely for the process of renting to generate income for the owner
Replacement Value
The cost to replace an item in today’s dollars
Restrictive Covenant
A restriction of use placed on title of the servient tenement for the benefit of the dominant
tenement
RRIF
A Registered Retirement Income Fund. A fund purchased by an individual that pays a regular
return
RRSP
A Registered Retirement Savings Plan is a savings plan that is registered with Canada Revenue
Agency and allows the individual to defer taxes, generally until retirement.
Second Home
A vacation property such as a cottage or other property not used as a principal residence
Self‐Directed RRSP
A type of RRSP (Registered Retirement Savings Plan) whose owner determines the asset mix
held in the trust
Self‐Employed borrower
A mortgage borrower whose income is derived from self‐employment activities
Septic System
A domestic wastewater treatment system (consisting of a septic tank and a soil absorption
164
Chapter 7: Insurance in the Mortgage Industry
system) into which wastes are piped directly from the home. Bacteria decompose the waste,
sludge settles to the bottom of the tank, and the treated effluent flows out into the ground
through drainage pipes.
Solicitor’s Letter of Opinion
A report by the lender’s real estate lawyer outlining the condition of the title of the mortgaged
property
Survey
A document that determines the boundaries of a property
Tenant
An individual renting a property
Term life insurance
A life insurance policy with a specified term or amount of time that the policy will be in place
Title
A term that refers to the ownership of a property. If something is registered “on title” it means
that it is officially registered against the ownership of the property through the Land Titles
Office, where property ownership is recorded
Title Defects
Any problem that “clouds” the property’s title. A title defect can be a lien, a person or entity
that may have had interest in the property and never surrendered it, or any number of other
situations making the title less than perfect
Title Insurance
An insurance policy that provides protection against errors in title such as survey errors, zoning
infractions and property encroachments. It can also protect the homeowner against fraud.
Underwriting
The process that a product or service provider uses to assess the eligibility of a customer to
receive its products such as mortgage financing, insurance or other credit to a consumer
Chapter 7: Insuraance in the M
Mortgage Indu
ustry
7.7
16
65
Review
w Questio
ons
Answers to the Revview Questio
ons are found at www.REM
MIC.ca
Sho
ort Answe
er Questio
ons
1. Ho
ow has mortgage default in
nsurance imp
proved the moortgage markket?
2. Wh
ho are the current mortgaage default prroviders in Onntario?
3. Wh
hat is/are the
e main benefits of mortgagge default inssurance to a) the borrowerr? b) the
len
nder?
4. Ho
ow can a borrower currenttly in default be assisted byy the lender aand the morttgage default
inssurer?
5. Ho
ow does title insurance
i
ben
nefit a) the bo
orrower? b) tthe lender? c) the real estaate lawyer?
6. Wh
hat type of in
nsurance wou
uld you suggesst to a purchaaser of a cond
dominium?
7. Wh
hen was title insurance first introduced
d?
8. Disscuss the maiin differencess between mo
ortgage credi tor life insuraance and term
m life
inssurance.
9. Wh
hich companiies are curren
ntly licensed to
t provide tit le insurance iin Ontario?
10. Without
W
errorss and omissio
ons insurance, what might the consequences be to a mortgage
bro
oker who com
mmits an erro
or and is sued
d by a client?
166
Chapter 8: Calculating a Mortgage Payment
Chapter 8: Calculating a Mortgage Payment
Learning Outcomes
Successful understanding of the concepts presented in this chapter will enable the learner to:
 Describe the components of a mortgage payment
 Describe the effect of compound interest
 Use the HP10BII financial calculator
 Perform an interest rate conversion
 Calculate the payment required to repay a mortgage based on different interest rates,
mortgage amounts, payment frequencies and amortization periods
Introduction
In today’s mortgage brokerage industry, virtually all mortgage agents use mortgage origination
software. This software performs the calculations required to determine a borrower’s mortgage
payment and various other financial components of a mortgage without the broker having to
perform these calculations manually.
However, as today’s mortgage agent is a professional, it is necessary for him or her to know
more about the financial components of a mortgage than the average consumer. By doing a
simple search on the internet, a consumer can find numerous different types of online mortgage
calculators that will calculate a payment, accelerate a payment, provide an amortization
schedule, calculate prepayment penalties and so on.
Therefore, to know more than the average consumer in today’s information age, the mortgage
agent must have a solid understanding of how a mortgage payment is calculated, including the
effects that changing different components of a mortgage have on the mortgage payment.
This will be achieved by using the most popular financial calculator in North America today, the
HP10BII.
8.1
The Components of a Mortgage Payment
We will begin our journey of calculating a mortgage payment by analyzing the different
components of a payment. There are six components present in each mortgage payment, and
without 5 of them a mortgage payment cannot be calculated. They are:
1. The Present Value (the mortgage amount)
The mortgage amount typically refers to the amount of money that must be repaid by the
borrower
2. The Amortization Period
The amortization period tells us how long it will take to fully repay the mortgage amount. The
amortization period is expressed in years
Chapter 8: Calculating a Mortgage Payment
167
3. The Interest Rate
The interest rate tells us how much the lender is receiving in interest in return for providing the
mortgage amount. This number has two components: the annual rate and the compounding
frequency
4. The Compounding Frequency
The compounding frequency tells us how often the annual rate of interest compounds, which in
turn tells us the precise amount of interest that is being charged
5. The Future Value
The future value tells us how much money will be outstanding at some future point in time. For
our purposes the future amount will always be zero since the payment being calculated is the
payment that is required to pay the entire mortgage amount off over the full amortization
period.
6. The Payment
Once you have the previous 5 components, you can calculate the payment. The payment tells
us exactly how much money is required to be paid to the lender in each payment period. A
payment period would be equal to a month if the mortgage had monthly payments, a week if
the mortgage had weekly payments, and so on.
These six essential components of a mortgage payment are reflected by six keys on the
calculator, which will be reviewed once you have configured the calculator.
8.2
Configuring the HP10BII
The HP10BII has several functions that allow us to explain the components of a mortgage
payment without having to resort to algebra to calculate a payment. The following figure is a
picture of the calculator.
168
Chapter 8: Calculating a Mortgage Payment
Figure 24 – HP10BII Calculator
To calculate
a payment
we’ll be
using this
row of
buttons…
…the +/‐
button
…and the
shift or 2nd
function
button
Chapter 8: Calculating a Mortgage Payment
169
Our focus will rest primarily on the top row of the calculator, focusing on the top five buttons. A
few other keys will be used as well but these five are the keys you will need to use most often.
As you can see, the top row’s five buttons have white letters on the top and gold letters on the
bottom. This means that these keys or buttons have two functions each. One of the key’s
functions is accessed by using the white portion of the button and the other by using the gold
portion of the button.
To use the white portion, all the user must do is press the key. This is in contrast to using the
gold portion of the key. To access this function the user must first press the second function
key. This key is the third button from the lower left hand corner of the calculator and looks like
this:
Figure 25 – HP10BII Shift/2nd Function Key
As calculations are performed, each button required will be clearly indicated. Nothing will be
left to chance.
Turning the Calculator ON
The first step in our process begins with turning on the calculator. Locate the ON key at the
lower left hand corner of the calculator. The key looks like this:
Figure 26 – HP10BII ON/OFF Key
Press the ON key. Your display should now read 0.00. If it doesn’t, don’t worry; simply follow
the rest of the directions and you will end up with the proper display.
Setting the Calculator to a Floating Decimal Place
The calculator comes pre‐programmed with the display set to show a number to two decimal
places. To perform mortgage calculations, a floating decimal place is required. A floating
decimal place means that the calculator will display a number to however many decimal places
are required without rounding the number.
To accomplish this press the following keys:
The Shift Key to access the second function keys. Once you’ve pressed this key,
simply press the next key.
170
Chapter 8: Calculating a Mortgage Payment
Figure 27 – HP10BII Display Key
The Display Key. This is the second function under the = sign on the button
located on the bottom row, the 4th key on the right of the ON button.
Figure 28 – HP10BII Decimal Key
The Decimal Key. This is the first function on this button. This key is located on
the bottom row, the 3rd key on the right of the ON button.
Your display should now read 0 (no decimal point after the zero). If your display reads anything
but a single 0 please repeat the above steps.
Your calculator is now ready to be used in the following sections.
8.3
Interest Rates
Before a mortgage payment can be calculated, it is vital to understand the role that interest
rates play in the process. Interest rates in Canada are typically compounded. This means that
the rate is charged more than once per year with the effect of charging interest on interest. The
effects of compound interest can be significant.
However, before the effects of compounding can be discussed, the method in which interest
rates are expressed or written must be explained. The standard form of expressing an interest
rate verbally is by first indicating the rate, then the compounding frequency followed by
whether the rate is calculated at the beginning of the compounding period or at the end of the
compounding period.
Canadian mortgages are calculated in arrears, or at the end of the compounding period. For
example, if a borrower was making monthly payments on his or her mortgage and the next
payment date was January 1st, that payment would cover the month of December.
For other financing, such as a car lease, payments are made in advance so interest must be
calculated in advance. For example, if an individual had a car lease and his or her next payment
was due on January 1st, that payment would cover the month of January.
Therefore, for Canadian mortgages an interest rate is expressed verbally in the following
manner, considering an annual rate of 6% for the following example:
“The rate is 6% compounded semi‐annually, not in advance.”
That is how the rate is expressed verbally. However, it is necessary to write these calculations
and therefore the method of expressing a rate on paper must be explained. That same
statement would be expressed in the following manner on paper:
Chapter 8: Calculating a Mortgage Payment
171
J2 = 6%
J refers to the fact that this is an annual interest rate
2 refers to the fact that this interest rate is compounded semi‐annually, or twice per year (there
are two semi‐annual periods in a year). 6% is the rate of interest.
If the rate was 6% compounded annually, not in advance it would be written as:
J1=6%
If the rate was 6% compounded monthly, not in advance it would be written as:
J12=6%
The following chart illustrates how compounding frequencies are written for an annual interest
rate:
Figure 29 – Expressing Compounding Frequencies
Compounding Frequency
Annually
Semi‐Annually
Monthly
Bi‐Weekly
Weekly
Daily
Written as:
J1
J2
J12
J26
J52
J365
The next step is to explore the effects of compounding on a borrowed amount.
Example
An individual is borrowing $100,000 at J2=6%, over a one year period and not making any
payments during that period (this is an example of an interest accruing mortgage – although not
a popular mortgage it is best suited to illustrate the effect of compound interest).
During the year, interest will be charged twice since the compounding frequency is semi‐
annually.
In the first 6 months (first semi‐annual compounding period) 3% will be charged (6% divided by
two compounding periods) on the outstanding balance of the mortgage, as is illustrated below:
$100,000 x 3% = $3,000
The $3,000 represents the amount of interest charged in the first 6 months. After the first 6
months the borrower will owe the principal ($100,000) plus the accrued interest ($3,000) as is
illustrated below:
$100,000 + $3,000 = $103,000
172
Chapter 8: Calcu
ulating a Morrtgage Paymeent
e second 6 mo
onths which is the second semi‐annual compoundin
ng period, ano
other 3% will
In the
be charged on the current outstanding balan
nce, as is illusstrated below
w:
$103,00
00 x 3% = $3,0090
The $3,090 represe
ents the amo
ount of interest charged in the second 6 months. Affter the secon
nd
6 mon
nths the borrower will owe the outstan
nding balancee ($103,000) p
plus the accru
ued interest
($3,09
90) as is illusttrated below:
$103,000 + $3,090 = $1006,090
In thiss example, th
he effect of co
ompound inte
erest, which ssimply meanss charging inteerest on
intere
est, is clear.
If the borrower waas told that he
e or she woulld be borrow ing $100,0000 on an interest accruing
mortggage over one
e year and at the end of th
hat year woulld owe $6,0900 in interest, how much
would
d the interestt rate be if it was
w charged only
o once a yyear compared to twice? W
Written
mathe
ematically the equation lo
ooks like this:
X (the unknow
wn) x $100,0000 = 6,090
X = 6,,090 / 100,0000
X = .06
6090 OR 6.0900%
This means
m
that J2
2=6% has the exact same effect
e
as J1=6..09%. In otheer words, theese interest
rates are equivalen
nt.
Pa
ause for cla
arification
n – Equivallent interes
est rates
Tw
wo interest rates are said to be equivaleent if, for thee same amoun
nt borrowed over the
same period of time, the sam
me amount iss owed at thee end of that p
period.
What has just been
n accomplished is a basic rate
r
conversioon. Howeverr, to perform this task
more quickly and efficiently,
e
the HP10BII financial calculaator will be ussed.
8.4
Converrting an In
nterest Rate
R
with the HP10
0BII
Becau
use the calculator providess the paymen
nt per compouunding period
d, the interesst rate must
first be
b converted to its equivalent interest rate
r
per comppounding perriod. For exam
mple, if
calcullating a montthly mortgage
e payment wh
hen the rate ffor the mortggage is J2=6% without
conve
erting the rate
e, the calculator would pro
oduce a paym
ment per sem
mi‐annual period. This is no
ot
the de
esired calculaation.
efore a rate co
onversion mu
ust first be pe
erformed to c onvert the seemi‐annual in
nterest rate to
o
There
its mo
onthly equivaalent interest rate.
Chapter 8: Calculating a Mortgage Payment
173
To accomplish this task using the HP10BII financial calculator, the following keystrokes will be
used.
Figure 30 – HP10BII NOM% Key
The NOM% button is the first key that will be used for an interest rate
conversion. It is located on the top row, the second button from the left.
NOM% refers to the annual rate of interest.
Figure 31 – HP10BII P/YR Key
The P/YR button is the second key that will be used for an interest rate
conversion. It is located on the top row, the second button from the right. P/YR
refers to the number of compounding periods per year.
Figure 32 – HP10BII EFF% Key
The EFF% button is the third key that will be used for an interest rate
conversion. It is located on the top row, the third button from the left and right
(the middle button). EFF% refers to the annual rate of interest with one
compounding period.
Let’s look at an example to convert the interest rate of J2=6% to its equivalent J1 rate. To
perform this task the following buttons will be pressed:
6
2
What you should now see on your display is 6.09. Remember to press the keys exactly as shown
and do not press any other keys. If you have followed the above keystrokes you will get 6.09 on
your display.
174
Chapter 8: Calcu
ulating a Morrtgage Paymeent
Pa
ause for cla
arification
n – “E” in your
y
displa
ay
If you
y ever get an
a answer on
n your calculaator’s display that looks sim
milar to this:
9.1
1234567 E‐2
this means thatt you must move the decim
mal place twoo places to the left, or the number of
plaaces indicated
d by the number followingg the E. In thiis example th
he actual answ
wer would
be
e .091234567
To ensure that you
u are perform
ming the necesssary steps, aalways write tthe keystrokees on paper ass
you co
omplete them
m. It is thereffore necessarry to stop usinng pictures an
nd begin usin
ng the
appro
opriate notation. The follo
owing chart illlustrates the process. Fro
om this point fforward, the
inputtting will be written
w
on the left, the keyss that are preessed will be w
written in thee middle and
the diisplayed outp
put on the right.
INPUT
T
KEEYSTROKES
OUTP
PUT
6
SH
HIFT NOM%
6
2
SHIFT
S
P/YR
2
SHIFT EFF%
6.0
09
Writin
ng the previous example would
w
therefo
ore look like tthis:
6 SHIFFT NOM%
2 SHIFFT P/YR
SHIFTT EFF% 6.09
Example 1
Let’s look
l
at anoth
her example.
The in
nterest rate iss J2=4.5% and
d the J1 equivvalent rate neeeds to be callculated. Thiss problem
would
d be solved ussing the following format:
4.5 SH
HIFT NOM%
2 SHIFFT P/YR
SHIFTT EFF% 4.5506
625
There
efore the J1 raate is 4.55062
25%
Pa
ause for cla
arification
n – Roundin
ng interest rates
Intterest rates are NEVER rou
unded. Write
e the entire raate as it appeears on your d
display.
Ro
ounding the raate would have the effect of changing tthe rate that is charged on
n the
mo
ortgage.
175
Chapter 8: Calculating a Mortgage Payment
Example 2
J2=5%, what is the J1 equivalent?
5 SHIFT NOM%
2 SHIFT P/YR
SHIFT EFF% 5.0625
Therefore the J1 rate is 5.0625%.
Now that converting an interest rate to its J1 equivalent has been mastered it is necessary to
take this one step further. As mentioned earlier, the calculator will provide a payment per
compounding period. By converting a rate to its J1 equivalent, in other words a rate with one
compounding period per year, the calculator will provide an annual mortgage payment. How
many mortgage payments are annual? Virtually none! Therefore a conversion to match the
frequency of the payment must be completed.
Example 3
Bob wishes to take a mortgage that has a rate of J2=6% with monthly payments. What is the
equivalent annual rate with monthly compounding?
Solution:
The following are the steps that must be completed:
STEP
Step 1:
Input the current rate
Step 2:
Convert to its J1
equivalent
Step 3:
Convert to the required
rate
KEYSTROKES
6 SHIFT NOM%
MEANING
The rate is 6% annually.
2 SHIFT P/YR
There are 2 compounding
periods per year.
SHIFT EFF%
This is the J1 rate. A rate must
always be converted to the J1
rate before it can be converted
to another frequency.
12 SHIFT P/YR
We input the number of
compounding periods that the
new equivalent rate has.
SHIFT NOM%
We solve for the new rate.
176
Chapter 8: Calculating a Mortgage Payment
These steps will be written as follows:
6 SHIFT NOM%
2 SHIFT P/YR
SHIFT EFF% 6.09
12 SHIFT P/YR
SHIFT NOM% 5.92634643744
Therefore J12 = 5.92634643744%
Example 4
Mary wishes to take a mortgage that has a rate of J2=4% with weekly payments. What is the
equivalent annual rate with weekly compounding? In this example the payments are weekly
which means that the rate must be converted to its weekly equivalent. Since there are 52
weeks in a year 52 must be inputted as the number of annual compounding periods.
Solution:
4 SHIFT NOM%
2 SHIFT P/YR
SHIFT EFF% 4.04
52 SHIFT P/YR
SHIFT NOM% 3.96203408856
Therefore J52 = 3.96203408856%
By this point you should be comfortable performing a rate conversion. This is necessary to
convert the rate stated by the lender into its equivalent rate with the same number of
compounding periods as the payment frequency.
If you are still having difficulty, begin this section again and complete the examples and the
Review Questions on rate conversions until you are confident enough to move to the next
section. These calculations are the necessary first step in being able to calculate a mortgage
payment.
8.5
Calculating a Mortgage Payment with the HP10BII
Before we can use the buttons required to calculate a mortgage payment, we need to review
what they are, where they are and what they look like. Take a moment to review the following
chart and find the keys on your calculator.
Chapter 8: Calculating a Mortgage Payment
177
Figure 33 – HP10BII Keys Used for Calculating a Mortgage Payment
The HP10BII Keys Used for Calculating a Mortgage Payment
KEY OR BUTTON
HOW IT IS
WRITTEN ON
PAPER
MEANING
SHIFT
Allows access to the second function of a key
SHIFT NOM%
By pressing SHIFT first, you access the NOM%
key which is where the annual interest rate is
inputted.
SHIFT P/YR
By pressing the SHIFT key, you access the P/YR
key which is where the number of
compounding frequencies per year is inputted.
PMT
The PMT key represents the periodic payment.
This is the last button pressed when solving for
a mortgage payment.
SHIFT EFF%
By pressing the SHIFT key, you access the EFF%
which provides the J1 rate as an answer.
N
The N key represents the number of
compounding periods in total
(the number of years multiplied by the
number of compounding periods per year).
+/‐
The +/‐ key changes a value to a negative
amount and is used right before the PV key.
PV
The PV key represents the present value or the
mortgage amount. It must always be
preceded by the +/‐ key.
FV
The FV key represents the future value. It will
always be 0 when calculating a mortgage
payment.
178
Chapter 8: Calcu
ulating a Morrtgage Paymeent
nverting an in
nterest rate th
he foundation
n for calculatiing a mortgagge payment h
has been laid..
In con
The next step is to examine the
e process of caalculating a m
mortgage payyment, which is outlined in
n
the fo
ollowing chartt.
Figure 34 – Calculating
g a Mortgage Pa
ayment – Keystrrokes
STEP
Step 1:
1
Input the current rate
r
Step 2:
2
Conve
ert to its J1
equivalent
Step 3:
3
Conve
ert to the required
rate
Step 4:
4
Input the mortgage
amou
unt
Step 5:
5
Input the number of
comp
pounding periods in
total
MEANING
KEYSTTROKES
HIFT NOM%
SH
We input the annu
ual rate
SHIFFT P/YR
SHIFTT EFF%
SHIFFT P/YR
SHIFTT NOM%
(Mortgage amount)
a
+/‐ PPV
(Num
mber) N
Step 6:
6
Input the Future Value
V
0 FV
Step 7:
7
Solve for the paym
ment
PMT
P
We input the comp
pounding
frequeency
We co
onvert to the J1 equivalentt.
We m
must always co
onvert to the
J1 ratee before we ccan convert to
o
anything else.
We input the numb
ber of
compo
ounding perio
ods that the
new eequivalent ratte has.
We so
olve for the neew rate.
We input the morttgage amountt
follow
wed immediattely by the +//‐
key, th
hen the PV bu
utton.
We input the numb
ber of years
plied by the n
number of
multip
compo
ounding perio
ods per year
follow
wed immediattely by the N
button
n.
The fu
uture value w
will always be
zero. Input 0 follow
wed
immediately by thee FV button.
We prress the PMT button and
view tthe results on
n the display.
Pa
ause for cla
arification
n – “BEGIN
N” in your d
display
If you’re
y
following the steps exactly and your
y
mortgagge payment iss still off by a few dollars
or cents, check to make sure
e that your display is NOT showing BEG
GIN. If it is your
calculator is calculating interrest at the be
eginning of thhe period, nott the end. This is not
correct. To fix this
t press the
e SHIFT key th
hen the Beg/EEnd key (the kkey on the second row
fro
om the top, faar right)
Example 1
Mr. Borrower has been approve
ed for a morttgage on his hhome in the aamount of $20
00,000. The
payments are mon
nthly based on an amortizaation of 25 yeears and an in
nterest rate o
of J2=6%.
What is his monthly payment?
Chapter 8: Calcu
ulating a Morrtgage Paymeent
17
79
Solutiion:
6 SHIFFT NOM%
2 SHIFFT P/YR
SHIFTT EFF% 6.09
HIFT P/YR
12 SH
SHIFTT NOM% 5.92634643744
200,0
000 +/‐ PV
0 FV
25 X 12
1 N
PMT 1,279.61324735
Pa
ause for cla
arification
n – Roundin
ng a mortg
gage paym
ment
Fo
or practical pu
urposes mortggage paymen
nts are alwayys rounded up
p to the next highest cent.
Fo
or example, a mortgage payment of $1,279.61001111 would actuaally be $1,279
9.62. Recall,
ho
owever, that interest ratess are never rounded!
There
efore the roun
nded paymen
nt is $1,279.62
Example 2
Mrs. Homeowner
H
has been app
proved for a mortgage
m
on hher home in tthe amount o
of $420,000.
The payments are weekly based
d on an amorrtization of 300 years and an
n interest ratte of J2=4.5%.
What is her weeklyy payment?
Solutiion:
4.5 SH
HIFT NOM%
2 SHIFFT P/YR
SHIFTT EFF% 4.5506
625
52 SH
HIFT P/YR
SHIFTT NOM% 4.45202652104
420,0
000 +/‐ PV
0 FV
30 X 52
5 N
180
Chapter 8: Calcu
ulating a Morrtgage Paymeent
4
73
PMT 488.0044176
There
efore the roun
nded paymen
nt is $488.01
Su
uccess Tip ‐ N
In the above exxample the am
mortization iss 30 years witth weekly payyments. Thatt means that
yo
ou must input 30 x 52 as th
he N. Always remember thhat the N is th
he total numb
ber of
compounding periods
p
multiiplied by the total
t
numberr of years.
Example 3
Malikk is obtaining a second morrtgage to payy off his creditt card debt. H
He has been aapproved for
a morrtgage in the amount of $3
32,500. The payments
p
aree monthly bassed on an am
mortization of
15 years and an intterest rate off J2=9.55% wiith a one yearr term. Whatt is his paymeent?
Solutiion:
9.55 SHIFT
S
NOM%
2 SHIFFT P/YR
SHIFTT EFF% 9.7780
00625
HIFT P/YR
12 SH
SHIFTT NOM% 9.36535833066
32,50
00 +/‐ PV
0 FV
15 X 12
1 N
PMT 336.7375526
19
3
There
efore the roun
nded paymen
nt is $336.74
Pa
ause for cla
arification
n – Term’s effect on a mortgag
ge paymen
nt
In the above exxample there is a one‐yearr term. The teerm does nott affect the blended
paayment as the
e payment is calculated
c
based on comppletely repayin
ng the mortgage over the
en
ntire amortizaation period of
o the loan.
Chapter 8: Calculating a Mortgage Payment
8.6
181
Calculating an Interest Only Mortgage Payment
The difference between a blended mortgage payment and an interest only mortgage payment is
that an interest only mortgage payment doesn’t contain any principal. That means that the
amount that you borrow will be the amount that you owe at the end of the term because you
are only repaying the interest due during the mortgage and not any of the principal. This also
means that interest only mortgages are not amortized because there is no principal reduction.
Example 1
John is obtaining a $14,500 second mortgage from a private lender. The rate is 14.5%
compounded semi‐annually with monthly payments of interest only. The term of the mortgage
is 1 year. Because it is an interest only mortgage there is no amortization.
Solution:
14.5 SHIFT NOM%
2 SHIFT P/YR
SHIFT EFF% 15.025625
12 SHIFT P/YR
SHIFT NOM% 14.08044164941
14,500 +/‐ PV
the future value is the
same as the present
value because no
principal is being repaid
14,500 FV
12 N
PMT 170.1386699303
Therefore the rounded payment is $170.14
we're using 12 N
because this mortgage is
for one year
182
8.7
Chapter 8: Calculating a Mortgage Payment
Using the SHARP EL-738
(refer to this guide only If you are using the Sharp EL‐738 Calculator)
NOTE: you don’t need to know how to calculate an equivalent interest rate using the
Sharp EL‐738. It is not part of the process to calculate a mortgage payment as it is with
the HP.
Example: We are borrowing $400,000 at a rate of 6.5% compounded semi‐annually (J2), with
monthly payments. What is the monthly payment?
 Before using, set the calculator to display 9 decimal places by pressing SETUP 0 0 9
 After this you should see 0.000000000 on your display.
STEP
Step 1:
Clear the
Calculator
KEYSTROKES
2ndF CA
Step 2:
Input the number
of payments per
year
2ndF P/Y 12
ENT
Step 3:
Input the number
of compounding
periods per year
2 ENT
Step 4:
Quit the C/Y input
ON/C
MEANING
Sets the calculator to its
default values
We tell the calculator
how many payments
there are annually.
Monthly is 12; Biweekly is 26; Weekly is
52
Press the down arrow
key first. Your display
will now show C/Y=
Then we input the
number of compounding
periods per year. For
example, a semi-annual
rate has 2 compounding
periods. An annual rate
has 1 compounding
period. A monthly rate
has 12 compounding
periods.
By pressing the ON/C
button we leave the C/Y
input. We can now enter
the rest of the mortgage
information.
What you see
on your
display
0.000000000
P/Y =
12.000000000
C/Y =
2.000000000
0.000000000
Chapter 8: Calculating a Mortgage Payment
Step 4:
Input the total
number of
payments in the
entire
amortization
Step 5:
Input the
mortgage
amount, known as
the Present Value
or PV
Step 6:
Input the annual
interest rate
Step 7:
Input the amount
owing at the end
of the
amortization,
known as the
Future Value or
FV
Step 8:
Solve for the
payment
Step 9:
Round the
payment up
183
25 X 12 = N
We input the number of
years multiplied by the
number of compounding
periods per year
followed immediately by
the N button.
ANS=N
300.0000000
400000 +/- PV
We input the mortgage
amount followed
immediately by the +/key, then the PV button.
(-400000)=PV
-400,000.0000
6.5 I/YR
We input the annual rate.
6.5=I/Y
6.500000000
0 FV
The future value will
always be zero. Input 0
followed immediately by
the FV button.
0=FV
0.000000000
We press the PMT
PMT=
button and view the
COMP PMT
2679.295144
results on the display.
Rounding up means that the second decimal place will always go up
to the next highest cent. In this example 2679.295144 becomes
$2,679.30
Using the SHARP EL‐738 to calculate equivalent interest rates
Example: J2=6% What is its J12 equivalent?
STEP
Step 1:
Clear the
Calculator
Step 2:
Input the number
of compounding
periods per year
Step 3:
Input the rate
MEANING
What you see
on your
display
2ndF CA
Sets the calculator to its
default values
0.000000000
2 (x,y)
Tells the calculator the
first of the variables, the
compounding frequency
2,_
0.000000000
KEYSTROKES
6 2ndF EFF
Converts the rate of
J2=6%
to
its
J1 2,6
EFF
equivalent, which is the 6.090000000
effective annual rate
184
Step 4:
Input the effective
annual rate
Step 5:
Input the new
number of
compounding
periods and solve
for the APR
Chapter 8: Calculating a Mortgage Payment
12 (x,y)
6.09 2ndF APR
Tells the calculator the
first of the variables, the
compounding frequency
Converts the
J1=6.09% to
equivalent
12,_
0.000000000
rate of
2,6
EFF
its J12
5.926346437
185
Chapter 8: Calculating a Mortgage Payment
8.8
Using the Texas Instruments BAII Plus
(refer to this guide only If you are using the TI BAII Plus Calculator)
NOTE: you don’t need to know how to calculate an equivalent interest rate using the
BAII Plus. It is not part of the process to calculate a mortgage payment as it is with the
HP.
Example: We are borrowing $400,000 at a rate of 6.5% compounded semi‐annually (J2), with
monthly payments. What is the monthly payment? Before beginning you need to set your
calculator to a floating decimal place. Press 2nd FORMAT 9 ENTER
STEP
Step 1:
Clear the
Calculator
Step 2:
Input the annual
interest rate (I/Y)
KEYSTROKES
MEANING
What you see
on your display
2nd CLR TVM
2nd is the first button
on the second row from
the top; CLR TVM is
the upper function of
the last button on the
second row from the
top; NOTE: the P/Y
and C/Y will be reset to
1, which is their
beginning value
0
6.5 I/Y
Step 3:
Input the number
of payments per
year (P/Y)
2nd P/Y 12
ENTER
Step 3:
Input the number
of compounding
periods per year
(C/Y)
2 ENTER
Step 4:
Leave the C/Y
Mode
2nd QUIT
We input the annual
rate.
We tell the calculator
how many payments
there are annually.
Monthly is 12; Biweekly is 26; Weekly is
52
A semi-annual rate has
2 compounding
periods. An annual rate
has 1 compounding
period. A monthly rate
has 12 compounding
periods.
By pressing the 2nd
QUIT buttons we leave
the C/Y input. We can
now enter the rest of
the mortgage
information.
I/Y = 6.5
P/Y = 12
C/Y = 2
0
186
Chapter 8: Calculating a Mortgage Payment
Step 5:
Input the total
number of
payments in the
entire
amortization (N)
Step 6:
Input the
mortgage
amount, known as
the Present Value
or PV
Step 7:
Input the amount
owing at the end
of the
amortization,
known as the
Future Value or
FV
Step 8:
Solve for the
payment (PMT)
Step 9:
Round the
payment up
25 X 12 = N
We input the number of
years multiplied by the
number of
compounding periods
per year followed
immediately by the N
button.
N = 300
400000 +/- PV
We input the mortgage
amount followed
immediately by the +/key, then the PV
button.
PV = -400,000
0 FV
The future value will
always be zero. Input 0
followed immediately
by the FV button.
FV = 0
We press the CPT then
the PMT button and
PMT =
CPT PMT
view the results on the
2,679.295144
display.
Rounding up means that the second decimal place will always go up
to the next highest cent. In this example 2679.295144 becomes
$2,679.30
Using the Texas Instruments BAII Plus to convert an interest rate
Example: J2 = 4.5%. What is the J12 equivalent?
We enter the rate, then convert to its J1 equivalent, then convert to its J12 equivalent
STEP
KEYSTROKES
Step 1:
Switch to the
conversion mode
2nd ICONV
Step 2:
Clear the
calculator’s
conversion mode
2nd CLR WORK
MEANING
2nd is the first button on
the second row from the
top; ICONV is on top of
the 2 button
2nd is the first button on
the second row from the
top; CLR WORK is the
upper function of the
button on the lower left
hand side of the
calculator.
What you see
on your
display
Doesn’t matter
NOM= 0
Chapter 8: Calculating a Mortgage Payment
Step 3:
Input the effective
annual interest
rate (NOM)
4.5 ENTER
Step 4:
Input the number
of compounding
periods per year
(C/Y) of the rate
now
2 ENTER
Step 5:
Convert to the
effective annual
interest rate
CPT
Step 6:
Enter the number
of compounding
periods we want to
convert to
12 ENTER
Step 7:
Convert to the new
interest rate
CPT
187
You will see the NOM=
in the left hand side of
your display.
NOM= 4.5
We input the annual
interest rate.
You will see the C/Y=
in the left hand side of
your display.
The rate has 2
C/Y= 2.
compounding periods,
so we enter 2
compounding periods in
C/Y
You will see the EFF=
in the left hand side of
your display.
We press the CPT
EFF= 4.550625
button (top left button)
to calculate the effective
rate.
You will see the C/Y=
in the left hand side of
your display.
We’re converting to
C/Y= 12.
J12, so we enter 12
compounding periods in
C/Y
You will see NOM= in
the left hand side of
your display. We press
NOM=
the CPT button (top left
4.45838349
button) to calculate the
new nominal rate
188
8.9
Chapter 8: Calcu
ulating a Morrtgage Paymeent
Advanc
ced Mortg
gage Callculations
s
Please Note: The following
f
calcculations are not required for testing p
purposes on th
he final exam
m.
They are here for your
y
informattion and to asssist you if yoou wish to calculate additio
onal
comp
ponents of a mortgage
m
for your client.
Acc elerating
g a Mortg age
By acccelerating a mortgage,
m
the
e borrower is increasing thhe size of the mortgage paayment. The
follow
wing example illustrates ho
ow to calculatte the amounnt saved by acccelerating a mortgage.
Example
A client has come to
t you for advvice. She req
quires a mortggage in the am
mount of $35
50,000. You
have informed herr that you can
n obtain this mortgage
m
bassed on a rate of 4.9%, com
mpounded
semi‐annually, nott in advance, amortized ovver 25 years w
with a 5 year tterm and monthly
payments. She wo
ould like to kn
now what the
e regular paym
ment is in thiss scenario, an
nd how much
she would
w
save if she
s decided to accelerate this
t mortgagee with weeklyy payments.
Solutiion
The first step that must be unde
ertaken is the
e calculation oof the mortgaage payment.
4.9 SH
HIFT NOM%
2 SHIFFT P/YR
SHIFTT EFF% 4.9600
025
12 SH
HIFT P/YR
SHIFTT NOM% 4.85
5071533217
350,0
000 +/‐ PV
0 FV
25 x 12
1 N
PMT 2,015.738940
058
Pa
ause for cla
arification
n – Using th
he “+/‐“ Ke
Key
When inputtingg the present value we use
e the “+/‐“ keey to make the mortgage aamount a
ne
egative number. This results in the payment being a positive num
mber. If you d
do not use the
“+/‐“ key the paayment will be
b a negative number. Thi s is importan
nt in the next example
be
ecause when entering
e
a changed payme
ent amount yyou must enteer it as a posittive number if
yo
ou’ve used the
e “+/‐“ key ass instructed above. If you haven’t, you will need to eenter the
changed payme
ent as a negattive!
Chapter 8: Calcu
ulating a Morrtgage Paymeent
18
89
efore the regu
ular monthly payment in th
his scenario i s $2,015.74. At the end of the
There
amorttization of thiis mortgage she
s will have paid $604, 7222 ($2,015.744 x 300 paymeents).
Howe
ever, the morttgage has a te
erm of 5 yearrs and it will nnot renew on the exact terrms of the
current term. It is therefore ne
ecessary to calculate how m
much she will owe at the eend of the firsst
5 years of the mortgage to realistically deterrmine how m uch money she will save b
by acceleratin
ng
this mortgage.
m
To accomplish this
t requires the
t learning oof a new proccess: calculatiing the
outstaanding balancce of a mortggage.
Calc
culating the
t
Outsttanding Balance
B
((OSB) of a Mortga
age
The process of calcculating an ou
utstanding baalance (OSB) oof a mortgagee at a point in
n time
provid
des the mortggage agent th
he informatio
on required too calculate the amount savved by
accele
erating a morrtgage payme
ent. To accom
mplish this tassk requires ussing two addiitional keys:
the IN
NPUT function
n and the AM
MORT function
n.
The IN
NPUT function is located on
o the first bu
utton on the l eft hand sidee of the secon
nd row from
the to
op. The AMO
ORT function is the second function of thhe FV button used in prevvious
calcullations and is located at th
he far right of the top row.. To access th
he AMORT function, the
user must
m first press the SHIFT key.
Usingg the previouss example the
e outstandingg balance will be calculated
d at the end o
of its five‐yeaar
term (sixty monthlly payments).. The calculattion is perfor med using the following p
process.
Pa
ause for cla
arification
n – Importa
ant note a
about the H
HP10BII +
If you
y are usingg the HP10BII + (not the HP
P10BII) you neeed to change the calculattor from a
flo
oating decimaal place to a fiixed decimal place. To do this press SH
HIFT, DISP 9. TThis will set
the
e calculator to 9 decimal places.
p
If you don’t do thiss you will see the word RU
UNNING on
yo
our display wh
hen completin
ng step 3.
STEP 1: Calculate the
t mortgage
e payment
4.9 SH
HIFT NOM%
2 SHIFFT P/YR
SHIFTT EFF% 4.9600
025
12 SH
HIFT P/YR
SHIFTT NOM% 4.85
5071533217
350,0
000 +/‐ PV
0 FV
25 x 12
1 N
PMT 2,015.738940
058
190
Chapter 8: Calcu
ulating a Morrtgage Paymeent
p
roun
nded mortgage payment.
STEP 2: Input the properly
2,015
5.74 PMT
STEP 3: Calculate the
t outstanding balance at
a the end of the term.
The fo
ollowing keysstrokes are re
equired to acccomplish this task, where 112 representss the numberr
of perriods per year and 5 represents the num
mber of yearss in the term::
12 x 5 INP
PUT SHIFT AM
MORT
60 – 60” should be displayeed. It is now necessary to press the “=””
Once those keys arre pressed “6
button. Once presssed, “Amort”” should appe
ear at the topp left of the display, “PRIN”” should
appeaar below it an
nd 762.43802562 should appear below that. “Amorrt” representss
“Amo
ortization,” “P
PRIN” represe
ents “principle
e” and the nuumber repressents the totaal principal
paid in period 60 – 60, which re
epresents the
e sixtieth paym
ment.
By pre
essing the “=”” button a seccond time “IN
NT” replaces ““PRIN” and 1,253.3019742
28 replaces
the prrevious numb
ber. This num
mber represen
nts the amou nt of interestt paid in the ssixtieth
payment. By presssing the “=” button
b
a third
d time, “BAL” appears, replacing “INT” aand “‐
309,2
287.166263” replaces
r
the previous
p
num
mber. This nu mber represeents the outsttanding
balance remainingg on the mortggage after the sixtieth payyment has been made (in o
other words aat
the en
nd of the 5‐ye
ear term).
p
is writtten like this:
This process
NPUT SHIFT AMORT
A
= = = ‐‐309,287.1666263
12 x 5 IN
efore, in this scenario,
s
at th
he end of the
e five‐year terrm the client will owe $309
9,287.17.
There
Pa
ause for cllarification
n ‐ Roundin
ng outstan
nding bala
ances
Ou
utstanding baalances are always rounde
ed off. This m
means that if tthe 3rd decimaal place is 5 o
or
nd
higher, the 2 decimal place
e increases by one; if it is 4 or lower the 2nd decimall place
re
emains the same.
Exxample:
An
n outstandingg balance of $400,000.123
$
is $400,000. 12 because the 3rd decimaal place is 3
(w
which is 4 or lo
ower).
is $400,000. 13 because the 3rd decimaal place is 6
An
n outstandingg balance of $400,000.126
$
(w
which is 5 or higher)
h
It is now necessaryy to calculate the outstand
ding balance aat the end of five years baased on an
accele
erated payme
ent. To accele
erate this mortgage the moonthly paymeent is divided
d by four.
$2,01
15.74 / 4 = $50
03.935
ment must no
ow be inputteed into the caalculator. Thiss will be donee
The accelerated mortgage paym
by re‐‐entering the mortgage with a weekly payment.
p
Chapter 8: Calculating a Mortgage Payment
191
4.9 SHIFT NOM%
2 SHIFT P/YR
SHIFT EFF% 4.960025
52 SHIFT P/YR
SHIFT NOM% 4.84319177322
350,000 +/‐ PV
0 FV
25 x 52 N
PMT 464.449035727
The accelerated payment is now entered by completing the following keystrokes:
503.94 PMT
Now that the new payment has successfully been inputted, the outstanding balance at the end
of the term can be calculated using the following keystrokes, where 52 represents the number
of periods per year and 5 represents the number of years in the term:
52 x 5 INPUT SHIFT AMORT = = = ‐297,675.736723
Therefore the amount owing at the end of the first five years using an accelerated payment is
$297,675.74. This equates to a difference of $11,611.43 ($309,287.17‐ $297,675.74). However,
the client wishes to know the amount that she will save over the first five years by accelerating
the payment, and this amount does not represent the savings. This is because the payment has
been increased and the extra money paid during the term of the mortgage must be subtracted
from the savings.
Therefore, under the monthly payment scenario the client would pay $120,944.40 during the
five‐year term ($2,015.74 x 60) and under the weekly accelerated payment scenario the client
would pay $131,024.40 ($503.94 x 260). Therefore, the client is actually paying $10,080 more
under the accelerated scenario during the same period ($131,024.40 ‐ $120,944.40). This
amount must be deducted from the difference between the two outstanding balances.
$11,611.43 ‐ $10,080 = $1,531.43
Therefore the client would have a net savings of $1,531.43 over the first five years of her
mortgage by using an accelerated weekly payment.
192
Chapter 8: Calculating a Mortgage Payment
Example
Based on borrowing $400,000 over 25 years at a rate of J2=5% with monthly payments and a
five‐year term, calculate the savings realized during the term of the mortgage by accelerating
the mortgage payment.
Solution
Step 1: Calculate the payment of the monthly
mortgage
5 SHIFT NOM%
2 SHIFT P/YR
SHIFT EFF% 5.0625
12 SHIFT P/YR
SHIFT NOM% 4.94869855817
400,000 +/‐ PV
0 FV
25 x 12 N
PMT 2,326.41994015
Step 2: Input the new payment
2,326.42 PMT
Step 3: Calculate the OSB of the monthly
mortgage
12 x 5 INPUT SHIFT AMORT = = =
‐354,030.024726
Step 4: Calculate the accelerated payment
2326.42 / 4 = 581.605
Step 5: Convert the rate to its weekly equivalent
5 SHIFT NOM%
2 SHIFT P/YR
SHIFT EFF% 5.0625
52 SHIFT P/YR
SHIFT NOM% 4.94086835724
Step 6: Change the amortization to weekly
52 x 25 N
Step 7: Input the accelerated payment
581.61 PMT
Step 8: Calculate the OSB of the accelerated
mortgage
52 x 5 INPUT SHIFT AMORT = = =
‐340,590.299687
Step 9: Using the information calculated in the above equation, calculate the total savings of
the accelerated mortgage.
Savings = (OSB of mthly mtg – OSB of weekly mtg) – (Total weekly pmts – Total mthly pmts)
Savings = (354,030.02 – 340,590.30) – [(581.61 x 260) ‐ (2,326.42 x 60)]
Savings = $13,439.72 – ($151,218.60 ‐ $139,585.20)
Savings = $13,439.72 ‐ $11,633.40
Savings = $1,806.32
Therefore the net amount saved over the term of this mortgage, by using accelerated payments,
is $1,806.32.
Chapter 8: Calcu
ulating a Morrtgage Paymeent
19
93
Calc
culating the
t
prepa
ayment p enalty on
n a partia
ally open
morrtgage
In the
e chapter, “Ad
dvanced Morttgage Concep
pts” we learneed about the different preepayment
penalties. In this section
s
we explore the pro
ocess of calcu lating these p
penalties. Lett’s begin with
h
an exaample.
Barbaara, the borro
ower, has an outstanding
o
mortgage
m
amoount of $145,533.80. On tthe 36th
payment, she has decided
d
to re
epay the entirre amount of the outstand
ding mortgagee. The lenderr
has th
he option of charging
c
Barb
bara 3 monthss’ interest as a penalty or tthe interest rrate
differential, whichever one is higher.
There
efore, the current rate of in
nterest for a similar
s
mortggage from thee lender mustt be known to
o
determine which penalty
p
the le
ender will charge the clientt. For this illu
ustration, it w
will be
med that the lender’s
l
curre
ent posted rate on its 2‐yeear term morttgage is 6% co
ompounded
assum
semi‐annually, nott in advance.
Her cu
urrent rate off interest is 7.15% compou
unded semi‐aannually, with
h monthly payyments, a 25‐‐
and a 5‐year term. The am
year amortization
a
mortization a nd term are n
not required for the 3
month interest calculation, how
wever in the IRD calculatioon the term iss required for calculating
the nu
umber of months remainin
ng in Barbaraa’s mortgage w
with her currrent lender an
nd the
amorttization is req
quired when calculating
c
th
he outstandin g balance at tthe end of th
he term.
3 M onths’ In terest Pe
enalty
The fo
ormula used to
t determine
e 3 months’ in
nterest penaltty is:
Penalty = Outstanding
O
Balance of the Mortgage x (Rate / 12 m
months) X 3 m
months
The raate must be converted
c
to its monthly equivalent
e
(J1 2) since a sem
mi‐annual ratte cannot be
divide
ed by twelve. The rate will then be divided by 100 too convert thee interest ratee to a decimaal.
For exxample, J12 = 7.04576428197 is actually .07045764228197 when u
used in a form
mula.
Penalty = $1
145,533.80 x [(7.04576428
8197 (equivallent monthly rate / 100))] / 12 x 3
80 x .07045766428197) / 122 x 3
Penalty = ($145,533.8
Penaalty = $145,533.80 x .005887147023 X 3
Pe
enalty = $145
5,533.80 x .01176144107
Penalty = $2,563.49211243
Penalty = $2,563.449
There
efore, the pen
nalty that Barbara would have
h
to pay baased on 3 mo
onths’ interesst penalty
equattes to $2,563.49.
194
Chapter 8: Calcu
ulating a Morrtgage Paymeent
Inte rest Rate
e Differen
ntial
The in
nterest rate differential
d
pe
enalty must be calculated tto determinee what Barbarra’s penalty
will be
e. For the folllowing illustrration, the Raate Differentiaal refers to th
he difference between
Barbaara’s rate and the current rate.
r
The fo
ormula used to
t determine
e the interest rate differenttial penalty iss:
Penalty = (Rate Diffferential / 12
2 months) x (tthe number oof months rem
maining in Barbara’s
mortggage) x (Outsttanding Balan
nce)
First, the rate diffe
erential must be converted
d to its monthhly rate, as was done in the 3 months’
intere
est penalty caalculation. Th
he rate of 7.15
5% compoun ded semi‐ann
nually minus the rate of 6%
%
comp
pounded semii‐annually leaaves a differen
nce of 1.15%,, compoundeed semi‐annuaally. That ratte
is then converted to
t its monthlyy equivalent of
o 1.14725444339. When cconverted to its decimal
equivalent, the number is .0114
47254439.
Penalty = (.0
01147254433
39) / 12 x (60 – 36) x $145,533.80
Penalty = .000956045366 x 24 x $145,533.80
Penalty = $3,339.285996149
Penalty = $3,339.229
There
efore, the pen
nalty under th
he interest ratte differentiaal scenario is $$3,339.29.
Conclusion
In thiss scenario, Baarbara would be charged the interest raate differential of $3,339.2
29 since it is
the hiigher of the tw
wo penalties that the lend
der has the opption of chargging.
8.10
0 Conclu
usion
In thiss chapter you
u have learned
d how to calcculate a basic mortgage paayment. The HP10BII can
also be
b used to:
 Calculate the ouutstanding baalance of an interest accruuing or reversse mortgage
 Dissplay the prinncipal and/or interest portion of a paym
ment
 Dissplay the totaal amount of principal and/or interest ppaid in a streaam of paymennts (for
exaample, in a te
erm)
 Calculate the Coost of Borrow
wing
 Calculate the Prresent Value of an investm
ment
 Calculate the Fuuture Value of
o an investme
ent
 Calculate the paayment requiired to obtainn a Future Vallue
 Calculate the innterest rate chharged on a mortgage
m
wheere it is not known
 Calculate the raate of interestt required to obtain a Futuure Value, and
 Sevveral other fuunctions whicch are more advanced
a
andd are typicallyy taught in mo
ortgage
financing courses; however keep in mind that you cann use this calcculator for maany functions
oth
her than simp
ply calculatingg a mortgage payment.
Chapter 8: Calcu
ulating a Morrtgage Paymeent
19
95
or to calculate
e a mortgage payment cann also be quitte advantageo
ous when
Usingg the calculato
meetiing a client ou
utside of your office and iff you do not hhave your lap
ptop. In this m
manner you
can caalculate the payment
p
for a client and trruly demonst rate your pro
ofessionalism!
Su
uccess Tip – Practice!
While these calculations pro
obably seem very
v
complicaated, the old saying, “Practice makes
pe
erfect” definittely applies to
o using the fin
nancial calcul ator. By praccticing these calculations
yo
ou can masterr using the HP
P10BII and confidently perrform these calculations fo
or the benefitt
of your client!
196
Chapter 8: Calculating a Mortgage Payment
8.11 Key Terms and Definitions
Amortization Period
The total amount of time required to fully repay a mortgage
Compounding Frequency
The number of times per year in which an interest rate is charged. Typical compounding
frequencies include semi‐annually and monthly.
EFF%
The J1 rate or the annual interest rate with only one compounding period
Equivalent Interest Rate
A rate that is equal to another. Two rates are said to be equal if, for the same amount borrowed
over the same period of time, the same amount is owed at the end of that period
Floating Decimal Place
The calculator provides the answer on the display to the number of decimal places the number
requires without rounding.
FV
The future value also referred to as the outstanding balance at a given point in time
HP10BII
The financial calculator used to compute several mortgage calculations
Interest Rate
The rate at which interest, which is a fee paid to the lender for borrowing money, is calculated
Interest Rate Conversion
The process of converting a rate to its equivalent with a different frequency of compounding
Mortgage Amount
The amount of money borrowed, also referred to as the present value
N
The key on the HP10BII representing the total number of compounding periods required to
repay a mortgage
NOM%
The key on the HP10BII representing the annual rate of interest
Outstanding Balance
The same as the future value, this is the amount owed at a given point in time.
P/YR
The key on the HP10BII representing the total number of compounding periods per year
Chapter 8: Calculating a Mortgage Payment
197
PMT
The key on the HP10BII representing the payment or the amount required to be repaid per
compounding period
PV
The key on the HP10BII representing the Present Value, also referred to as the mortgage
amount
Rounded Payment
A payment that has been properly rounded. A mortgage payment is rounded up to the next
highest cent unless otherwise indicated.
Term
A contracted period of time in which mortgage payments are made. At the end of this period
the contract is renewed, typically resulting in a different interest rate and payment amount.
198
ulating a Morrtgage Paymeent
Chapter 8: Calcu
8.12
2 Review
w Questio
ons
Answers to the Revview Questio
ons are found at www.REM
MIC.ca
Sho
ort Answe
er Questio
ons
1. No
ote: This quesstion does nott apply to the
e Sharp or Texxas Instrumen
nts calculatorrs.
Your client has asked you wh
hich interest rate is lower:: 6% compoun
nded semi‐an
nnually or
93% compoun
nded monthlyy. Which rate
e is lower?
5.9
2. No
ote: This quesstion does nott apply to the
e Sharp or Texxas Instrumen
nts calculatorrs.
Perform the following rate conversions:
c
a. J12 = 7%. What
W
is the J4
4 equivalent?
b. J4 = 3.2%. What
W
is the J1
12 equivalentt?
c. J12 = 3%. What
W
is the J2
2 equivalent?
d. J365 = 18%. What is the
e J1 equivalen
nt?
3. Your client has asked you to tell her the amount
a
of he r mortgage p
payment baseed on the
folllowing propo
osed mortgagge: $295,500 mortgage am
mortized overr 35 years witth an interestt
ratte of 4.25% co
ompounded semi‐annually
s
y, not in advaance, with weeekly paymen
nts and a 3
year term. Whaat is her prop
posed paymen
nt?
4. Calculate the paayment for th
he following mortgages:
m
a. $470,000 mortgage,
m
25 year
y
amortizaation, monthlly payments, 3 year term, J2=6%
b. $350,000 mortgage,
m
40 year
y
amortizaation, bi‐wee kly paymentss, 5 year term
m, J2=5.57%
c. $20,000 seccond mortgagge, 15 year am
mortization, m
monthly paym
ments, 15 yeaar term,
J2=14%
d. $1,250,000 mortgage, 35
5 year amortization, weekkly payments,, 5 year term,, J2=3.75%
5. Yo
our client doe
es not qualifyy for an institu
utional mortggage so you h
have arranged
d a private
se
econd mortgaage for him. The
T mortgage
e amount is $$34,500 and tthe interest raate is 13%
co
ompounded semi‐annually
s
y. The month
hly payments are interest only for one yyear. What iss
th
he amount off the proposed mortgage payment?
p
(H int: the preseent value and the future
vaalue are the same
s
because
e there is no principal
p
beinng repaid)
Chapter 9: Attracting a Client
199
Chapter 9: Attracting a Client
Learning Outcomes
Successful understanding of the concepts presented in this chapter will enable the learner to:
 Discuss the impact of regulation and legislation on the marketing activities of mortgage
agents
 Discuss the importance of and differences between a mission and vision Statement
 Discuss the importance of different types of business cards
 Explain networking and how to be successful at it
 Explain the marketing of intangibles
 Discuss the benefits of testimonials
 Illustrate how to differentiate oneself from the competition
 Explain database marketing
 Discuss various methods of obtaining referrals
Introduction
In the mortgage brokerage industry, there are two vital components to success: attracting a
client and being able to achieve that client’s financing needs. Without a client a mortgage
agent’s technical expertise in mortgage financing is useless. Today’s mortgage brokerage
industry is comprised of over nine thousand mortgage agents in Ontario, all of whom are vying
for the consumers’ attention.
Some do this extremely well but it takes most several years to obtain a level of success that
equates to a comfortable lifestyle. This is due in large part to a lack of understanding that in the
mortgage brokerage industry the majority of work that is performed is sales‐related. The ability
to obtain a mortgage broker’s or agent’s license, while vitally important, is of little consolation if
the broker or agent doesn’t have a sufficient flow of clients to generate a sustainable income.
In referring back to the 80‐20 rule discussed earlier, it is, at least anecdotally, a fact that twenty
percent of sales people will produce eighty percent of the business in any commission based
industry. This is a truism for several reasons, but primarily because the commissioned agent is
his or her own boss. If he or she has a focused, disciplined and committed boss then success can
follow. However, if his or her boss allows frequent time off and does not provide a structured
environment in which to flourish the agent will typically fail.
The net result of this relationship is that the commissioned agent must have a dedication to his
or her success that, at the outset of his or her career, is equal to that of a new business. A
recent survey produced by Entrepreneur.com found that approximately 50% of businesses failed
during the first four years of business. This actually contradicts the statement that eighty
percent of businesses fail in the first year of business, a statement that has attained the status
of urban myth. Both statements, however, illustrate the difficulty that new businesses have in
the early stages of their development and the commissioned agent is no exception to this rule.
As an individual making a career change, moving into sales for the first time or leaving a financial
institution to undertake a new challenge, the mortgage brokerage industry can be an incredibly
200
Chapter 9: Attractingg a Client
c
if done
e properly. Th
his can be de fined as having a sound teechnical
rewarrding career choice
knowledge of the mortgage
m
ind
dustry as well as the abilityy to attract an
nd keep clientts.
This chapter
c
will exxplore some successful
s
strrategies for thhe mortgage agent in meeeting the goall
of attracting clientts, with a focu
us on advertissing, networkking, marketin
ng, and datab
base
management.
9.1 The Impa
act of Reg
gulation and
a Legis
slation
The activities available to attracct a client are
e numerous, aand many aree impacted byy legislation
and other
o
industryy guidelines. Legislation an
nd industry guuidelines are designed to prevent such
practiices as misleaading advertissing, the bait and switch (pproviding a co
onsumer with
h an attractive
offer to obtain him
m or her as a client
c
but being unable to provide the p
product or service at the
indicaated price), faalse advertisin
ng and so on.
d legislation
Before addressing the methodss used to attraact a client, thhe industry gguidelines and
that affect
a
these methods
m
mustt be discussed
d. The first seet of guidelines that need to be
explored is called the
t Canadian Code of Adve
ertising Standdards.
The Canadia
an Code of
o Adverttising Sta
andards
The Canadian
C
Code
e of Advertisiing Standardss was createdd by the adverrtising industry in 1963 to
promote the profe
essional practtice of advertiising. This Coode is regularrly updated byy Advertising
Stand
dards Canada,, (ASC), which
h was founded in 1957. Thhis not‐for‐profit, self‐regu
ulatory body
regulaates the adve
ertising industtry and handles consumerr complaints rrelated to advvertising.
The Code
C
promote
es truth, hone
esty, fairness,, and accuracyy in advertising and is com
mprised of
fourte
een clauses th
hat set the crriteria for acce
eptable adve rtising. The ffollowing is a condensed
versio
on of those clauses:
1. Acccuracy and Clarity
C
Adverrtisements must not contaain inaccurate
e or deceptivee claims, statements, illusttrations or
representations, either direct or
o implied, witth regard to a product or sservice. In asssessing the
truthffulness and accuracy of a message,
m
the concern is noot with the in
ntent of the seender or
precisse legality of the
t presentattion. Rather, the focus is oon the messaage as receiveed or
perce
eived, i.e. the general imprression conve
eyed by the addvertisementt.
2. Dissguised Adve
ertising Techn
niques
No ad
dvertisement shall be presented in a format or style that conceals its commercial intent.
3. Priice Claims
No ad
dvertisement shall include deceptive prrice claims or discounts, un
nrealistic pricce
comp
parisons or exaggerated claaims as to wo
orth or value.
ait and Switch
h
4. Ba
Adverrtisements must not misre
epresent the consumer’s
c
oopportunity to
o purchase th
he goods and
servicces at the term
ms presented
d.
Chapter 9: Attracting a Client
201
5. Guarantees
No advertisement shall offer a guarantee or warranty, unless the guarantee or warranty is fully
explained as to conditions and limits and the name of the guarantor or warrantor is provided, or
it is indicated where such information may be obtained.
6. Comparative Advertising
Advertisements must not unfairly discredit, disparage or attack other products, services,
advertisements or companies, or exaggerate the nature or importance of competitive
differences.
7. Testimonials
Testimonials, endorsements or representations of opinion or preference, must reflect the
genuine, reasonably current opinion of the individual(s), group or organization making such
representations, and must be based upon adequate information about or experience with the
product or service being advertised, and must not otherwise be deceptive.
8. Professional or Scientific Claims
Advertisements must not distort the true meaning of statements made by professionals or
scientific authorities.
9. Imitation
No advertiser shall imitate the copy, slogans or illustrations of another advertiser in such a
manner as to mislead the consumer.
10. Safety
Advertisements must not without reason, justifiable on educational or social grounds, display a
disregard for safety by depicting situations that might reasonably be interpreted as encouraging
unsafe or dangerous practices, or acts.
11. Superstition and Fears
Advertisements must not exploit superstitions or play upon fears to mislead the consumer.
12. Advertising to Children
Advertising that is directed to children must not exploit their credulity, lack of experience or
their sense of loyalty, and must not present information or illustrations that might result in their
physical, emotional or moral harm. Child‐directed advertising in the broadcast media is
separately regulated by the Broadcast Code for Advertising to Children, also administered by
ASC. Advertising to children in Quebec is prohibited by the Quebec Consumer Protection Act.
13. Advertising to Minors
Products prohibited from sale to minors must not be advertised in such a way as to appeal
particularly to persons under legal age, and people featured in advertisements for such products
must be, and clearly seen to be, adults under the law.
14. Unacceptable Depictions and Portrayals
It is recognized that advertisements may be distasteful without necessarily conflicting with the
provisions of this clause; the fact that a particular product or service may be offensive to some
people is not sufficient grounds for objecting to an advertisement for that product or service.
Advertisements shall not:
202
Chapter 9: Attractingg a Client
orm of person
nal discriminaation, includinng that based
d upon race, n
national origin
n,
(a) condone any fo
relligion, sex or age;
(b) ap
ppear in a realistic mannerr to exploit, co
ondone or inccite violence;; nor appear tto condone, o
or
dirrectly encouraage, bullying;; nor directly encourage, oor exhibit obvvious indiffereence to,
unlawful behavviour;
(c) de
emean, denigrrate or disparrage any iden
ntifiable persoon, group of p
persons, firm,, organization
n,
ind
dustrial or com
mmercial activity, professiion, product oor service or attempt to bring it or them
m
intto public conttempt or ridiccule;
(d) un
ndermine hum
man dignity; or
o display obvvious indiffereence to, or en
ncourage, graatuitously and
d
witthout merit, conduct
c
or atttitudes that offend
o
the staandards of pu
ublic decencyy prevailing
am
mong a significcant segmentt of the population.
Pa
ause for cla
arification
n – Advertiising Stand
dards Cana
ada
Mo
ore informatiion on Adverttising Standaards Canada ccan be found by visiting
ww
ww.adstandards.com
Leg islation
Adverrtising and maarketing, refe
erred to by th
he MBLAA andd its Regulatioons as public relations
materrials, is discusssed in four sp
pecific locatio
ons: section 227 of the MBLLAA, sections 7 to 9 of
Regullation 187/08
8, sections 5 to 7 of Regula
ation 188/08 aand sections 18 to 20 of Regulation
191/0
08.
The se
ections of Reg
gulation 187//08 and Regu
ulation 188/088 deal with th
he use of nam
mes in public
relatio
ons materialss as well as a prohibition on the usage oof false, misleeading or deceptive
inform
mation.
Pub
blic Relat ions Mat erials: Ag
gents and
d Brokerss
To begin, Regulatio
on 187/08 de
efines the term
m “public relaations materiials” as:
(a) an
ny advertisem
ment by the brroker or agen
nt in connectioon with his or her status aas a licensee o
or
hiss or her dealin
ng or trading in mortgagess that is publi shed, circulatted or broadccast by any
me
eans, or
(b) an
ny material th
hat a broker or
o agent make
es available too the public in
n connection with his or
her status as a licensee
l
or his or her dealiing or tradingg in mortgagees. O. Reg. 18
87/08, s. 1 (2)).
Pa
ause for cla
arification
n – Examplles of publilic relation
ns materialls
He
ere are some examples of what are con
nsidered publ ic relations m
materials:
 Radio ad
 Businesss cards
 Magazine ad
 Newspaaper ad, whether it is a
d
classifie
ed ad or displlay ad
 Flyer or Bro
ochure
 A sign (i.e
( on a build
ding or vehicle
e)
 Website
 Billboarrd or poster
 An ad placed on a websitte
 Bench ad
a
 An advertorrial (an articlee that is an
 A prom
motional email
advertisemeent)
Chapter 9: Attractingg a Client
20
03
R
alsso regulates the use of an agent’s and bbroker’s namee in the follow
wing sectionss
This Regulation
of Reg
gulation 187//08.
o licensee name
Use of
7. A mortgage
m
age
ent or agent shall
s
not deal or trade in m
mortgages in a name otherr than his or
her licensee name. O. Reg. 187/08,
1
s. 7.
This means
m
that a broker or age
ent can only do
d business bby using their name as it is registered
with FSCO.
F
FSCO does
d
allow an
n agent or bro
oker to be reggistered in hiss or her full leegal name as
well as
a an also kno
own as, so thaat if your legaal name is, forr example, W
William and yo
ou are known
n
as Billl, you can do business usin
ng either nam
me.
Use of
o name, etc.,, in public relaations materrials
8. (1)) In all of his or her public relations materials, a morrtgage agent or agent shalll disclose his
or her licensee name and the authorized name and liccence number of the brokeerage on
wh
hose behalf he or she is au
uthorized to deal
d or trade iin mortgages, and the nam
mes and
numbers must be
b clearly and
d prominentlyy disclosed. O
O. Reg. 187/008, s. 8 (1).
(2) If the authorize
ed name of th
he brokerage is, or includees, a franchisee name that tthe brokeragee
is permitted
p
to use under a franchise
f
agre
eement, the ppublic relatio
ons materials must clearly
ind
dicate that the brokerage is
i independently owned a nd operated.. O. Reg. 187/
7/08, s. 8 (2).
(3) In
n the public re
elations mate
erials, at least one referencce to the brokker or agent m
must include
one of the following titles an
nd the materiials may also include an eq
quivalent titlee in another
lan
nguage:
1. When referrring to a broke
er, the title “m
mortgage brooker”, “brokeer”, “courtier en
hypothèques” or “courtie
er” or an abbrreviation of aany of those titles.
2. When referrring to an agent, the title “mortgage
“
ageent”, “agent”” or “agent en
n
hypothèques” or an abbreviation of an
ny of those tittles. O. Reg. 187/08, s. 8 ((3).
Prohibition re pub
blic relations materials
9. A mortgage
m
age
ent or agent shall
s
not inclu
ude false, mis leading or deeceptive inforrmation in hiss
or her public relations materrials. O. Reg. 187/08, s. 9.
Pub
blic Relat ions Mat erials: Mortgage
M
B
Brokerag
ges
Regullation 188/08
8 defines “pub
blic relations materials”, inn relation to a brokerage aas:
(a) an
ny advertisem
ment by the brrokerage in co
onnection witth its businesss as a brokerrage that is
published, circu
ulated or broaadcast by anyy means, or
(b) an
ny material th
hat a brokeragge makes available to the public in connection with its business aas
a brokerage;
b
This Regulation
R
alsso regulates the use of the
e brokerage’s name in thee following sections of
Regullation 188/08
8.
Use of
o authorized name
5. A brokerage
b
shaall not carry on
o business in
n a name otheer than its au
uthorized nam
me. O. Reg.
188/0
08, s. 5.
204
Chapter 9: Attractingg a Client
o name, etc.,, in public relaations materrials
Use of
6. (1)) A brokerage
e shall disclose
e its authorized name andd its licence nu
umber in all o
of its public
rellations materrials and the name
n
and num
mber must bee clearly and prominently disclosed. O.
Reeg. 188/08, s. 6 (1).
(2) If the authorize
ed name of a brokerage is, or includes, a franchise n
name that thee brokerage iss
permitted to usse under a fraanchise agreement, the puublic relationss materials must clearly
ind
dicate that the brokerage is
i independently owned a nd operated.. O. Reg. 188/
8/08, s. 6 (2).
(3) If,, in its public relations matterials, a brokkerage identiffies a broker or agent by n
name, the
bro
okerage shall use the nam
me in which th
he broker or aagent is licenssed. O. Reg. 1
188/08, s. 6
(3)).
or agent, the materials
(4) If,, in its public relations matterials, a brokkerage refers to a broker o
mu
ust include att least one refference to the
e broker or a gent that includes one of the followingg
titlles, and the materials
m
mayy also include an equivalennt title in another languagee:
1. When referrring to a broke
er, the title “m
mortgage brooker”, “brokeer”, “courtier en
hypothèques” or
o “courtier” or an abbreviiation of any of those titlees.
2. When referrring to an agent, the title “mortgage
“
ageent”, “agent”” or “agent en
n
hypothèques” or
o an abbreviation of any of
o those titless. O. Reg. 1877/08, s. 8 (3).
Mislleading, Deceptiv e and Fa
alse Adve
ertising
As secction 9 of Reg
gulation 187//08 states, “A mortgage aggent or agent shall not incllude false,
misleaading or dece
eptive information in his or her public rrelations mateerials.” To fu
ully
underrstand the sco
ope of this se
ection require
es a fuller undderstanding o
of the terms m
misleading,
decep
ptive and false. Misleadingg can be defin
ned as decep tive or tendin
ng to create a false
impre
ession. Misleading advertiising occurs when
w
a repressentation relaated to a prod
duct or servicce
is decceptive, materially false or misleading in
n order to pe rsuade the co
onsumer to b
buy it.
Decep
ptive can be defined
d
as the
e act of convincing anotheer to believe information that is not
true, or not the wh
hole truth as in certain typ
pes of half‐truuths, while fallse can be defined as
delibeerately decep
ptive. False ad
dvertising is the
t use of falsse or misleading statemen
nts in
adverrtising. As advvertising has the potentiall to persuadee people into commercial ttransactions
that they might otherwise avoid
d, many gove
ernments arouund the world
d use regulattions to
contro
ol misleadingg, deceptive or
o false adverttising.
Broke
erages must be
b keenly awaare of the deffinitions of th e terms used
d in this Regullation,
especcially in this cllimate of financial turmoil and the increease of overssight of lendin
ng and
broke
ering practices. Several other jurisdictio
ons have alre ady deemed phraseology currently
used by some Ontaario brokeragges as deceptive or misleadding. For exaample, the Au
ustralian
estment Commission penaalized a brokeerage for using the phrasess,
Securrities and Inve
“independent and impartial” an
nd “we work for
f most of thhe lenders,” w
when this was proven
factuaally incorrect.. The contextt is an importtant factor whhen advertisin
ng. These same
statem
ments may be
e considered true when made
m
by one bbrokerage and
d false when made by
anoth
her.
The fo
ollowing is a list of potentiial terms, phrrases and scennarios that m
may also be deeemed to be
misleaading, decepttive or false, depending
d
on
n the context in which theey are used.
Chapter 9: Attracting a Client
205
“Have access to all / work with all lenders”
While the broker/agent making this statement may believe it to be true, does he or she know
for certain that his or her brokerage in fact has access to all of the lenders in the industry? In
most cases this statement will be factually incorrect since both the Bank of Montreal and the
Royal Bank of Canada do not deal directly with brokers.
“Access to over 50 lenders”
Is this true? The question that must be asked before using this statement is how many lenders
did the brokerage actually use in the previous year? The MBLAA and its Regulations require this
answer to be disclosed to borrowers when requested. If the brokerage didn’t use in excess of
50 lenders in the previous year, why would its representative make this statement? In other
words, what is the goal of this statement? In most cases the goal of this type of statement is to
convey to the consumer that the brokerage can shop for the best mortgage for him or her by
having access to a vast number of lenders. If the number 50 is factually incorrect the brokerage
may be using misleading terminology in its advertising. It should ensure that all of its public
relations material accurately reflects the number of lenders that it has actually used and
whenever this is not the case the materials should be amended.
“No job? No credit? No problem!”, “Good credit, bad credit or no credit...all are approved!”,
“Guaranteed approval”
These are all statements designed to get a consumer with difficulty in obtaining a mortgage to
contact the brokerage, broker or agent. While the argument can be made that anyone can be
approved as long as they have enough equity, regardless of their circumstances, these
statements could be considered misleading, deceptive or false because they imply that everyone
will be approved regardless of their circumstances, which is clearly not possible.
“Lowest rates in town”
This statement implies that this brokerage has the lowest rates for everyone. Unless a
brokerage can prove this statement to be factual, it can be considered misleading, false or
deceptive. Consider what the brokerage would have to do to prove this statement. This would
require being able to state without doubt that it knows all of the other rates that every
brokerage and lender offer and that it has the lowest of them all. While possible, it is not
probable and the brokerage would most likely not be able to prove this statement.
Quoting teaser or discounted rates without advising of other costs or details
For example, quoting a rate of 1%, which may be a three month teaser rate, without indicating
that the rate increases after those three months would likely be considered misleading,
deceptive or false, as would an advertisement that offered a rate of 1% but didn’t disclose the
fact that to obtain this rate required the borrower to pay to buy down the rate.
The U.S. Federal Trade Commission (FTC) at one point in 2007 stated that more than 200
companies had been warned about “potentially deceptive” mortgage advertisements. The FTC
slammed advertisers for highlighting teaser rates and low payment options without explaining
the harsh reality of these loans to consumers.
Quoting payments based on extended amortizations that appear to be less expensive than
regular amortized mortgage
A way to make payments appear lower than they would traditionally appear is to use an
extended amortization. If the payment is in fact based on an amortization period in excess of 25
206
Chapter 9: Attractingg a Client
t advertisem
ment it may bbe considered
d misleading since the
years and it is not disclosed in the
payment is most likely the prim
mary selling po
oint of the addvertisement.. The British C
Columbia
Registtrar of Mortggage Brokers included
i
this example in a n information
n bulletin to tthe BC
mortggage brokeragge industry1.
Bait and
a switch
This iss a term that reflects when
n a brokerage
e attracts connsumers by ad
dvertising a certain producct
at a raate lower thaan the markett rate, but nevver actually pprovides that rate. For exaample, an
adverrtisement may boast a rate
e of 2% to qualified borrow
wers (the baitt). However tthe brokerage
may never
n
actuallyy arrange a mortgage
m
at th
hat rate becauuse either no consumer caan meet the
qualiffications for that product or
o it doesn’t actually
a
exist. The consum
mer is then offfered a higheer
rate in
n line with prrevailing markket rates (the
e switch).
Adv ertising Tips
T
– Co
ompetitio
on Bureau
u of Cana
ada
When
n a brokerage
e is developing policies and
d procedures that ensure iits public relaations
materrials are comp
pliant, it may wish to inclu
ude some of tthe following advertising tips from the
Comp
petition Bureaau of Canada..
Do:
 Doo avoid fine print disclaimeers. They ofteen fail to channge the generral impressionn conveyed byy
an advertiseme
ent. If you do use them, maake sure the ooverall impreession created
d by the ad
and the disclaim
mer is not missleading.
 Doo fully and clearly disclose all material innformation inn the advertissement.
 Doo avoid using terms
t
or phraases in an advvertisement tthat are not m
meaningful an
nd clear to the
ord
dinary person
n.
 Doo, when conduucting a contest, disclose all
a material d etails.
 Doo ensure that your sales force is familiarr with these ""Dos and Donn'ts." Advertissers may be
held responsible for representations mad
de by employ ees.
Don't
 Doon't confuse "regular price" or "ordinaryy price" with "manufacturrer's suggesteed list price" oor
a like term. The
ey are often not
n the same.
 Doon't use "reguular price" in an
a advertisem
ment unless t he product has been offerred in good
faith for sale at that price for a substantiaal period of ti me, or a subsstantial volum
me of the
pro
oduct has bee
en sold at thaat price within
n a reasonablle period of time.
 Doon't use the words
w
"sale" or
o "special" in
n relation to t he price of a product unleess a
siggnificant price
e reduction haas occurred.
 Doon't run a "salle" for a long period or reppeat it every w
week.
 Doon't increase the
t price of a product or service to cov er the cost off a free produ
uct or service.
 Doon't make a peerformance claim
c
unless you
y can provee it, even if yo
ou think it is aaccurate.
Testimonials ussually do not amount
a
to ad
dequate prooof.
 Doon't sell a prodduct above yoour advertiseed price.
 Doon't unduly deelay the distriibution of prizes when connducting a contest.
1
Regisstrar of Mortgaage Brokers, British Columbiaa, Bulletin MB 06‐002
Chapter 9: Attractingg a Client
20
07
 Doon't forget thaat no one actually needs too be misled foor a court to find that an aadvertisemennt
is misleading.
m
9.2 Business
B
s Develop
pment forr Mortgag
ge Agentts
Please Note: The following
f
top
pics are design
ned to assist you in undersstanding how
w to market
yourself and begin
n obtaining clients as a licensed mortgagge agent. Ho
owever this seection is not
includ
ded in the cou
urse’s final exxamination.
The fo
ollowing topiccs are designe
ed to assist th
he new mortggage agent in
n learning how
w to develop
his orr her businesss. By embraciing business development
d
t activities immediately up
pon getting
licenssed, the new mortgage
m
age
ent increases his or her likkelihood of su
uccess, because the fact is
that no
n mortgage agent
a
can be successful without first finnding a clientt.
Miss
sion and Vision Statement
S
ts
Missio
on Statement
A Misssion Stateme
ent is a plan fo
or companiess and people tto accomplish the goals th
hey set. It is
design
ned to shape the companyy’s or individu
ual’s identity and is typicallly based on a vision, goal,,
or eth
hics.
A Misssion Stateme
ent can be helpful to a mortgage agent because it prresents a wayy to establish
and understand go
oals, and brings substance and meaningg to the purpo
ose of the bu
usiness.
The fo
ollowing are some
s
examples of Mission
n Statements::
w superior products
p
and services by ddeveloping innovations and solutions
"Provvide society with
that im
mprove the quality
q
of life and satisfy cu
ustomer needds, and to pro
ovide employyees with
mean
ningful work and
a advancem
ment opportu
unities, and innvestors with a superior raate of return” ‐
Merckk
"To enable people and businessses throughout the world to realize theeir full potenttial” ‐
Micro
osoft
"Orgaanize the world's informatiion and make
e it universallyy accessible aand useful” ‐ Google
n Statement
Vision
A Vision Statement is something that the business or mo rtgage agent aspires to beecome. It
should illustrate th
he core belieff of the busine
ess or mortgaage agent and
d effectively ccommunicatee
that to the reader..
The main
m objective
e of a Vision Statement
S
is to
t explain thee core belief o
of where the company or
mortggage agent is going with th
he business.
Prope
erly developed Mission and
d Vision state
ements can p rovide daily ffocus for the business or
agentt and assist in keeping goals at the foreffront. This daaily refocusin
ng can substan
ntially
increaase the poten
ntial for succe
ess. For the consumer the se statementts clearly and succinctly
outlin
ne the beliefs and direction
n of the busin
ness or the m ortgage agen
nt. In so doing they can
quickly communicaate and articu
ulate key messsages to the consumer. A well designeed Mission
208
Chapter 9: Attractingg a Client
V
stateme
ent will assistt the consume
er in positive ly relating witth the busineess or
and Vision
mortggage agent.
municating yo
our Mission and
a Vision Staatements
Comm
It is im
mportant thatt, once constrructed, these
e statements aare communiicated to clien
nts, potentiall
clients and others within the industry. This can
c be done iin several ways such as byy including
them in or on:
 Staationary
 Buusiness cards
 Addvertisementss
 Neewsletters
 Proomotional maaterials
 Em
mails
 Anny items that the
t public see
es.
Bus iness Ca
ards
“Grea
at sales start with a great Business Carrd”
‐ Jo
oe Girard, “W
World’s greate
est Salesperso
on” accordingg to the Guin
nness Book off World
Records
The purpose of an effective bussiness card is to attract andd set in motio
on the wheels of acquiringg
poten
ntial users of your
y
service. It provides the mortgage agent with:
 A direct
d
marketting vehicle
 A person‐to‐pe
p
rson sales calll
 Ann advertisemeent
 A lead generatoor
 A networking
n
to
ool
 A visual
v
represe
entation of yo
ou.
c
as a mo
obile, miniature version of the mortgage agent. For those just
Think of business cards
beginning, it is ofte
en the most inexpensive, affordable
a
toool. It createss and makes a statement
aboutt who the mo
ortgage agent is and how he
h or she condducts his or h
her business. A business
card is an image bu
uilder, provid
ding a first and
d potentially powerful imp
pression that can judge the
mortggage agent po
ositively or ne
egatively. It can
c provide a n insight into
o what he or sshe stands for,
especcially if a Misssion and/or Vision Stateme
ent is include d in it.
Within the businesss card the mortgage agen
nt should incluude all of his or her contacct
inform
mation, the USP
U and a logo
o. The Missio
on and/or Vis ion Statemen
nt, a brief bioggraphy, a
coupo
on or helpful tips for the co
onsumer mayy also be incluuded.
A card
d can be mad
de to stand ou
ut from otherrs by using co lour, Mylar or plastic stock, using a
graph
hic, or includin
ng a picture of
o oneself. Ho
owever the b usiness card is designed th
he core idea is
simple: be unique.
Chapter 9: Attractingg a Client
20
09
ness Card Don
n’ts
Busin
 Neever cross thinngs out – prinnt new cards when
w
info ch anges and ch
halk it up to a business
expense
 Neever use a sticcker – again, get
g new cards
 Doon’t use neon stock, it’s oftten too hard to read the pprint
 Doon’t use difficult to read foont ‐ Test the font on friendds who wear reading glassses and
enlarge it if neccessary
 Doon’t use skinny letters ‐ Usee easier to reead, thicker leetters
 Doon’t use all capital letters, THEY’RE
T
TOO
O DIFFICULT TTO READ
 Doon’t use too many
m
different type faces, they are conffusing
 Doon’t use scriptt or fancy fonts that are tooo difficult to read
Uniq
que Form
ms of Bus
siness Ca
ards
In atte
empting to differentiate th
he mortgage agent from hhis or her com
mpetition, he or she might
consid
der using uniq
que forms of business card
ds. Currentlyy there are au
udio and video
o business
cards. Both offer the
t ability to provide a mo
ore in‐depth ppresentation of products aand services;
ever they can be considerably more exp
pensive than sstandard business cards.
howe
Audio
o Business Ca
ards
Audio
o business carrds are definittely an attenttion grabber, telling poten
ntial clients th
hat the
mortggage agent is different and
d serious about his or her bbusiness. Theey are less likkely to be
throw
wn away and tend
t
to peak people’s curiosity, causingg them to be listened to in
n their
entire
ety. Audio bu
usiness cards are gaining in popularity aand can typiccally be purch
hased with
softw
ware through businesses
b
su
uch as Stapless, Future Shopp, etc.
Video
o Business Cards
Video
o Business Carrds offer the same benefitts of audio buusiness cards with further latitude in the
abilityy to visually craft a messagge. They allow
w the mortgaage agent to iinterview passt customers
and have customer testimonials. Testimoniaals are vital inn the marketing of intangibles such as
servicces.
o Business Carrds should typ
pically be no longer than 6 to 8 minutees to ensure th
hat the
Video
poten
ntial customer does not losse interest.
Tips for
f Distributin
ng Business Cards
C
For bu
usiness cards to be successful, they mu
ust end up in tthe hands of potential cusstomers. To
achievve this goal th
he mortgage agent should
d always leavee his or her ho
ome or officee with at leastt
twentty business caards and be prepared
p
to giive them awaay. By settingg a goal of disstributing a
certaiin number of cards per we
eek, he or she
e will be able to increase h
his or her expo
osure to
poten
ntial customers and increase his or her volume of buusiness.
a friends, aat seminars, in
ndustry eventts, workshops,
Be sure to provide business cards to family and
netwo
orking eventss, classes, meetings and an
nywhere else there might be a potentiaal customer.
210
Chapter 9: Attractingg a Client
Su
uccess Tip – Businesss cards
Ne
ever leave your home or office
o
withoutt at least 20 bbusiness cardss. Get into th
he practice off
givving them to people you do
d not know. You will incr ease the num
mber of peoplle who are
aw
ware of your business
b
and thereby incre
ease the num
mber of poten
ntial new custtomers, which
h
is the goal of alll successful sales
s
people!
Netw
working
Definition
e are several definitions
d
off Networking, but at its corre, Networkin
ng is building or expandingg
There
one's social netwo
ork or sphere of influence by
b initiating m
mutually advaantageous neew
relatio
onships with people. Netw
working can be
b one of thee most cost efffective mean
ns of obtaining
new business,
b
which can be esp
pecially imporrtant for new
w sales peoplee.
The purpose of nettworking is to
o create mean
ningful relatioonships. Today’s environm
ment is very
comp
petitive, and a personal relationship can
n separate a m
mortgage ageent from all off those who
are simply marketiing and adverrtising. People like to dea l with those tthey know and trust, and
perso
onal contact through netwo
orking can cre
eate that.
Netw
working Strate
egies for Funcctions
 Weear a nametag
 Doon’t hover, jusst mingle
 Coomment on innteresting artiicles of clothing as a conveersation startter
 Haave a businesss card enlargeed and laminaated and weaar it as a name tag
 Alw
ways smile an
nd look intere
ested
 Bee confident
 Haave goals about whom to meet
m
 Think of things to discuss in groups, like current
c
affairss; be up to daate on current events
 Reemember the goal: set apppointments annd get contacct informationn for your Dattabase
Maarketing proggram
 Bee a host, not a guest
 Focus your atteention, do nott let it wander
 Follow up
 Coollect businesss cards
 Haave fun
Wherre to Networkk
 Service Clubs
 Church groups
 Chamber of Com
mmerce
 Personal parties
 Buusiness functioons (i.e. tradee shows, etc.))
Chapter 9: Attractingg a Client
21
11
Su
uccess Tip ‐ Networkking
Ne
etworking is a fantastic me
eans of developing personnal relationships. However, it must be
do
one in moderration. Ensure
e that you inttroduce yoursself to new people and pro
ovide them
with a businesss card, but do
o not try to se
ell at an eventt. After you’vve made yourr introduction
n
an
nd have very briefly
b
mentio
oned your line of businesss, change the subject. If th
hey feel the
ne
eed to speak to
t you immed
diately they will.
w You do nnot want to become the peerson that no
o
on
ne likes having at his or he
er party! By approaching eevents with a determinatio
on to subtly
prromote yourself, you will be
b readily acccepted.
The Marketin
ng/Adver tising of Intangiblles or Se
ervices
Marke
eting intangib
bles or service
es is quite diffferent in com
mparison with
h marketing p
products that a
poten
ntial customer can see and
d feel. Studies indicate thaat upwards off sixty percen
nt of
consu
umers will cho
oose a mortgage agent based on their pprior dealingss with the ageent, the
reputation of the agent
a
or being referred to the agent.
This clearly
c
indicattes that a perssonal relation
nship is vital, which is whyy networking and personal
contact is so important. In marrketing mortggage financingg, which is an
n intangible, itt is importantt
to use
e marketing to focus consu
umers on keyy concepts thaat have the efffect of turnin
ng the
intanggible into the tangible. Th
he following are strategies designed to market the in
ntangible
servicce of mortgagge financing.
Testim
monials
The use of testimo
onials can havve the effect of
o reducing thhe need of a cconsumer to touch or feell
a prod
duct. Testimo
onials from saatisfied clientts have the efffect of perso
onalizing the p
process. The
consu
umer can relate to anotherr person who
o has had a beeneficial expeerience and trranslate that
experrience to him or her. In essence this provides the coonsumer with
h something tangible:
anoth
her consumerr who can be seen or heard
d.
Clarity
Since uncertainty causes
nt to provide your
c
apprehension and stress,
s
it is vittally importan
poten
ntial client witth clarity. This means cleaarly outlining the process iinvolved in ob
btaining
mortggage financing so that the client can understand thaat progress is being made aas steps are
comp
pleted. This caan be done verbally or in pamphlets
p
orr brochures.
Atten
ntion to Detaiil
Since mortgage fin
nancing is an intangible
i
serrvice, it must be described
d to the clientt. This processs
must be done in ass much detail as the client requires. Ass some clientss are more deetail oriented
than others,
o
the mortgage
m
agen
nt must first determine
d
thee appropriatee level of detaail to provide
to the
e client and th
hen ensure th
hat he or she pays particul ar attention tto these detaails. One of
the faastest ways to
o lose a clientt’s faith is to be
b uncertain oof the detailss of their appllication or of
any part of the mo
ortgage appliccation process.
Continued Contactt
After the sale is co
omplete and the
t mortgage has closed, ccontinue to sttay in contactt with the
client. By having a competent CRM
C
(Custom
mer Relationshhip Managem
ment) program
m the
mortggage agent caan ensure that he or she re
eceives repeaat business an
nd referrals frrom this clien
nt.
212
Chapter 9: Attractingg a Client
Marrketing: th
he Art of Differen tiation
Marke
eting comes in
i a variety off forms but in
n the mortgagge industry it is important to understan
nd
that most
m lenders and mortgage brokeragess are offering the same pro
oduct: moneyy.
Since the consume
er sees the prroduct as virtu
ually identicaal between brrokerages and
d lenders, it iss
necesssary to devellop a marketing program that
t
differenttiates one mo
ortgage agentt from
anoth
her, whether that
t
person works
w
for a brrokerage or a lender. Thiss assists the co
onsumer in
differentiating between mortgaage providerss and making the decision of whom to cchoose based
d
on tho
ose differences.
To be able to achie
eve this goal, the mortgage
e agent mustt understand the competittion, the
produ
ucts and serviices offered and
a focus on the
t differencees. Some of tthe factors to
o focus on aree:
Produ
uct Availabilitty
Mortggage brokerages have acce
ess to produccts and servic es provided b
by numerous non‐bank
lende
ers, whereas banks
b
only haave access to their own prooducts. While this does no
ot
differentiate one mortgage
m
age
ent from anotther, it is a maajor differenttiation that neeeds to be
made
e clear to pote
ential clients. However, since most connsumers belieeve that all m
money is
create
ed equally or that most len
nders have th
he same prodducts, simply sstating in marketing
materrials that the mortgage agent has accesss to over a vaast number o
of lenders is n
not sufficient
to hellp the client understand
u
ho
ow that is of benefit to him
m or her.
By usiing a testimonial, this can be summarizzed quickly annd efficiently.. For examplee, including a
testim
monial in marketing that saays, “I though
ht I knew whaat I wanted w
when I was approved at myy
bank, but after I sp
poke with Maalik, my mortggage broker, I realized there were manyy more
options available to me than jusst what my bank had offerred. It was a real eye open
ner,” can
clearly differentiatte between a bank and a mortgage
m
age nt.
Of course, the testtimonial mustt be honest and genuine bbut this clearlyy illustrates the power of
testim
monial‐based marketing in illustrating the differencees in product availability beetween
tradittional lenderss and the morrtgage brokerrage communnity.
Servicce
Servicce can be a major
m
differenttiator betwee
en mortgage providers if m
marketed pro
operly. If
marke
eted imprope
erly the word service will simply
s
be anoother overuseed word with virtually no
mean
ning. In todayy’s market eve
eryone professes to have ssuperior servvice but, unlesss that service
is cleaarly defined the claim beco
omes vague. To make thee claim importtant requiress knowledge o
of
the co
ompetition’s service levelss. In so doingg the mortgagge agent can eexplicitly dem
monstrate thee
differences betwee
en his or her service and that of the co mpetition.
For exxample, if the
e mortgage aggent completes a budget tto assist in deetermining the suitability o
of
financcing solutionss at the initiall consultation
n stage, this s hould be focu
used on sincee most
mortggage sales people do not. A further exaample would be in ease off contact. Thee phrase, “I’m
m
availaable seven days a week twenty‐four hou
urs a day” is nnot only inco rrect, but sou
unds
despe
erate. There are no mortggage agents who
w will answ
wer a phone caall in the middle of the
night,, but by clearly setting out the hours off contact and if there are o
other membeers of the
mortggage agent’s team
t
who are
e available to
o answer callss, a differentiaation can be m
made. TD
Canad
da Trust had a very successful campaign
n at differenttiating it from
m the rest of the banks in
Chapter 9: Attracting a Client
213
Canada by clearly stating that it is open longer than any of its competitors. That statement
differentiated the bank. If it had simply marketed great service and convenient hours, the
distinction would have been lost on most consumers.
Professionalism
Another overused word, it is necessary for the mortgage agent to clearly define how they are
professional. This can be done by including professional designations in marketing materials,
and explaining those designations when appropriate.
Niche Marketing
Niche marketing is the ability of a marketer to target a specific group or demographic and design
a marketing campaign that answers the needs of that group or demographic. An excellent
example of niche marketing can be found in the automobile insurance industry by companies
with a program designed specifically for drivers over the age of fifty. This program targets a
specific demographic, one that the insurance brokerage has decided offers high returns, and
markets specifically to that group through media used by that group.
In the mortgage brokerage industry the marketing tends to be undifferentiated. Advertisements
tend to include several messages, such as offering mortgages to individuals with poor credit, no
income, who are self‐employed, or who are looking for the best rates. While this casts the
widest net, it does not speak to any specific target market. Therefore, no one encountering this
marketing will feel like it is speaking directly to him or her, which is a key element of any
marketing.
Potential areas of niche marketing for the mortgage agent include:
 The medical profession
Often these professionals are self‐employed high‐income earners with significant debt that
could benefit from non‐bank products
 Construction workers
Often seasonally employed working long hours, they might benefit from specific products
from non‐bank lenders as well as more convenient methods of applying for mortgage
financing.
The above examples provide an insight into what niche marketing might be for the mortgage
agent. In all cases niche marketing requires the marketer to identify a potential niche market,
research what the characteristics and needs of that market are and either develop or identify
products or services to meet those needs.
Whatever the message ends up being, it must eventually be delivered to the public. This can be
done in several ways, of which the following is a partial list:
 Flyers
 Classified Advertisements
 Yellow Pages advertisements
 Unaddressed admail through Canada Post
 Promotional items such as pens, fridge magnets, etc.
 Sponsoring an event
 Sponsoring an award
 Hosting or being a presenter at a seminar
214












Chapter 9: Attractingg a Client
Bro
oadcast faxing
De
elivering coup
pons
Be
ench advertising
Billboards
Ne
ewspaper inse
erts
Ne
ewspaper inte
erviews
Maagazine articles
Ne
ewsletters
Em
mails
Dirrect mail
Your website
Orr any means that can delive
er a message to a wide au dience.
Whatever the messsage is and however
h
it is delivered,
d
thee key to succeessfully markeeting a
produ
uct or service is developingg the strategyy and then im
mplementing iit. As P.T. Barrnum once
said, “without
“
prom
motion some
ething terrible
e happens – nnothing!”
Su
uccess Tip – Make th
he phone ring!
r
Th
he goal of all marketing an
nd advertisingg is simple: too make the ph
hone ring! Keeep this in
mind when devveloping yourr marketing and advertisinng pieces and create them with that
ulttimate goal in
n mind.
Data
abase Ma
arketing
Datab
base marketin
ng is the functtion of wareh
housing potenntial and existting client infformation in
an ele
ectronic mediium that allow
ws the user to
o assemble o r list these cliients in group
ps to whom
marke
eting efforts may
m be directted. Databasse marketing begins with a single client and can be
built to
t encompasss thousands of
o clients. The key to data base marketiing is to havee a system in
place whereby clie
ents receive marketing
m
on a regular bassis.
List off potential clients might in
nclude:
 Firrst time homee buyers
 Reenewers, and
 Reefinancers.
By seggmenting the
ese potential clients
c
into caategories, thee mortgage aggent can tailo
or the
messaage. For exam
mple, the info
ormation sentt to first timee home buyerrs would be different than
that sent
s
to renew
wers, and so on.
o
In add
dition, inform
mation sent to
o current clien
nts would difffer from that sent to potential clients.
The mortgage
m
agen
nt will have a more person
nal relationshhip with his orr her current clients and
may send
s
marketin
ng such as birrthday cards, quarterly new
wsletters, and so on. These clients
should be personally contacted on a regular basis to updaate their reco
ords and ensu
ure that the
inform
mation in the database is current.
c
This also providess opportunityy to search fo
or additional
needss such as refin
nancing for a debt consolid
dation or hom
me renovation before the client’s
mortggage is up forr renewal.
Chapter 9: Attractingg a Client
21
15
e marketing program
p
in pl ace, the oddss of obtainingg repeat
By having a consisttent database
business is greatly increased, lo
owering the co
osts associateed with obtaiining businesss.
Refe
errals
Referrals refer to those
t
clients who
w have bee
en advised too do business with the mortgage agent
by a third party. A client may be
b referred to
o him or her bby a financial planner, a Reeal Estate
salepe
erson, an insu
urance agent,, a past clientt, or whoeverr has come into contact wiith the
mortggage agent in the past. This type of bussiness tends tto be the leasst difficult to complete,
since the client is acting
a
on the advice of som
meone who iss typically a frriend of his or hers. The
relatio
onship that client has with
h the referral source preveents the usual apprehensio
on that
poten
ntial clients haave with new
w sales people
e.
Tips for
f Obtaining Referrals
 Doo the people you
y deal with know you ne
eed referrals?? Many peop
ple who know
w you will thin
nk
you are so successful that yo
ou do not nee
ed any referraals. Ensure th
hat they realize you need
every one and treat
t
them alll with the pro
ofessionalism they have grrown to know
w and expect
fro
om you.
 Doo your referreers know the quickest
q
and easiest routee to get their referral to yo
ou?
Pro
ovide your re
eferrers with a simple referrral form thatt they can em
mail or fax to yyou. It only
needs some bassic informatio
on, such as who the client is, their conttact informatiion and what
the
ey need.
 Thank‐you letteers: ensure thhat you alwayys send a thannk‐you letter tto your referral source,
wh
hether the refferral turns in
nto a client orr not.
 Uppdate your daatabase with the
t referral in
nformation.
 Coontact the pottential custom
mer as soon as
a possible.
 Guuarantee conffidentiality too all parties.
 Send a thank‐yoou gift when the
t financingg is completedd.
 Invvite your refeerrers to comppany parties to
t show yourr appreciation
n.
Su
uccess Tip – Getting family and
d friends’ m
mortgagess
Do
oing the morttgage of a fam
mily member or friend cann be difficult ffor new and eexperienced
aggents alike. Family and frie
ends tend nott to want to l et you see th
heir credit, and may not bee
co
omfortable with the thought of you kno
owing their prrivate businesss. But don’tt worry,
be
ecause you caan still get the
eir business! I suggest findding a highly ssuccessful aggent or brokerr
in your brokeraage. Partner with him or her
h to do the mortgages fo
or your familyy and friends..
No
ow you can te
ell your familyy and friends that you’ve bbecome a liceensed agent aand think thatt
they should use
e your colleaggue to do the
eir next mortggage! Just bee sure that your colleague
paays you a nice
e referral fee.
216
Chapter 9: Attracting a Client
9.3 Key Terms and Definitions
Advertising
A paid, controlled message through a non‐personal medium. Types of advertising include
publicity, public relations, product placement, sponsorship, and sales promotion.
Advertising Standards Canada (ASC)
This not‐for‐profit, self‐regulatory body founded in 1952, regulates the advertising industry and
handles consumer complaints related to advertising.
Audio Business Card
A smaller version of a CD that allows the user to create their own audio business card
Bait and Switch
Providing a consumer with an attractive offer to obtain him or her as a client but being unable to
provide the product or service at the indicated price
Business Card
A marketing tool that provides contact information, a logo, and other relevant information
about the company, products and/or services of the company and/or the individual
Classified Advertisement
A print advertisement placed in the Classified section of a newspaper
Database Marketing
Database Marketing is the function of warehousing potential and existing client information in
an electronic medium that allows the user to assemble or list these clients in groups that can be
marketed to.
Flyer
A stand‐alone marketing piece, usually on 8.5 x 11 inch paper
Marketing
Presenting products or services to potential customers in a fashion that positively promotes the
product or service and makes customers eager to buy or use those products or services
Mission Statement
A Mission Statement is a plan for companies and people to accomplish the goals they set. It is
designed to shape the company or individual’s identity and is typically based on a vision, goal, or
ethics.
Mortgage Agent
Individuals who are remunerated for dealing in mortgages or trading in mortgages in Ontario, as
employees or otherwise. Mortgage agents are restricted in their abilities by the MBLAA and its
Regulations and must be supervised by a licensed mortgage agent. Mortgage agents must be
licensed.
Networking
Building or expanding one's social network or sphere of influence by initiating mutually
Chapter 9: Attracting a Client
217
advantageous new relationships with people
Niche Marketing
Marketing to a specific audience or target demographic
Referral
A client or customer who has been advised by a third party to use the product or service of
another
Standards of Practice
Regulation 188/08, which applies to mortgage brokerages, Regulation 187/07, which applies to
mortgage agents and agents, and Regulation 189/08, which applies to Mortgage Administrators
constitute the Standards of Practice under the MBLAA. These Regulations detail the business
rules that licensees must follow to comply with the MBLAA and its Regulations.
Testimonials
An endorsement in writing, verbally or electronically by a client
The Canadian Code of Advertising Standards
The Canadian Code of Advertising Standards was created by the advertising industry in 1963 to
promote the professional practice of advertising
Unaddressed Admail
Bulk, unaddressed advertising that is delivered in bulk to a certain area by Canada Post
Video Business Card
A visual presentation of a sales person on CD
Vision Statement
A Vision Statement is something that the business or mortgage agent aspires to become. It
should illustrate the core belief of the business or mortgage agent and effectively communicate
that to the reader.
218
Chapter 9: Attractingg a Client
9.4 Review
R
Questions
Q
s
Answers to the Revview Questio
ons are found at www.REM
MIC.ca
Sho
ort Answe
er Questio
ons
1. Wh
hat is a “Bait and Switch”??
2. Wh
hat does the Canadian Cod
de of Advertissing Standardds promote?
3. Wh
hat does the Mortgage Brrokerages, len
nders and Adm
ministrators A
Act, 2006 prohibit
reggarding adverrtising?
4. Disscuss the differences betw
ween a Missio
on and a Visioon Statement..
5. Wh
hat does a bu
usiness card provide
p
to the
e mortgage aggent?
6. Wh
hat are the be
enefits of an audio business card?
plain your answer.
n
tyypically more
e or less expen
nsive than maarketing? Exp
7. Is networking
8. In what ways caan a mortgage
e agent differrentiate him oor herself fro
om the compeetition?
9. Wh
hy are testimonials beneficial in the maarketing of inttangible prod
ducts or services?
10. Discuss three ways
w
that a mortgage
m
agen
nt can obtainn referrals.
Chapter 10: First Contact
219
Chapter 10: First Contact
Learning Outcomes
Successful understanding of the concepts presented in this chapter will enable the learner to:
 Explain the importance of the initial telephone call
 Discuss the benefits of a call script
 Use a call script in an incoming and outgoing telephone conversation
Introduction
Please Note: The following topics are designed to assist you in handling first contact with a
potential client from a sales perspective. However this chapter is not included in the course’s
final examination.
First contact with a potential client is a vital part of the mortgage application process. It is the
mortgage agent’s first chance at a good impression and the first opportunity to turn a potential
client into an actual client.
As discussed earlier, the purpose of a mortgage agent’s advertising and marketing efforts is to
initiate first contact. The purpose of first contact is twofold: to determine if the client may
qualify for financing, and to get an appointment.
There are a few different models concerning the workflow of a mortgage application, including
having the potential client complete an online mortgage application; however it is important to
note that developing a relationship with a potential client is a key component in completing the
mortgage transaction.
10.1 The Initial Telephone Call
The initial telephone conversation is vital to developing a relationship with a potential client.
Once the phone rings the mortgage agent’s advertising/marketing has been successful. If the
mortgage agent finds that he or she is receiving calls from clients that he or she does not want,
then the first area to consider modifying is the advertising/marketing.
In today’s environment, most calls fielded by mortgage agents have one characteristic in
common: a question about the rate. This is a question that most consumers have been
programmed to ask from television advertising and other marketing by major lending
institutions. Most consumers believe that the only difference between mortgages offered by
lenders revolves around the interest rate; therefore when inquiring about obtaining a mortgage
that is typically the first question that is asked.
This question, however, is virtually impossible to answer successfully. If the mortgage agent
answers this question by telling the caller what the lowest rate is, the caller will most likely end
the call and continue shopping to compare what other mortgage agents have to offer.
220
Chapter 10: First Coontact
e is a model of buying behaaviour called the Phenomeenological Bu
uying Behavio
our Model thaat
There
breakks the buying of services in
nto four categgories as seenn from the buyer’s perspecctive. They
are:
 Neeed
 Pree‐purchase reesearch
 Purchase
 Poost‐purchase cognitive
c
disssonance (remorse).
ns the processs
The potential purcchaser, in our case the potential home bbuyer or morrtgagee, begin
by fee
eling a need to
t obtain morrtgage financiing. This can be triggered by the need to purchase a
home
e, the need to
o refinance, co
onsolidate de
ebt, etc. Whaatever the reaason behind tthe need, thee
need exists in the potential
p
purchaser’s mind
d.
The next step, pre‐‐purchase ressearch, is fairly unique to sshopping for higher priced
d goods and
servicces. This activvity revolves around reseaarching and leearning aboutt the required
d product or
servicces. Unlike less expensive items where research is nnot normally d
done, purchasers feel the
need to learn as much
m
as possib
ble about the product or s ervice they are considerin
ng purchasingg
to be able to make
e an informed
d decision.
The potential purcchaser then be
ecomes an acctual user or ppurchaser of the product o
or service,
which
h is typically followed by post‐purchase cognitive disssonance, com
mmonly referrred to as
“buye
er’s remorse.””
he potential mortgage
m
borrower, the prre‐purchase rresearch stagee can lead to researching
For th
online
e and makingg several phon
ne calls before finally settl ing on a morttgage provideer. This may
resultt in the caller asking the sim
mple question, “What is y our best 5 yeear rate?” beccause he or
she iss in the researrch stage and
d is looking for informationn, not to applyy for a mortggage.
ever, a mortgaage agent, un
nderstanding that part of hhis or her function is sales,, must turn
Howe
this siimple requestt for informattion into a po
otential clientt. That requirres a specific process for
dealin
ng with incom
ming telephon
ne calls that le
eaves little too one’s imagin
nation, and fo
ocuses on
using a call script.
Pa
ause for cllarification
n – Call scrripts
A call script is a written document that outlines
o
or scrripts a converrsation. This is used to
allow the agentt to remain fo
ocused on covvering certainn topics that he or she feeels are
ne
ecessary in th
he call and allo
ows the agen
nt to refer to sstandard resp
ponses for typ
pical
qu
uestions. Pro
ofessional age
ents always usse a script, w hether in pap
per format orr by
co
ommitting the
e script to me
emory.
There
e is no way of knowing who
o is calling, ho
ow he or she obtained you
ur telephone number or
what his or her intent might be. This uncertainty requirees the agent to
o initially treaat every
incom
ming call in the same fashio
on, tailoring the
t conversattion to the specific caller o
only after theiir
purpo
ose has been determined.
Within the first ten
n to fifteen se
econds, you must
m tell the ccaller….
 Whho you are
Chapter 10: First Contact
221
 The benefit you will provide to him or her
You have to do the same two things on an incoming call as an outgoing cold call, but they are
done differently. On an incoming call, you have already done something to prompt the
potential client to call you, such as place an ad. In most cases, your potential client is contacting
you to ask one simple question: “What is your best 5 year rate?.” It is strongly suggested that
you attempt to deflect this question, for several reasons.
First, you do not know anything about the client and will not know if they qualify. If you tell
them a low rate, then find out that they do not qualify for it, they may think that you are
practicing the “bait and switch,” which is enticing them with one promise only to switch later to
something worse.
Secondly, if you immediately give them the rate, they can simply hang up and go to the next ad,
always looking for the lowest rate, continuing to research. Many people who call think all
mortgages are created equally, so they believe the only difference is rate, which simply is not
the case.
Thirdly, you need to develop a relationship with this potential client, and if he or she has all of
the information that he or she wanted (i.e., rate) before the agent has even introduced him or
herself to the caller, that caller will feel no connection with the agent and will have no problem
in hanging up.
The following is an example of an incoming call script that attempts to address these issues.
Keep in mind, however, that no script is perfect. A successful agent will eventually have to
address concerns as they arise in any given conversation.
10.2 Incoming Call Script
The following script is a basic example of how to handle an incoming telephone call. The agent’s
lines are in normal font and potential client responses are in italics.
Good (afternoon, morning or evening), (Your company name), how may I help you?
Hi, can you tell me your five‐year rate please?
I would love to sir, but first off let me introduce myself. My name is (your name), and may I ask
your name please?
Sure, my name is Bob Andrews.
And would you prefer that I call you Mr. Andrews or by your first name?
Bob would be fine.
Wonderful. Bob, may I ask who referred you?
222
Chapter 10: First Contact
Actually I’m calling from your ad in the newspaper.
Super. Bob, most of my business comes from referrals from satisfied past clients. May I treat
you the same way that I would treat one of my referred clients?
Sure.
Great! Okay Bob, the rate that I can get you depends on many different factors, but I can say
with the outmost of certainty that I can get you the best rate based on your circumstances. In
addition, I will get you the best overall mortgage to suit your needs. I have a few brief questions
I need to ask you to determine what we can do to get you the best possible mortgage, but
before I continue, can I get your telephone number just in case we get cut off?
Client answers.
Thank you. Now, are you looking to purchase a home, refinance your existing home, or do you
have a mortgage coming up for renewal?
Client answers.
And how much money do you need?
Client answers.
And how would you say your credit is?
Client answers.
Fantastic. Well, based on this preliminary information it sounds like we have three different
programs that will meet your needs. I need to go into some more specific details about your
situation to ensure I get you the lowest possible rate and the right mortgage to suit your needs,
so I suggest we meet to discuss your situation further. I have some available time either (give
two possible days) at either (give two possible times) which do you prefer?
Client answers.
Great. Can I get your exact address please?
Client answers.
Now, I need you to have a few documents ready for our chat so that I can get you the best
mortgage for your needs. If you could have a …..(list the required documents based on what
they are looking for, i.e., Purchase, refinance, pre‐qualification, etc.) Do you have those handy?
Client answers.
And if you can’t find any of those documents, don’t worry, we can still proceed without them.
So I will meet you on (reiterate the date and time). One last question Bob, do you have a
significant other?
Chapter 10: First Coontact
22
23
Clientt answers.
Wond
derful. I suggest that we all get togethe
er for this meeeting so that we can address any
questtions your spo
ouse may havve as well.
Thankk you so much
h for your call and I look fo
orward to meeeting you. G
Good‐bye.
ember: the go
oal of the advertisement iss to get peopl e to call. Thee goal of the aagent is to geet
Reme
an appointment with
w the caller as long as the agent belieeves that the ccaller is qualified. Agents
must also considerr that meeting with those who may nott qualify has its merits. Th
he agent can
practiice his or her interviewing technique, database
d
the cclient for the future (the cclient’s
situattion may chan
nge in the future), or obtaiin potential r eferral clients.
Tips
s for Suc cess
Practiice makes pe
erfect
Reme
ember to pracctice your scriipt before you start gettin g calls. Like ccold calling, aask your
spousse or significant other (som
meone who will
w give you h elpful advice on how you are
performing) to be your incomin
ng call or pracctise by recordding yourselff and listeningg to the
conve
ersation. In all cases, try to
o record yourrself and revieew the tape aafter your calls. This way
you caan identify if you are soun
nding aggressiive, defensivee, or just right!
Use a mirror
Becau
use a smile traanslates acro
oss a telephon
ne line, you shhould ensure that you are always
smilin
ng when you’re on a call. A great way to ensure thatt you are is byy having a sm
mall mirror in
front of you so thaat you can watch your smille.
Write
e things down
n
Be sure to have pe
en and paper for each call. Write downn the caller’s n
name as soon
n as you get itt
(there
e’s nothing more
m
embarrassing then forgetting a cal ler’s name affter they’ve ju
ust given it to
o
you!),, and any other details thaat might be he
elpful.
Make
e these wordss your own
Make
e sure you use
e words and phrases
p
that are
a comfortabble for you. IIn other word
ds, rephrase
the sccript to match
h how you no
ormally speak. This will en sure that you
u do not soun
nd like you aree
readin
ng from a script, even whe
en you are!
Do no
ot be afraid
Reme
ember that the phone can be your best friend. The m
more comforrtable you aree on the
phone
e, the easier it
i will be to meet
m
your objective: gettinng appointmeents with qualified clients.
224
Chapter 10: First Coontact
10.3
3 Outgoin
ng Cold Call
C Scrip
pt for Refe
errals
Pa
ause for cllarification
n – Cold ca
alls
A cold call is an
n outgoing call made to someone who iis not known to the agent and who hass
no
ot been referrred to him orr her. This potential client is considered
d “cold” or un
nfriendly. Thee
ob
bject of a cold
d call is to transform the “ccold” individuual into a “waarm” prospecct, or someone
who is warm to
o the idea of doing
d
businesss with the aggent. By follo
owing a scriptt, the agent
hances of succcess!
haas the best ch
dition to receiving incomin
ng calls you may
m wish to coontact potenttial referral so
ources, such
In add
as a Real
R Estate Salesperson or Financial Planner. Withinn the first ten to fifteen secconds you
must tell the poten
ntial referrer::
 Whho you are
 The benefit that you can proovide to him or
o her
If you don’t, chancces are he or she
s will stop listening. Thiink of the cold calls you reeceive. As
soon as you realize
e they are nott someone yo
ou know, but they are som
meone trying tto “sell” you,
you trry to find a way to hang up
p the phone. By peaking hhis or her inteerest in the firrst ten to
fifteen seconds, yo
ou will get som
meone who wants
w
to hearr more! The ffollowing is a basic script
c be used to
o accomplish this task. Th
he agent’s linees are in norm
mal font and p
potential
that can
client’s responses are in italics.
Hi, myy name is (your name) and
d I’m calling from (your brookerage), a national (or large local,
local, successful, etc.) mortgage
e brokerage. The purposee behind my ccall today is to
o discuss how
w
g
your business, all at no cost to you. Does
we caan help you caan make more money by growing
makin
ng more money and doing more busine
ess interest yoou?
Let th
hem answer.
ncern by sayin
ng:
If theyy say no, address their con
“Serio
ously, sir/ma’am, I respectt that you’re a busy personn and I would
dn’t want to w
waste your
time, but I can help
p you like I’ve
e helped othe
ers to increas e their busineess and makee more moneyy,
all at no cost to you. Doesn’t th
hat sound like
e something tthat might bee worth a few
w moments off
your time?”
t
d not or if th ey insist on h
hanging up, leet them go!
They should respond positively,, but if they do
Cold calling
c
is a numbers game so don’t get caught up figghting with yo
our cold call, jjust move on
to the
e next one!
“Yes!!”
Excelllent! I’m sorrry, to whom am
a I speakingg?
This iss Mr. Jones.
Chapter 10: First Contact
225
Great, Mr. Jones, and please, feel free to call me (your first name)
Now that you’ve gotten their attention, it’s time to focus on your strengths, and what you are
really calling about: helping them do more business, which will, undoubtedly, help you do more
business.
Talk to them about your strategies, including:
 Joint advertising
 Referrals to them of potential home buyers
 Joint seminars and workshops focusing on home buying and mortgaging
 Joining them at their sales meetings to add value by discussing rates and sales techniques
 Sharing sales techniques that you keep up on through constant training
 Helping them cold and warm call
 Going on “walk abouts” with them (dropping off flyers)
 Helping them with open houses, or showing a property
 Arranging office parties for them and their clients.
Now, to discuss the great ways I can help you make more money and do more business all we
have to do is get together for a chat. I have time on (give them two choices, like Tuesday and
Thursday) at either (give them two opposite choices, like one morning and one afternoon – if
they aren’t available at those times, ask them when it’s convenient for them). Which do you
prefer?
The goal of any cold call is to get to meet with the client/referral source, so everything you do
must be dedicated to that end!
226
Chapter 10: First Contact
10.4 Key Terms and Definitions
Call Script
A written document that outlines or scripts a telephone conversation, allowing the user to
remain focused on the purpose and objectives of the call
Cold Call
A call made to a cold or potentially unfriendly new client or referral source who does not know
the caller
Post‐purchase Cognitive Dissonance
Commonly referred to as buyer’s remorse, this refers to the emotional state a buyer is in after
completing what is typically a large purchase and who is no longer in an emotionally charged
state.
Pre‐purchase Research
The research done by a potential purchaser of a more expensive item. This may include online
research as well as contacting past clients, calling service providers, etc.
Warm Call
A call made to a warm or potentially friendly new client or referral source who may know the
caller or may have been referred to the caller by a third party
Chapter 10: First Coontact
22
27
10.5
5 Review Question
ns
Answers to the Revview Questio
ons are found at www.REM
MIC.ca
Sho
ort Answe
er Questio
ons
1. Wh
hat is the typical question that a potenttial client askks when first ccontacting a m
mortgage
agent?
2. Wh
hat are five tiips for successs when usingg a call script??
3. Disscuss the ben
nefits of usingg a call script.
4. Wh
hat is a cold call?
c
5. Ho
ow can a cold call be turne
ed into a warm
m call?
6. Wh
hat information should be
e provided to the caller witthin the first tten to fifteen
n seconds of a
calll?
7. Wh
hy is it importtant to develop a relationsship with a pootential client?
228
Chapter 11: The Initial Consultation
Chapter 11: The Initial Consultation
Learning Outcomes
Successful understanding of the concepts presented in this chapter will enable the learner to:
 Determine the documentation that must be obtained from an applicant
 Create a mortgage file on an applicant
 Use a file checklist and file worksheet
 Discuss the locations in which the client meeting can occur and the advantages and
disadvantages of each location
 Determine the needs of the applicant
 Complete a mortgage application
Introduction
The initial consultation with your potential client is a major step in the mortgage application
process. There are several considerations for this step, including:
 The location of the meeting
 Preparing the client for the meeting, including advising him or her of the time involved, who
should attend and what documents to have available
 Preparing for the meeting, including creating a blank file
 Verifying the client’s identity
 Completing the application
 Determining the borrower’s needs.
A well‐prepared mortgage agent will find that the meeting will usually proceed smoothly
resulting in the potential client transforming into a client. Many mortgage agents often miss the
difference between a potential client and a client, since it can occur rather subtly. However
there is a major difference. A potential client is one who is not yet dedicated to completing the
transaction with this particular mortgage agent.
A client is an individual(s) who has made the decision to complete the transaction with the
mortgage agent, usually based on several factors, including trusting the mortgage agent,
developing a personal relationship with the agent, believing in the agent’s technical proficiency
and having the agent satisfy the four borrower expectations found in chapter 7, which are that
the mortgage agent will:
1. Act in the borrower’s best interests
2. Completely analyze the borrower’s needs
3. Make appropriate recommendations based on the borrower’s needs
4. Facilitate the transaction to its successful completion.
11.1 Required Documentation
Each type of mortgage transaction requires documentation to be obtained from the applicant in
addition to a signed mortgage application. The following list outlines those documents as well
Chapter 11: The Initial C onsultation
22
29
e purpose beh
hind obtaining each. A clie
ent should bee instructed to provide theese, as
as the
appliccable, at the initial consulttation.
Doc
cumentatiion for al l Transac
ctions
 Em
mployment Ve
erification
Em
mployment do
ocumentation
n requiremen
nts vary from lender to lender; howeverr the followin
ng
is a list of docum
mentation that is typically acceptable ffor an employyee:
 Letter of Em
mployment
 Pay Stubs
 T4
 NOA (Notice of Assessment – often re
equested wh en there is co
ommission income)
 Tax Return (also may be requested when
w
there is commission iincome)
For a self‐employe
ed individual the
t following may be requuired:
 Financial Sttatements
 Business Liccense
 Business Ch
heque
 PIP
PEDA Consen
nt
This document allows the mortgage agen
nt to use the aapplicant’s peersonal inform
mation for the
purposes contained within the consent fo
orm.
 Ph
hoto Identifica
ation
Photo identificaation is requirred to prove the
t identity oof the applicant. The original document
sho
ould be viewe
ed and a photocopy obtain
ned for the fi le.
ation Agreem
ment (if appliccable)
 Divvorce/Separa
If applicable
a
this document outlines
o
the terms
t
and connditions of th
he separation or divorce
and will typicallly include anyy payments th
hat are requirred to be mad
de for alimon
ny.
 Ch
hild Support Order/Agreem
O
ment (if appliicable)
If applicable
a
this document outlines
o
the terms
t
and connditions of ch
hild support, iincluding anyy
payments that are
a required to be made.
Spe
ecific Doc
cumentat ion for a Purchas e
The fo
ollowing is a list of docume
entation thatt is typically reequired when
n a client is purchasing a
prope
erty:
 Purchase and Sale Agreemen
nt
 MLLS Listing
 Pro
oof of Down payment
 Re
ental Letter (iff applicable)
 Re
eal estate sale
esperson Information
230
Chapter 11: The Initial C onsultation
Spe
ecific doc umentati on for a Refinancce, Equityy take-Ou
ut and
Swittch
The fo
ollowing is a list of docume
entation thatt is typically reequired when
n a client is reefinancing hiss
or herr current morrtgage, takingg equity out of
o his or her pproperty or sw
witching lendeers on
renew
wal:
 Current mortgaage statementt
 Charge/Mortgage
 Traansfer/Deed
 Pro
operty tax staatement
 Pro
operty insuraance policy
 Mo
ortgage repayyment historyy (if applicable)
11.2
2 File Cre
eation
pplication file should have the same cheecklist. A typ
pical file can b
be made up of
Everyy mortgage ap
a legaal size file fold
der with two forms
f
stapled
d to the insidee of the foldeer. On the lefft side will be a
checkklist and on th
he right side a worksheet for
f notes and calculations.. Mortgage agents may
have different styles of files and
d the informaation may be in different fo
ormats or in vvarying
orderrs; however th
he informatio
on is essentiallly the same.
File Checklis
st
A file checklist is a key compone
ent for ensuring that the rrequired docu
umentation iss obtained on
n
everyy transaction. This preventts the embarrrassment of hhaving to go b
back to a clien
nt for
additiional docume
entation in the future and provides a quuick summaryy of what is in
n the file. If
the fille is broken in
nto sections based
b
on the checklist, theen every file w
will follow thee same orderr,
allowing the mortggage agent to
o know where
e to find spec ific documents in any file. A coloured
e
section oof the file forr ease of filingg documents..
sheet or file folderr can be used to separate each
Prope
er completion
n of the checkklist and the worksheet
w
wi ll allow the m
mortgage agen
nt to quickly
reacquaint him or her with the file, especiallly if the file haasn’t been worked on for several days
or if there are seve
eral files being processed simultaneous
s
sly.
The fo
ollowing figurre is an example of a file checklist, and may be repro
oduced in wh
hole or in partt.
In the
e top section the
t client’s co
ontact inform
mation is noteed. It is helpfu
ul to mark thee best time
and contact number to reach th
he client shou
uld the need aarise. The neext section allows the
mortggage agent to
o check off the
e documents that are in thhe file and acts as a reminder for
docum
ments that arre typically required for evvery transactioon as well as the documen
nts specificallly
for a condominium
c
m, refinance, equity
e
take‐o
out, switch or purchase. Th
he final sectio
on is
dedicated to disclo
osure docume
ents. Each file must have each of thesee documents except for th
he
Investtor/lender dissclosure, which is only app
plicable on prrivate mortgaage transactio
ons.
23
31
Chapter 11: The Initial C onsultation
Figure 35 – Residentia
al Mortgage App
plication File Cheecklist
Ressidential Mortgage Applicaation File Checklistt
Source:
Client Names (First,, Last)
Addresss:
Home Tel: ( )
Work
W
Tel: ( )
Cell: ( )
Best time and number to contacct:
Closingg Date:
Appliication Numbber:
Standa
ard Documen
ntation
Employyment Verificcation
Sign
ned Application
n
PIPEEDA Consent
T4s
Pay SStubs
Pho
oto ID
Cred
dit Bureau
Emp loyment Letter
NOA
App
praisal Requestt
Appraisal
Renttal Income Proo
of
Tax R
Return
Divo
orce/Separatio
on Agreement
Finanncial Statemen
nts
Busin
ness License
Child Support Ord
der/Agreementt
Businness Listing
Busin
ness Cheque
Oth
her:
Otheer:
Oth
her:
Otheer:
For Co
ondominiumss Only
Stattus Certificate
Mastter Insurance PPolicy
For Re
efinancing / Equity
E
Take‐O
Outs and Swittches
Current Mortgage
e Statement
Charrge/Mortgage
List of debts/balan
nces (Refinance only)
Tran sfer/Deed
Property Tax State
ement
Propperty Insurancee Policy
Mortgage Repaym
ment History: _______
_
Month
hs
Otheer:
For Pu
urchases Onlyy
Purchase & Sale Agreement
A
Prooof of Down payyment / Gift Letter
MLSS Listing
Renttal Letter (satissfactory rent paid)
Reaal Estate Salesp
person Contactt Information
Otheer:
Disclossure Docume
entation
Sign
ned lender Com
mmitment
Morttgage Summarry/Amortization
Inve
estor/lender Disclosure
Credditor Insurance Request or W
Waiver
Sign
ned borrower disclosure
d
Otheer:
Note: This
T form mayy be reproducced without ppermission, in
n whole or in part
232
Chapter 11: The Initial C onsultation
File Workshe
eet
A file worksheet is a key compo
onent used fo
or recording nnotes and more importantly providing a
quick summary of the file. This can be particcularly imporrtant if more tthan one person is workin
ng
on the
e file, if the mortgage
m
agen
nt is working on several filles simultaneeously or if the file hasn’t
been worked on in
n some time.
The fo
ollowing figurre is a sample
e of a mortgagge worksheett, which may be reproduceed in whole o
or
in parrt. In the top section is a brief
b
summaryy of the morttgage requestt, including th
he amount,
the raank, the purpose of the mo
ortgage, the GDS
G and TDS,, the credit sccore and the d
date the
creditt report was obtained.
o
This date should
d be changedd whenever a new credit reeport is pulled
on the
e client. If there are severral credit repo
orts in the filee, the most cu
urrent will bee readily
known.
Figure 36 – Residentia
al Mortgage Worksheet
Resid
dential Mortgage
M
W
Worksheet
Client Names (First,, Last)
Mortgage Amount: $
Purposse of Mortgagge:
Loan to Value:
Credit Score:
Raank: 1
st
2
nd
3
rd
Source:
Otheer:
GDS:
TDS:
Cre
edit Bureau D
Date:
Is th
he client working with anyy other broker or lender? Yes / No If yees, whom?
Client Objectives (i.e. improve cash
c
flow; low
wer the interrest rate, etc.)
Appliccation Challen
nges: GDS/TD
DS, Credit, Em
mployment, Prroperty, Etc. ((explain)
List of Potential len
nders (explain
n why for eacch)
1
2
3
First Contact Notess
Date of Inquiry
Initial Consultation
n Notes
Date of Meeting:
Additional Notes (include date of
o note entry)
Note: This
T form mayy be reproducced without ppermission, in
n whole or in part
Chapter 11: The Initial C onsultation
23
33
The next section iss used as a prompt for the mortgage aggent to check whether the client is
working with or haas been working with anotther mortgagee agent or len
nder. This is important to
identiify quickly as it will help de
etermine how
w serious the client is in deealing with th
he mortgage
agentt.
Su
uccess Tip – Is your client
c
workking with ssomeone eelse?
To
o determine iff your client is working witth another brroker or lendeer, use the fo
ollowing
qu
uestion, prefe
erably before you meet with the client: “Mr. Client, I need to ask you if you arre
cu
urrently working with any other
o
broker or lender on your financin
ng needs as m
most lenders
will look negatiively on and not
n deal with an applicantt who is dealin
ng with severral sources at
the same time.. Are you deaaling with anyy other sourcees Mr. Client??.” This quesstion is short
an
nd to the poin
nt and will help the client understand
u
thhat they shou
uld only be deealing with
yo
ou and no one
e else!
The Client
C
Objectivves section off the Workshe
eet ensures t hat the mortgage agent has clearly
identiified what is important to the client. Th
his is particul arly useful if, for example,, a client
wishe
es to consolidate debts to lower his or her
h payment and the morttgage agent iss able to
accom
mplish this, bu
ut at a higherr rate than the
e client was eexpecting. Byy understandiing the client’s
main objective, the
e mortgage agent can focu
us on the factt that this maain objective w
was achieved
d.
The Application
A
Ch
hallenges secttion is designed to clearly articulate anyy challenges tthe client’s
appliccation may haave, quickly and clearly so that the morrtgage agent ccan easily ideentify these
issuess on reviewing the file or in
n discussions with the lendder or the clieent.
The next two sections are availaable for notess on the first contact, the initial consulttation or any
other notes that may
m be relevant. It is a besst practice to summarize th
he first contaact and initial
consu
ultation as soo
on as they have occurred to
t allow the ccapture of all relevant info
ormation. This
can be important for
f future con
nversations.
11.3
3 Meeting
g the Client
There
e are three baasic places wh
here a mortgaage agent cann meet a clien
nt:
 The client’s hom
me
 The mortgage agent’s
a
office
 Annother outsidee location.
There
e are several positives
p
and negatives forr each locatioon, but it is im
mportant to fo
ocus on
provid
ding good cusstomer servicce for the client, so wherevver is best forr the client is often the
right choice.
c
Wherever the meeting takes place it is vital that trust bee created with
h the client ass
soon as possible. The
T different locations sim
mply necessitaate different processes to create this
trust.
Firs t Impress
sions
It is im
mportant to begin
b
every meeting,
m
regarrdless of wheere it occurs, w
with a positivve attitude an
nd
professional deme
eanor. To make a good firsst impressionn it is important to dress likke a
n time, and be well preparred. Once in tthe meeting aask open‐end
ded questionss,
professional, be on
234
Chapter 11: The Initial C onsultation
listen well, and takke notes. Takking notes from the beginnning of the meeeting beforee the actual
intervview begins iss an importan
nt way of telling the client that the morrtgage agent b
believes that
what the client hass to say is imp
portant, and it is.
Pa
ause for cllarification
n – Open‐eended quesstion
An
n open‐ended
d question is a question th
hat does not eelicit a single word or shorrt response.
Fo
or example, asking a perso
on how long he
h or she has worked at hiss or her job w
will elicit a
sh
hort response
e. This is a clo
osed‐ended question. Ask ing a person tto describe h
his or her job
sh
hould result in
n a much longger response, which will m
most likely include how lon
ng he or she
haas been at the
e job. This is vital in developing a good dialogue witth your client.
The Client’s Home
When
n visiting a clie
ent in his or her
h home, it is important tto prepare to arrive early. This limits
the po
ossibility of getting lost in unfamiliar te
errain and proovides the mo
ortgage agentt an
opporrtunity to revview the client’s file before
e entering hiss or her homee. A best pracctice is to
arrive
e at least ten minutes aheaad of schedule and park doown the road
d. This time should be
taken to reacquain
nt oneself witth the client’ss information,, including hiss or her namee and the
purpo
ose of the finaancing.
n approachingg the home fo
ocus on the taask at hand. This means that the mortggage agent
When
should clear his or her mind and
d leave all of his or her trooubles, concerns, plans and any other
distraaction outside
e of the home
e.
Once the client answers the door, the mortggage agent shhould introduce him or herrself. Providee
the ho
omeowner with
w a business card, preferrably a card w
with a photo o
on it to put th
he
home
eowner at easse about the agent’s
a
identity. Don’t forrget to shake hands. While this may
seem obvious, it may
m not be to someone wh
ho has not be en in sales beefore. The neext step is
contro
olling the envvironment. The agent musst suggest thaat the meetin
ng occur in the kitchen or a
sittingg room. Any place that do
oes not have a television o r other distraaction is acceptable.
When
n sitting, the mortgage
m
age
ent must ensu
ure that the cclient is seated across the ttable and nott
to the
e left or right of him or herr. If the meetting includes a spouse it iss important to
o have them
both sitting
s
across from the age
ent. This is im
mportant becaause if the aggent ends up between the
couple, he or she will
w not be ab
ble to gauge both
b
of their rreactions simultaneously. By being ablee
to watch the clientts’ movementts and body laanguage, thee agent will bee able to bettter determinee
who the
t decision‐m
maker is.
Pa
ause for cllarification
n – Decisio
on‐maker
Th
he decision‐m
maker is the sp
pouse or individual in a re lationship wh
ho is primarilyy
re
esponsible forr the ultimate
e decision. Th
he non‐decisioon making sp
pouse or indivvidual will
offten look at th
he decision‐m
maker when a question is bbeing asked o
or a decision m
must be
made. By askin
ng simple que
estions at the
e beginning off the meetingg you can deteermine who
the decision‐maker is by waatching this be
ehaviour. Payy attention to
o both, but fo
ocus on the
de
ecision‐makerr!
Chapter 11: The Initial C onsultation
23
35
It is not rude to ask a client to turn off a television or radiio, or limit the amount of distraction
that may
m be occurring around the room, succh as by puttinng a dog in an
nother room.. If the
mortggage agent te
ells the client that his or he
er full attentioon is required
d to ensure th
hat the right
produ
uct and best rate
r
is attaine
ed, the client should agreee to the requeest.
Before beginning the
t interview it is importan
nt to create trust. This is m
much more d
difficult and
time consuming
c
to
o do in a client’s home as opposed
o
to thhe agent’s offfice since the office
enviro
onment in itself depicts prrofessionalism
m. In the hom
me environmeent the agentt must prove
professionalism an
nd technical proficiency.
p
This
T should bee done at the outset. The client will
alread
dy unconsciou
usly begin to look at the aggent as a proofessional if th
he agent dressses
professionally; how
wever this is not
n enough to
o create trustt quickly.
To acccomplish thiss task requires preparation
n. A few minuutes should b
be spent discu
ussing the
agentt’s background and experie
ence. If the agent
a
is new, then the focu
us should be on the
broke
erage’s background. This will
w reassure the
t client thaat he or she iss dealing with
ha
professional. Once
e this has bee
en accomplish
hed it is time to move on tto taking the application.
The Mortgag
ge Agent’ s Office
Meeting in the age
ent’s office re
equires the saame attentionn to detail as meeting in a client’s homee;
howe
ever it is easie
er to set the to
one of the me
eeting beforeehand. Given
n the promineent display off
any aw
wards, professsional accom
mplishments, diplomas, etcc., the client w
will begin to u
unconsciouslyy
develop a level of trust
t
as soon as he or she enters the m
meeting room.. To illustratee this point
consid
der a doctor. In each exam
mination room
m there tendss to be a diplo
oma on the w
wall. This is
design
ned to reassu
ure the patien
nt that the do
octor is indeedd a practicingg professional. The same
resultt occurs when
n a client seess the evidence of accompl ishments in tthe agent’s offfice. Yet
anoth
her example is the promine
ent displayingg of awards bby Real Estatee Salespersons. They
underrstand that qu
uickly creating trust is key to a strong r elationship.
Limiting distraction
ns by turning off cell phones and closinng the office d
door is also reequired, as
well as
a ensuring th
hat the client or clients are
e seated acrosss from the m
mortgage agent.
Ano
other Outs
side Loca
ation
A morrtgage agent once said thaat he had ove
er two hundreed offices in O
Ontario. He w
was referring
to Tim
m Horton’s loccations. Mee
eting a client at
a another ouutside locatio
on, although p
perhaps moree
conve
enient for the
e client, limitss the control that
t
the agennt has over the environment. This
mean
ns that distracctions may be
e unavoidable
e. To limit thee distractionss, the agent sh
hould arrive
early and choose an
a area within
n the location
n that has thee least amoun
nt of traffic.
The saame process that occurs in
n a client’s ho
ome must theen be followeed. Ensure that the client
or clie
ents are seate
ed across from
m the agent and
a that the i ntroduction iincludes sufficient
inform
mation on the
e agent’s cred
dentials to elicit a feeling oof trust from tthe client.
11.4
4 Identity
y Verificattion
In tod
day’s mortgagge market, ide
entity theft and impersonaation are a siggnificant concern, making
it necessary for the
e mortgage agent to verifyy the identity of his or her client at the initial
236
Chapter 11: The Initial Consultation
consultation. Regardless of whether the appointment is conducted at the client’s residence or
elsewhere, the mortgage agent must obtain photo identification for all clients.
Where possible a photocopy should be taken of this identification, or a picture taken, either
using a camera or smartphone, but if not possible then an attestation to the fact that the
identification was viewed must be made and put in the file. In all cases the statement below
that best represents the circumstances of the identity verification should be included in the
application when submitted to the lender, ideally in the notes section.
Three forms of typical attestations, based on differing circumstances are:
“I have / have not met the client before however I have viewed photo identification in the form
of (driver’s license, passport, etc,) and attest to the fact that it appears to be an accurate
representation of the client,” or
“The client is a previous client of mine and I have viewed photo identification in the form of
(driver’s license, passport, etc.) and attest to the fact that it appears to be an accurate
representation of the client,” or
In the case of taking an application by email or through the Internet where personal contact is
not possible,
“I have/have not met the client before and have not personally met the client in this transaction
and therefore cannot verify the client’s identify through photo identification.”
While obtaining photo identification is not legally mandated as of the date of publication of this
book, it is a best practice and should be followed without fail to protect the integrity of the
transaction and the security of all parties involved.
In so doing the mortgage agent affirms his or her professionalism to both of his or her clients:
the lender and the borrower. If the borrower protests, inform him or her that it is for his or her
protection. If the client continues to protest this should be taken as a red flag for fraud and the
mortgage agent should refuse to continue with the transaction until the client agrees to produce
valid identification.
11.5 The Application Form
The mortgage application form is the document that is used to obtain all of the information
required to qualify the borrower. There is no standard application; many brokerages have their
own form. However, all forms request the same information from the borrower and therefore
require the same explanation.
Example
Bob Clark has decided that he wants to buy a new home. He’s found a house currently under
construction and would like to see if he qualifies for a mortgage. You have met with Bob and
have taken his application, as illustrated in the following figure.
23
37
Chapter 11: The Initial C onsultation
Figure 37 – Sample Ap
pplication Form
REEMIC Mortgagess Inc.
Sourcce: Flyer
123 Anywhere
A
Stre
eet, Suite 100
0
Toron
nto, ON, M1S 5B2
Tel: (4
416) 555‐1212
Mortgaage Ap
pplicaation Form
m
AP
PPLICANT(S)
Name
e of Applicantt in Full
Bob Clark
C
Contaact Informatio
on
Tel: 416‐555‐9999
Name
e of Co‐Appliccant in Full
N/A
Contaact Informatio
on
DOB (MM/DD
D/YYYY)
03/22/1970
Cel: 647‐5
555‐1212
SIN
N
55
55‐121‐121
Email: bob.clark@
@hotmail.com
DOB (MM/DD
D/YYYY) SIN
N
Present Address
1155 Renter Boule
evard, Toronto, ON, M1S 1N1
1
Previo
ous Address
No of Yeaars
4
No. of Years
DETAILS OF MORTGAGE
M
R
REQUEST
Purpo
ose of Mortgaage
Purch
hase a new ho
ome currentlyy under consttruction
Amou
unt
Rate Term
Frequency
F
Amortization
A
Date Requ
uired
Rank (1st, 2nd)
th
$500,000 4.5% 5 Years
Monthly
M
25
2 years
February 220 , 2013 1st
PARTICULLARS OF SECU
URITY
Lot #
Plan #
Municipallity
O
Occupancy
R
Rental Incomee
99
W1234
W
Toronto
A
Applicants
$N/A
Civic Address
A
(if diffferent from Present Addrress)
ot size
Lo
1234 borrower Lan
ne, Toronto, ON,
O M1S 1M1
1
50ft. X 150 ft.
PR
ROPERTY TYP
PE AND CONSSTRUCTION
Annuaal Taxes
Date Acquired
A
Purchase Price
Down
Present
$500
Payment
Value
(MM//DD/YYYY)
0,000
$3,200
0.00
$0.00
$500,0000
N/A
Detached
Duplex
Triplex
Semi
Townhouse
Other
Age of
o Building: Ne
ew Constru
uction: Brick Storeys: 2
Zoning: Residential
Garagge: Single ‐ Atttached He
eating: Forced
d Air/Gas
Condo (M
Mtc Fee: $___________)
# of Bedroo
oms: 3
Prope
erty Extras (Describe)
Finish
hed Basementt, central air, central vac, outdoor
o
Jacuzzzi
238
Ran
nk
Chapter 11: The Initial C onsultation
urrent
Cu
Baalance
DETAILS OF EXISTING
E
FIN
NANCING
Rate
R
Paym
ment
Lender
(%)
Renew
wal
Date
To
Remain
n?
1st Mtg
N/A
N/A
N//A
N/A
N/A
N/A
2nd Mtg
N/A
N/A
N//A
N/A
N/A
N/A
EMPLOYMENT INFORM
MATION
APPLIICANT’S EMP
PLOYER’S NAM
ME:
SELF‐EMPLO
OYED?
Delivery Inc. POSITION: Truck
T
Driver
FastD
ADDR
RESS: 600 Freiight Lane, Torronto, ON
INCOM
ME: $125,000
0 Per Year
TEL. 416‐8
888‐9999
FAX: 416‐9
999‐0000
NO. OF YEA
ARS: 4
CO‐AP
PPLICANT’S EMPLOYER’S
E
NAME:
SELF‐EMPLO
OYED?
OTHER INCOME (SPECIFY SOUR
RCE AND AMO
OUNT)
N/A
ASSETS AND LIABILITTIES
ASSETT TYPE
BANK
K ACCOUNT
2007 Ford F150
Perso
onal Effects
RRSP
OTHER:
TOTAL
NET WORTH
W
AMOUNT
LIABILITYY TYPE
A
AMOUNT
PAYMENT
TO
REMAIN??
$ 50,000.00
$ 25,000.00 MasterCaard
$ 0.00
$ 0.00
Y
$ 40,000.00
$
$
$ 25,000.00
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$140,000.00
0
$ 0.00
$ 0.00
ASSETS ($14
40,000.00) – LIABILITIES ($$0.00) = NETT WORTH $140,000.00
NOTES
Mr. Clark would likke a 25 year amortization
a
with
w a loan too value of 1000%.
CONSENT
C
IN CONNECTION WITH MY
M APPLICATION FOR CREDIT, I/WE HEREBY AGREE TO
O YOU PROCURIN G ANY CREDIT OR
R OTHER REPORTSS TO
MINE MY ABILITY TO OBTAIN MORTGAGE FINANCING AND SHARE TH
HIS INFORMATION
N WITH OTHER CR
REDIT GRANTORS OR
DETERM
CONSUM
MER REPORTING AGENCIES. I/WEE FURTHER AGREEE THAT YOU MAYY ASSIGN THIS APPPLICATION TO TH
HE LENDER OF YO
OUR
CHOICE AND MAY DESIG
GNATE THE CLOSING LAWYER. I/W
WE ACKNOWLEDG
GE THAT YOU MA
AY RECEIVE A FIND
DERS FEE FROM TTHE
LENDER
R. I/WE FURTHER STATE THAT THE INFORMATION CONTAINED IN THIIS APPLICATION ISS ACCURATE TO THE BEST OF MY/O
OUR
KNOWLLEDGE. I/WE AU
UTHORIZE YOU TO
O USE THE INFORMATION CONTA
AINED WITHIN TH
HIS APPLICATION AND AS OBTAIN
NED
THROUG
GH THIS TRANSAC
CTION TO PROVID
DE ME/US WITH INFORMATION TH
HAT YOU BELIEVEE MAY BE OF INTEREST TO US IN TTHE
FUTURE
E.
DATE: Jan 20, 2013
3
APPLICANT’S SIGNATUREE:
Bobb Clarkk
23
39
Chapter 11: The Initial C onsultation
Sec tion-by-S
Section Applicatio
A
on Analyssis
Appliccant(s) Inform
mation
Figure 38 – Borrower Application:
A
Info
ormation Sectio
on
REEMIC Mortgagess Inc.
Sourcce: Flyer
123 Anywhere
A
Stre
eet, Suite 100
0
Toron
nto, ON, M1S 5B2
Tel: (4
416) 555‐1212
Mortgaage Ap
pplicaation Form
m
AP
PPLICANT(S)
Name
e of Applicantt in Full
Bob Clark
C
Contaact Informatio
on
Tel: 416‐555‐9999
Name
e of Co‐Appliccant in Full
N/A
Contaact Informatio
on
DOB (MM/DD
D/YYYY)
03/22/1970
Cel: 647‐5
555‐1212
Present Address
1155 Renter Boule
evard, Toronto, ON, M1S 1N1
1
Previo
ous Address
SIN
N
55
55‐121‐121
Email: bob.clark@
@hotmail.com
DOB (MM/DD
D/YYYY) SIN
N
No of Yeaars
4
No. of Years
 Source
Source refers to
o how the app
plicant heard about the m
mortgage agen
nt. Examples might be a
refferral, in whicch case it is ne
ecessary to ask who referrred the appliccant, or an ad
dvertisement,
in which case it is necessary to ask which advertisemeent the applicant viewed.
orrower’s Nam
me
 Bo
The applicant must
m provide his
h or her fulll legal name, as it will be u
used to complete the credit
inq
quiry as well as
a on all othe
er loan docum
mentation, inccluding the legal documen
ntation to
reggister the mo
ortgage. It is a best practicce to view phooto identificaation at this sttage to ensurre
thaat the applicaant is the persson that he or she is applyying as.
pplicant Date Of Birth and Co‐App Date of Birth
 Ap
Do
ocument the applicant’s
a
an
nd co‐applicant’s date of bbirth. Use thee application’s format. If
3/7/1980 maay
no
o format is sho
own, use a fo
ormat that is easily
e
identifi able. For exaample, using 3
be misinterpretted. Instead use
u the formaat March 7, 11980.
 Social Insurance
e Number (SIN)
It is helpful to have
h
the sociaal insurance number
n
whenn completing a credit inquiiry; however it
is not
n mandatory. If the app
plicant does not wish to prrovide his or h
her social insu
urance
240
Chapter 11: The Initial C onsultation
he mortgage agent
a
cannott demand it. A
An applicant may legally refuse to
number then th
pro
ovide this info
ormation.
 Co
ontact Informaation
Re
ecord the applicant’s contaact informatio
on, including his or her em
mail address. The email
address will be especially useful in the futture when maarketing to th
he applicant. Ensure that
the
e main contacct number is clearly indicaated.
pplicant’s Pressent Address
 Ap
Do
ocument the applicant’s
a
cu
urrent addresss with postal code and ind
dicate the len
ngth of time
thaat the applicaant has reside
ed at this locaation. The poostal code is o
of particular im
mportance fo
or
the
e default insu
urer as the inssurer has auto
omated valuaation systemss that use thiss information
n
to assist in dete
ermining if the
e value noted
d on the appliication is con
nsistent in thee area in whicch
the
e property is located.
 Pre
evious Address
If the
t applicant has resided at
a their prese
ent address foor three yearss or less, the m
mortgage
agent should do
ocument the applicant’s previous addreess. The totaal of all addresses should b
be
at least three ye
ears.
 Co
o‐Applicant orr Guarantor
Co
o‐applicant sp
pouses are inccluded in the same applicaation. All otheer applicants’’ names
sho
ould be listed
d in the appliccation, howevver each appllicant should have a separrate
application com
mpleted on him or her to ensure
e
that al l information
n is captured aand that
infformation rele
evant to each
h applicant is separate. Foor example, iff there is a bro
other who is a
co‐applicant hiss name should
d be included
d in the appliccation to ena ble anyone viewing the
application to know
k
that he or she must refer
r
to the bbrother’s appllication as weell.
Pa
ause for cllarification
n – Co‐app
plicants and
d guaranttors
A co‐applicant is an individu
ual who is app
plying with thhe applicant aand who will be
re
egistered on title and/or on
n the mortgagge. The co‐appplicant’s inccome and deb
bts are
included in all mortgage
m
calcculations.
egistered on title but who
o is guaranteeeing to the
A guarantor is an individuall who is not re
lender that if th
he applicant fails
f
to meet his or her oblligations undeer the loan th
he
gu
uarantor will meet
m
those obligations,
o
su
uch as makingg the loan payyments. The guarantor’s
income and debts are not in
ncluded in the
e mortgage caalculations un
nless he or sh
he lives in
the same home
e.
Details of Mortgagge Request
Figure 39 – Borrower Application:
A
Dettails of Mortgag
ge Request
DETAILS OF MORTGAGE
M
R
REQUEST
Purpo
ose of Mortgaage
Purch
hase a new ho
ome currentlyy under consttruction
Amou
unt
Rate Term
Frequency
F
Amortization
A
$500,000 4.5% 5 Years
Monthly
M
25
2 years
Date Requ
uired
February 220th, 2013
R
Rank (1st, 2nd)
1
1st
Chapter 11: The Initial Consultation
241
 Purpose of the mortgage
This section must be as detailed as possible, indicating the purpose or reason for the
requested financing. For example, if it is an equity take‐out, the use of the proceeds must be
indicated.
 Amount Requested
Enter the total amount that the applicant is requesting based on the preliminary
consultation. This amount may change once it has been determined if a mortgage default
insurance premium is being added and/or any other fees need to be added to the mortgage
amount.
 Term of Mortgage
Document the term that the applicant and mortgage agent have decided is appropriate for
the applicant. This requires the mortgage agent to discuss the applicant’s future plans.
 Amortization
The Amortization period is the total number of years it will take to fully repay the mortgage,
as decided upon after a discussion between the mortgage agent and the applicant. A shorter
amortization period will result in a higher payment while a longer amortization period will
result in a lower payment.
 Date Required
If the application is for the purchase of a home, document the closing date of the purchase.
If it is for a switch or renewal, document the date that the term expires. If it is for a
refinance, document the date on which the applicant requires the funds or the date that the
mortgage agent expects the transaction to fund. Do not use “ASAP” or “As Soon As Possible”
without discussing the time frame with the applicant. It is important to manage the
applicant’s expectations regarding the time that the process will take from application to
funding.
 Type of Mortgage
Document the type of mortgage that the applicant is requesting, such as a VRM or variable
rate mortgage, FRM or fixed rate mortgage, LOC or line of credit, etc.
 Accelerated Payment
Document if the applicant would like to accelerate the mortgage payment to repay the
mortgage in a shorter period of time, which will save the applicant money over time. The
applicant must understand that an accelerated mortgage payment is higher than a regular
mortgage payment.
 Rank
Document whether the requested mortgage is a 1st, 2nd, 3rd or other mortgage.
242
Chapter 11: The Initial C onsultation
urity
Particculars of Secu
Figure 40 – Borrower Application:
A
Parrticulars of Secu
urity
PARTICULLARS OF SECU
URITY
Lot #
Plan #
Municipality
O
Occupancy
99
Toronto
W1234
W
A pplicants
Civic Address
A
(if diffferent from Present Addrress)
1234 borrower Lan
ne, Toronto, ON,
O M1S 1M1
1
R
Rental Incomee
$N/A
ot size
Lo
50ft. X 150 ft.
umber (Part of
o the Legal Description)
 Lott and Plan Nu
A lot refers to a tract or parccel of land and each parcell is assigned a lot number,, as well as a
plaan number which refers to
o the plan. Th
his informatioon is typically found on thee Purchase
and Sale Agreem
ment, the Traansfer/Deed and
a Charge/M
Mortgage.
 Mu
unicipality (paart of the Leggal Description)
Do
ocument where the properrty is located.. This inform ation is typically found on
n the Purchasee
and Sale Agreem
ment, the Traansfer/Deed and
a Charge/M
Mortgage.
 Occcupancy
If the
t property will
w be occup
pied by the ow
wner alone, chheck the applicant box. Iff the propertyy
will be rented to a tenant, ch
heck the tenaant box. If thee property will be occupieed by the
wner and a tenant, check both
b
boxes.
ow
ental Income
 Re
If the
t property is being rente
ed or leased to
t tenants, hoow much is th
he rent?
 Civvic Address Of The Propertty To Be Morttgaged
This is the stand
dard address of a propertyy, including thhe street nam
me and numbeer, city,
pro
ovince and po
ostal code. Complete
C
this section if thee property to be mortgageed is differentt
fro
om the applicant’s current address. Forr example, if tthe applicantt is currently rrenting and
thiis application is to purchasse another prroperty, the ccurrent addreess will be his or her rental
address while the property to
t be mortgagged address w
will be the neew home address.
 Lott Size
Incclude the lot specifications
s
s here.
Prope
erty Type and
d Constructio
on
Figure 41 – Property Type
T
and Constru
uction
Date Acquired
A
(MM//DD/YYYY)
N/A
PR
ROPERTY TYP
PE AND CONS TRUCTION
Purchase Price Down
Present
0,000
$500
Payment
Value
$0.00
$500,0000
Detached
Duplex
Triplex
Semi
Townhouse
Other
Age of
o Building: Ne
ew Constru
uction: Brick Storeys: 2
Annuaal Taxes
$3,200
0.00
Condo (M
Mtc Fee: $___________)
# of Bedroo
oms: 3
243
Chapter 11: The Initial Consultation
Zoning: Residential
Garage: Single ‐ Attached
Heating: Forced Air/Gas
Property Extras (Describe)
Finished Basement, central air, central vac, outdoor Jacuzzi
 Date Property Acquired or Purchased
Document the date that the property was originally purchased.
 Purchase Price (If Less than 2 Years Ago)
Document the price paid for the property.
 Down Payment
Document the amount of down payment that the applicant originally provided.
 Present Value
Document the value that the applicant feels his or her house is currently worth.
 Annual Taxes
Document the amount of taxes that are paid on the property annually.
 If Condo, Condo Mtc. Fee
If the property to be mortgaged is a condominium unit it will have a maintenance fee. This
amount must be recorded in this section, including what items are including in the fee.
 Check the boxes that apply regarding the type and description of the building(s)
 Property Extras
List any property extras of interest such as a finished basement, indoor or outdoor pool, etc.
Details of Existing Financing
This section is designed to document any and all existing financing currently on the property to
be mortgaged. If the application is for a purchase, this section may be left blank.
Figure 42 – Borrower Application: Details of Existing Financing
Rank
Current
Balance
DETAILS OF EXISTING FINANCING
Rate
Payment
Lender
(%)
Renewal
Date
To
Remain?
1st Mtg
N/A
N/A
N/A
N/A
N/A
N/A
2nd Mtg
N/A
N/A
N/A
N/A
N/A
N/A
 Mortgage(s)
Document the current outstanding balance of the mortgage, the current rate of interest, the
amount of the payment, including the frequency of the payment (i.e., monthly, weekly, etc.),
which institution or private lender the first mortgage is currently held by, the contact
information for that lender and if the mortgage is to be paid off from the proceeds of the
244
Chapter 11: The Initial Consultation
new mortgage being applied for if it will remain in place. Complete this process for all
mortgages on the property, including any Lines of Credit.
Employment Information
Figure 43 – Borrower Application: Employment Information
EMPLOYMENT INFORMATION
APPLICANT’S EMPLOYER’S NAME:
SELF‐
EMPLOYED?
FastDelivery Inc. POSITION: Truck Driver
ADDRESS: 600 Freight Lane, Toronto, ON
INCOME: $125,000 Per Year
CO‐APPLICANT’S EMPLOYER’S NAME:
EMPLOYED?
TEL. 416‐888‐9999
FAX: 416‐999‐0000
NO. OF YEARS: 4
SELF‐
OTHER INCOME (SPECIFY SOURCE AND AMOUNT)
N/A
 Employer’s Name, Address/Tel#
Document the applicant’s current employment information.
 Self‐Employed?
If the applicant is self employed
 Position
Document the applicant’s position or title with his or her current employer.
 # of Years
Document the number of years that the applicant has been employed by his or her current
employer.
 Salary
Document the salary or income of the applicant before taxes are deducted.
 Per Year or Month
Document whether the salary or income from the previous section is an annual or monthly
amount.
 Other Income
Document any other income that the applicant has ensuring that full details are provided.
 Previous Employer’s Information
Complete the fields attached to this section in the same fashion as for the current employer.
 Co‐Applicant’s Employer
Complete the fields attached to this section in the same fashion as for the applicant.
245
Chapter 11: The Initial Consultation
Financial Information
Figure 44 – Borrower Application: Assets and Liabilities
ASSETS AND LIABILITIES
ASSET TYPE
BANK ACCOUNT
2007 Ford F150
Personal Effects
RRSP
OTHER:
TOTAL
NET WORTH
AMOUNT
LIABILITY TYPE
AMOUNT
PAYMENT
TO
REMAIN?
$ 50,000.00
$ 25,000.00 MasterCard
$ 0.00
$ 0.00
Y
$ 40,000.00
$
$
$ 25,000.00
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$140,000.00
$ 0.00
$ 0.00
ASSETS ($140,000.00) – LIABILITIES ($0.00) = NET WORTH $140,000.00
 Assets
Document all assets owned by the applicant. Include an addendum if there is not enough
space to list all of them. All personal effects can be totalled and listed as Personal Effects. If
this mortgage is a refinance, switch or equity take‐out, be sure to include the value of the
property in this section as well. Add up all assets and document this as Total Assets.
 Liabilities
Document all liabilities for which the applicant is responsible. Include an addendum if there
is not enough space to list all of them. If this mortgage is a refinance, switch or equity take‐
out, be sure to include the outstanding balance of the mortgage in this section as well. Add
up all liabilities and document this as Total Liabilities.
 Payments
Document the payment totals for each listed liability as a monthly amount. Document the
total monthly obligations of the applicant in the space provided.
 To Remain?
Document which, if any, of the liabilities will be paid off from the proceeds of the proposed
mortgage.
 Net Worth
List the Assets and Liabilities. Subtract the liabilities from the assets and list this amount as
the Net Worth.
Notes
Detail anything of importance that may impact the applicant’s ability to obtain an approval
and/or that may add to or clarify information in the application.
246
Chapter 11: The Initial C onsultation
orization
Autho
This section, once signed by the
e applicant(s), allows the m
mortgage ageent to perform
m the requireed
investtigations and provide requ
uired information to potenntial lenders.
Tips
s for a Co
omplete Applicatio
A
on
plete all Fields
Comp
Ensurre that all field
ds of the application are completed, whhether or nott information
n is obtained
for that field. For example,
e
if th
he field does not apply to tthe applicatio
on it is best to
o enter “N/A””
or “no
ot applicable”” in the field. If the field iss left blank soomeone viewiing the appliccation in the
future
e will be unab
ble to determ
mine if the info
ormation wass missed bein
ng entered or if it was not
appliccable to this applicant.
a
pare Informattion with Doccumentation
Comp
When
n taking an ap
pplication verify that what the applican t is saying maatches the infformation
found
d in the suppo
orting documentation. Some applicantts may inadveertently provide inaccuratee
inform
mation such as
a employment income or outstanding balances on his or her mo
ortgage or
other debts.
Signature
When
n completing a paper appliication, ensurre that the appplicant(s) siggn(s) the application. By
having the client’s signature on the applicatiion, the morttgage agent h
has consent to
o complete
the ne
ecessary inve
estigations to obtain a com
mmitment fro m a lender. A
Although verb
bal
autho
orization is acceptable, som
me applicantss may disputee providing au
uthorization aat some pointt
in the
e future. For example,
e
if an
n applicant iss declined andd six months later attemptts to obtain
financcing, he or she may not recall the reaso
on for the inq uiry on his orr her credit reeport. The
appliccant may then
n contact Equ
uifax or Transunion (whichhever credit reeporting agen
ncy the
inquirry was found through) and
d request thatt the inquiry bbe removed. Equifax or Transunion will
contact the mortgaage agent or mortgage bro
okerage to reequest the authorization fo
or that credit
inquirry. If there is no signed ap
pplication, the
e applicant m
may have a casse that the mortgage agen
nt
initiatted the creditt inquiry without the applicant’s authorrity, which is a breach of the contract
betwe
een the credit reporting aggency and the
e brokerage. In this case tthe mortgagee agent would
d
be req
quired to provide addition
nal details abo
out how the aauthorization
n was given an
nd when it
was given
g
to be ab
ble to prove th
hat it was a le
egitimate creddit inquiry.
Notess
The mortgage
m
application form itself does no
ot provide sppace for explaanatory notess. The
mortggage agent sh
hould use a se
eparate piece
e of paper or a Notes pagee, such as the Worksheet,
to maake notes rele
evant to the application.
a
For
F example, if the applicaant indicates tthat he or shee
has haad past creditt issues, the mortgage
m
age
ent must docuument that in
nformation an
nd include it iin
the lo
oan submissio
on to the lend
der. A best prractice is to innclude explan
natory notes ffor any
poten
ntial questions that a lende
er may have about
a
the appplication.
11.6
6 Determiining the Applican
nt’s Need
ds
Deterrmining the applicant’s nee
eds is a very important
i
steep in completting the application. To
determine the app
plicant’s need
ds, specific questions mustt be asked. Th
he following fform, which
may be
b reproduced without permission, assists in determ
mining those n
needs. Once the form hass
Chapter 11: The Initial Consultation
247
been completed the mortgage agent can search for specific products that meet the applicant’s
needs. The following figure is a sample of an Applicant Needs Assessment form.
Figure 45 – Applicant Needs Assessment
Applicant Needs Assessment
1. What are your goals with regards to this mortgage?
Purchase:
Price Range from $__________ to $__________
Down payment Available: $__________________
Obtain a lower rate:
Current Rate: _________%
Obtain a lower payment:
Current Payment: $__________
Consolidate Debt:
Amount: $___________
Renovations:
Amount: $__________
Type of Renovations: __________________________________
Other. Explain:_______________________________________________________________
2. What is the amount of the mortgage payment that you believe would fit your current
lifestyle?
From $__________ to $__________
3. What interest rate range do you expect to obtain?
From __________% to __________%
4. Do you plan on moving in the next 5 years? If yes, when?
5. Do you plan on changing employers in the next 5 years? Is yes, when?
6. Do you believe your current home will meet your family’s needs over the next five years?
Yes
No
7. Do you typically receive bonus or commission income in addition to your regular income? If
yes, how often?
Annually
Monthly
8. Do you intend to make a lump sum payment or payments on your mortgage to pay it off
faster?
Yes
No
9. Which is most important to you:
Debt Repayment: Paying your mortgage off as soon as possible?
248
Chapter 11: The Initial Consultation
Cash Flow: Having a low or the lowest payment possible?
10. Which is most important to you:
Mortgage Payment: Having a mortgage payment that fits your cash flow?
Interest Rate: Having a low or the lowest interest rate possible?
11. When it comes to your mortgage payment, would you say that you:
Would like a mortgage payment that stays the same month to month?
Would like a mortgage payment that might increase or decrease if there is the potential to
save money?
12. If given the option to have a variable interest rate that is lower than a fixed interest rate,
would you:
Be willing to watch interest rates on a monthly basis to ensure that your mortgage has the
best rate possible?, OR
Prefer to have a fixed interest rate that did not fluctuate and did not require regular
attention?
13. Would you prefer a payment frequency that is:
Monthly
Additional Notes:
Bi‐Weekly
Weekly
Chapter 11: The Initial Consultation
249
11.7 Key Terms and Definitions
Business License
A license provided to a business that serves as proof that a business is registered and
operational
Civic Address
The street address of a property, including the number of the property, the street, the unit
number (if applicable), the province and the postal code
Closed‐ended Question
A question designed to elicit a single word answer such as a yes or no
Co‐Applicant
An individual who is registered on title and who is applying for financing with the applicant
Decision‐Maker
The individual who tends to make the majority of the decisions for the family unit
File
The collection of relevant documents related to a mortgage transaction
File Checklist
A document that allows the mortgage agent to check off the documents received in the file
Financial Statements
Formal records of a business' financial activities. These statements provide an overview of a
business' profitability and financial condition in both short and long term.
Guarantor
An individual who is not registered on title but who is guaranteeing that payments will be made
to the lender if the borrower defaults
Legal Description
A description of the property, including the lot and plan number, and the municipality, township
or borough in which the property is located
Letter of Employment
A document provided by an employer that lists the employee’s position, length of employment
and income
MLS Listing
Multiple Listing Service. This is typically how real estate salespersons expose a property to the
marketplace.
Mortgage Repayment History
A history of the applicant’s mortgage payments, typically over twelve to twenty‐four months,
provided by a lender
250
Chapter 11: The Initial Consultation
Open‐Ended Question
A question designed to elicit a conversational answer, not simply a “yes” or “no” answer
Paystub
A document provided to an individual by his or her employer each time the employee is paid (by
cheque, direct deposit or other), and is often required by a lender in addition to a job letter
and/or any other document used to verify the employee’s income
PIPEDA Consent
Consent under the Personal Information Protection and Electronic Documents Act that allows
the mortgage agent to use the applicant’s information for a set of specific purposes
Property Insurance Policy
An insurance policy that insures the property against losses due to fire, vandalism, etc.
Property Tax Statement
A statement provided by the municipality in which the property is located indicating the amount
of annual property taxes and if any property taxes are outstanding
Purchase and Sale Agreement
The document completed by a real estate salesperson for the sale of property
T4
A document provided to an individual by his or her employer, typically when there is
employment income, such as salaried or hourly income. Employers are required by law to
provide the T4 so that employees may file their income tax returns. The T4 indicates, among
other things, the amount of money the employee earned in the one year period, as well as the
deductions from earnings
Tax Return
The document required to be completed by a taxpayer and submitted to Canada Revenue
Agency that describes income, deductions, expenses, etc. as prescribed by the Income Tax Act
Chapter 11: The Initial C onsultation
25
51
11.8
8 Review Question
ns
Answers to the Revview Questio
ons are found at www.REM
MIC.ca
Sho
ort Answe
er Questio
ons
1. De
escribe the do
ocumentation
n that must be
e obtained byy a mortgage agent in every mortgage
traansaction.
hat documen
ntation is typiccally required
d for a self‐em
mployed indivvidual?
2. Wh
3. Wh
hat documen
ntation is typiccally required
d for a purchaase transactio
on?
4. Wh
hat documen
ntation is typiccally required
d for a refinannce, equity taake‐out or sw
witch
traansaction?
5. Disscuss the imp
portance of th
he file checklist.
6. Wh
here are the different
d
placces that a clie
ent may be m et and what aare the positiives and
negatives of eacch?
7. Wh
hy is it importtant to verifyy an applicantt’s identity?
8. Disscuss the difference betwe
een a co‐appllicant and a gguarantor.
9. Wh
hy is it importtant to have the
t mortgage
e application signed by thee applicant(s)?
10. How can a mortgage agent determine th
he applicant’ss needs?
252
Chapter 12: Application Analysis – Borrower Documents
Chapter 12: Application Analysis – Borrower
Documents
Learning Outcomes
Successful understanding of the concepts presented in this chapter will enable the learner to:
 Analyze documents used for income verification
 Analyze documents used when purchasing a property
 Complete an application for creditor insurance
 Identify inconsistencies in borrower documents
 Identify potential fraudulent borrower documents
 Review borrower documentation for potential misrepresentation or fraud
Introduction
The Chapter on the Initial Consultation identifies which documents must be obtained from a
potential client. Presented with this documentation, a mortgage agent must be able to review
each document to determine if there is any potential misrepresentation or fraud. This requires
the mortgage agent to be familiar with these documents, understand the information provided
in each and its relevance to the mortgage application, and be able to identify inconsistencies in
these documents before they are submitted to the appropriate lender.
Clearly it is in the agent’s best interests to do such a review. If an application submitted to a
lender contains information in the application that is different than in the supporting
documentation, the application process will be slowed down significantly and/or the application
may be declined by the lender. The following sections contain a visual representation of each
document as well as an analysis of each.
12.1
Fraud and Forgery
Unfortunately each of the following documents can be forged and used for fraudulent purposes
in the mortgage application process. To help safeguard against submitting forged documents to
a lender, the agent must have an understanding of the information contained in each
document.
With today’s technology, individuals wishing to create a forged document can and will. They
can use software to manipulate documents provided by employers, the government or other
participants in the mortgage transaction to appear to be valid. Because forgery is more
sophisticated in today’s marketplace than ever before, it is necessary for the mortgage agent to
closely inspect the documents provided by the borrower. In the vast majority of cases
borrowers are honest and supply legitimate documentation. However it is the dishonest
borrower who will cause the greatest harm to a mortgage agent’s reputation if that mortgage
agent submits forged documentation to a lender that he or she should have known was forged.
Chapter 12: Applicatio
on Analysis – Borrower Do
ocuments
25
53
ollowing docu
uments are provided as samples of whaat a mortgagee agent can eexpect to
The fo
receivve, dependingg on the type of transactio
on, as well as the types of information tthat can be
expeccted to be fou
und in these documents.
d
12.2
2 Income Docum
mentation
In thiss section we will
w begin by learning how
w to identify bborrower docu
uments, follo
owed by an
explanation and an
nalysis of them for accuraccy and inconssistencies, inccluding poten
ntial fraud,
where
e applicable.
T4A
A
A T4A
A is a document provided to
t an individu
ual by his or hher employer which summarizes incomee
from various sourcces and is use
ed by the indivvidual for subbmitting an annual incomee tax return.
This document
d
is typically obtaiined by a broker/agent whhen the appliccant has com
mmission or
contraact income, such
s
as a com
mmissioned saales person orr independen
nt contractor. There are,
howe
ever, other tim
mes that an applicant will receive
r
a T4A
A.
The tyypes of incom
me that are re
eflected in a T4A
T include:
 pension or supeerannuation
 lum
mp‐sum paym
ments
 sellf‐employed commissions
c
 annuities
 rettiring allowannces
 patronage alloccations
 RESP accumulatted income payments
p
 RESP educationnal assistance payments
 feees or other am
mounts for se
ervices or
 othher income suuch as researrch grants, certain paymennts under a w
wage‐loss replacement plan
n,
death benefits, and certain benefits
b
paid to partnersh ips or shareholders.
Emplo
oyers must also prepare a T4A slip if they provided ggroup term liffe insurance (taxable
beneffits) for forme
er employeess, or retirees, even if the tootal of all ben
nefits paid in tthe calendar
year was
w $500 or less. In additiion, the employer must prrepare a T4A slip if they are the
Admin
nistrator or trrustee of a multi‐employer plan and th ey provided ttaxable beneffits under thee
plan to
t employeess, former emp
ployees, or retirees, if the ttotal of all beenefits paid exxceeded $25.
254
Figure 46 – Sample T4A
A
Chapter 12: Applicatio
on Analysis – Borrower Do
ocuments
Chapter 12: Applicatio
on Analysis – Borrower Do
ocuments
25
55
o a T4A
Detailed analysis of
This section describes the sectio
ons of a T4A that
t
are mostt relevant to tthe mortgagee process.
1 ‐ Social insurance numb
ber
Box 12
Emplo
oyers must en
nter the sociaal insurance number
n
(SIN) of the recipieent as it appeears on the
recipient's SIN card
d. If an emplo
oyer cannot obtain
o
the SIN
N, the employyer must enteer nine zeroes.
Success Tip ‐ SIN
S
If an applicant pro
ovides a T4A with nine zerroes in Box 122, it doesn’t n
necessarily meean
anything other than the fact th
hat the appliccant didn’t prrovide his or h
her SIN to thee employer.
Full verification
v
of the applican
nt’s informatiion is require d to ensure that he or shee is actually
the same
s
individu
ual named in the
t T4A.
Box 13
1 – Business Number
If the T4A is for a business
b
the employer
e
must enter the ffirst nine digitts of the recip
pient’s
business number (BN).
Box 16
1 ‐ Pension or
o superannuation
If the recipient recceived annuityy payments frrom the emp loyer, the em
mployer must enter the
taxable part of ann
nuity paymen
nts it paid to an
a employee or retired em
mployee out o
of, or under, a
superrannuation orr pension fund
d or plan, including disabillity benefits p
paid in the form of a life
annuiity.
Box 18
1 ‐ Lump‐sum
m payments
Emplo
oyers must en
nter the taxab
ble part of a single
s
payme nt out of a peension fund o
or plan due to
o
any of the followin
ng reasons:
 witthdrawal from
m the plan, re
etirement fro
om employmeent, or death of an employyee or formerr
em
mployee; or
 terrmination of, amendment to, or modification of the plan; or
 reiimbursementt of any over‐contribution to the plan.
Box 20
2 ‐ Self‐emplloyed commissions
One of
o the most im
mportant secttions of a T4A
A for a brokerr/agent, Box 220 contains th
he amount off
comm
missions an em
mployer paid to a person working
w
as ann independen
nt agent (i.e., not an
“employee”). GSTT paid to the recipient
r
on those servicess is not includ
ded in this am
mount.
Box 22
2 ‐ Income ta
ax deducted
This iss the total inccome tax deducted by the employer froom the recipieent's remuneeration duringg
the ye
ear. This inclu
udes the fede
eral, provinciaal (except Queebec), and territorial taxess that apply.
This box
b will be blaank if the emp
ployer didn’t deduct any t axes during tthe year. Amounts
withh
held under the
e authority off a garnishee or a requirem
ment to pay tthat applies to
o the
emplo
oyee's previously assessed
d tax arrears will
w not appeaar here.
256
on Analysis – Borrower Do
ocuments
Chapter 12: Applicatio
6 ‐ Payer's Bu
usiness Number (BN)
Box 61
This iss the 15‐digit BN of the em
mployer, and does not apppear on copiess provided to
o the recipient.
If the BN does app
pear the broke
er/agent shou
uld confirm thhe informatio
on on the slip
p from the
emplo
oyer as this may
m be a sign of a forged document, sinnce many indiividuals aren’t aware that
the BN is not to ap
ppear on the recipient’s
r
slip.
T4
A T4 is a documentt provided to
o an individual by his or he r employer to
o summarize income for a
given one year perriod. This doccument is typ
pically obtaineed by a brokeer/agent when the
appliccant has employment inco
ome such as salaried or ho urly income.
Everyy employer (re
esident or non‐resident) must
m provide a T4 slip to em
mployees if itt has paid its
emplo
oyees any of the
t followingg types of inco
ome:
 em
mployment income
 taxxable allowannces and beneefits
 fishing income or
o any other payments forr services ren dered duringg the year
 sallary, wages (including pay in lieu of term
mination notiice,) tips or gratuities, bon
nuses,
vacation pay, em
mployment commissions,
c
gross and inssurable earnings of self‐em
mployed
fishers, and all other
o
remune
eration paid to
t employeess during the yyear
 taxxable benefitss or allowancces
 deductions withhheld by the employer
e
durring the year and
 pension adjustm
ment (PA) am
mounts for em
mployees whoo accrued a beenefit for the year under
the
e employer’s registered pe
ension plan (R
RPP) or deferrred profit‐shaaring plan (DPSP)
Detailed analysis of
o a T4
This section describes the sectio
ons of a T4 th
hat are most rrelevant to th
he mortgage process.
Emplo
oyer's name
The operating or trrading name of the emplo
oyer.
Emplo
oyee's name and address
The employee's lasst name, follo
owed by the first
f
name andd initial, not iincluding the title of the
emplo
oyee (such ass Director, Mrr., or Mrs.), fo
ollowed by th e employee'ss address, inccluding the
provin
nce, territory, or U.S. state
e, Canadian postal code orr U.S. zip codee, and countrry.
Year
The fo
our digits of the
t calendar year
y
in which the employeer paid the remuneration tto the
emplo
oyee.
Chapter 12: Application Analysis – Borrower Documents
Figure 47 – Sample T4
257
258
Chapter 12: Application Analysis – Borrower Documents
Box 10 ‐ Province of employment
One of the following abbreviations will indicate where the employee reported to work:
AB
BC
MB
NB
NL
NS
NT
ZZ
Alberta
NU Nunavut
British Columbia
ON Ontario
Manitoba
PE Prince Edward Island
New Brunswick
QC Quebec
Newfoundland and Labrador
SK Saskatchewan
Nova Scotia
YT Yukon
Northwest Territories
US United States
Other
ZZ is used if an employee worked in a country other than Canada or the U.S., or worked in
Canada beyond the limits of a province or territory (for example, on an offshore oil rig).
For any employee who worked in or whose employment was located in more than one province,
territory, or country in the year, separate T4 slips are completed. For each location, the total
remuneration paid to the employee and the related deductions, such as CPP/QPP contributions,
EI premiums, and tax is listed.
Box 12 ‐ Social insurance number
The employee's social insurance number (SIN) as it appears on the employee's SIN card. If the
employer doesn’t have the SIN, this section will contain nine zeros.
Box 14 ‐ Employment income
This box reports the total income before deductions, including all salary, wages (including pay in
lieu of termination notice), bonuses, vacation pay, tips and gratuities, honorariums, director's
fees, management fees, and executor's and Administrator's fees received to administer an
estate (as long as the Administrator or executor does not act in this capacity in the regular
course of business).
Boxes 16 and 17 ‐ Employee's CPP or QPP contributions
This box reports the amount deducted from the employee for contributions to the Canada
Pension Plan (CPP) or Quebec Pension Plan (QPP).
Box 18 ‐ Employee's EI (Employment Insurance) premiums
This box reports the amount of EI premiums deducted from the employee's earnings. If
premiums were not deducted this box will be blank. Based on federal regulations, the maximum
amount to be deducted for EI premiums in 2012 is $839.97.
25
59
Chapter 12: Applicatio
on Analysis – Borrower Do
ocuments
Succcess Tip – EI
E premium
ms
If the
e amount in Box
B 18 exceed
ds the maximu
um annual prremium, as in
ndicated in the chart
below
w, the brokerr/agent should
d review the T4 to ensure that it is not fraudulent. TThe
follow
wing table illu
ustrates the maximum
m
amounts of insuurable earninggs and maxim
mum
employee premiums over the past
p several years.
y
ear
Max. Ann
nual
Insurab
ble
Earning
gs
Ra
ate (%)
Feder
ral Quebec
Max. A
Annual
Empl oyee
mium
Prem
Max. Annual
Employer Premium
Federal
Quebec
Federal
Quebec
2012
$45,900
1.8
83
1.47
$839.97
$674.73
$1,175.96
$944.62
2011
$44,200
1.7
78
1.41
$786.76
$623.22
$1,101.46
$872.51
2010
$43,200
1.7
73
1.36
$747.36
$587.52
$1,046.30
$822.53
2009
$42,300
1.7
73
1.38
$731.79
$583.74
$1,024.51
$817.24
2008
$41,100
1.7
73
1.39
$711.03
$571.29
$995.44
$799.81
2007
$40,000
1.8
80
1.46
$720.00
$584.00
$1,008.00
$817.60
2006
$39,000
1.8
87
1.53
$729.30
$596.70
$1,021.02
$835.38
2 ‐ RPP contrributions
Box 20
This box
b reports th
he total amou
unt the emplo
oyee contribuuted to a regisstered pensio
on plan (RPP).
If the employee did not contribute to a plan,, this box willl be blank.
Box 24
2 ‐ EI insurab
ble earnings
This box
b reports th
he total amou
unt used to caalculate the eemployee's EI premiums. TThis box will b
be
blank if:
 theere are no inssurable earninngs
 inssurable earninngs are the saame as the em
mployment inncome in boxx 14; or
 inssurable earninngs are over the
t maximum
m for the yearr (see the desscription provvided for Box
18)
Box 26
2 ‐ CPP/QPP pensionable earnings
In mo
ost cases, this box will be blank.
b
Box 46
4 ‐ Charitable
e donations
This box
b reports am
mounts deducted from the
e employee'ss earnings forr donations to
o registered
charitties in Canadaa.
Box 22
2 ‐ Income ta
ax deducted
This box
b reports th
he total incom
me tax deductted from the employee's rremuneration
n. This includees
the fe
ederal, provin
ncial (except Quebec),
Q
and territorial taxxes that apply. If no taxes were
deduccted this box will be blank.
260
Chapter 12: Applicatio
on Analysis – Borrower Do
ocuments
Su
uccess Tip – Income tax rates
Mortgage agen
nts should be aware of the
e following taxxes to be ded
ducted and sh
hould ensure
that the amoun
nts on the T4 appear to me
eet the follow
wing table. Iff a mortgage aagent believees
that the taxes deducted
d
in Box
B 22 are no
ot reflective oof the applican
nt’s income h
he or she
sh
hould confirm
m the informattion on the slip from the eemployer as this may be a sign of a
fo
orged docume
ent. Tax ratess can be obtained from Caanada Revenu
ue Agency’s w
website at
htttp://www.craa‐arc.gc.ca
Fo
or 2012, the Federal
F
rates are:
 15% on
n the first $42
2,707 of taxable income, +
 22% on
n the next $42,707 of taxaable income (oon the portio
on of taxable income
over $4
42,707 up to $85,414), +
 26% on
n the next $46,992 of taxaable income (oon the portio
on of taxable income
over $8
85,414 up to $132,406), +
 29% off taxable income over $132
2,406.
or 2011, the Ontario
O
rates are:
Fo
 5.05% on the first $39,020 of taxxable income,, +
$
+
 9.15% on the next $39,023,
% on the amount over $78,,043
 11.16%
5 ‐ Business Number
Box 54
This box
b contains the
t 15‐digit Business
B
Number (BN) thatt is used by th
he employer tto report
deducctions to CRA
A. The BN shou
uld not appeaar on the twoo copies of thee T4 slip that are given to
emplo
oyees. If the BN does appear the broke
er/agent shouuld confirm th
he informatio
on on the slip
from the employerr as this may be a sign of a forged docuument, since m
many individu
uals aren’t
aware
e that the BN is not to app
pear on the re
ecipient’s slip .
"Othe
er informatio
on" area
The "o
other informaation" area att the bottom of the T4 slipp has boxes fo
or the employyer to enter
codess and amountts that relate to employme
ent commissioons, taxable aallowances an
nd benefits,
deducctible amountts, fishers' inccome, and other entries iff they apply.
Example
40
Boxx ‐ Case
22400.98
Amoun
nt ‐ Montant
Codess 30 to 85 ‐ Ta
axable allowaances and be
enefits, deducctible amoun
nts, employm
ment
comm
missions, and other entries
30 ‐ Housing, bo
oard, and lodging
31 ‐ Special worrk site
32 ‐ Travel in a prescribed zo
one
Chapter 12: Applicatio
on Analysis – Borrower Do
ocuments
33
34
36
37
38
39
40
41
42
43
53
70
71
72
73
74
75
77
78
79
80
81
82
83
84
85
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
26
61
Medical traavel
Personal usse of employe
er's automob
bile
Interest‐fre
ee and low‐interest loan
Employee home‐relocat
h
tion loan deduction
Security op
ptions benefitts
Security op
ptions deduction 110(1)(d)
Other taxab
ble allowance
es and benefits
Security op
ptions deduction 110(1)(d.1)
Employmen
nt commissio
ons
Canadian Forces
F
personnel and policce deduction
Deferred se
ecurity option
ns benefits
Municipal officer's
o
expe
ense allowancce
Status Indiaan employee
Section 122
2.3 income ‐ employment
e
outside Canaada
Number of days outside
e of Canada
Pre‐1990 past service co
ontributions while
w
a contriibutor
Pre‐1990 past service co
ontributions while
w
not a coontributor
Workers' co
ompensation benefits repaid to the em
mployer
Fishers gross earnings
Fishers net partnership amount
Fishers share‐person am
mount
Placement or employme
ent agency workers gross earnings
Drivers of taxis
t
or other passenger‐caarrying vehiclles gross earn
nings
Barbers or hairdressers gross earninggs
Public transit pass
Employee‐p
paid premium
ms for private
e health servicces plans
Job Letter
A job letter is a document provided to an ind
dividual by hi s or her employer. This do
ocument is
her documenntation, to verrify an applicaant’s
often required by a lender, in addition to oth
emplo
oyment as we
ell as income.. The followin
ng is a samplee of a job lettter. A legend is provided tto
explain each sectio
on of the lette
er. To be acce
eptable the joob letter shou
uld contain all of the
inform
mation identiffied in the leggend. It is important that a broker/ageent review thee job letter to
o
ensurre that it conttains all of the
e necessary in
nformation, aas well as to cconfirm that it is authenticc.
If there are any spe
elling errors the
t broker/aggent should reeview the document careffully. If the
broke
er/agent has any
a doubts re
egarding its authenticity hee or she shou
uld verify its ccontents by:
 Ensuring the coompany existss. Perform a Canada
C
411 ssearch (www..canada411.ccom) to verifyy
b
should contaact the borrow
wer for
thaat the company is listed. If it isn’t the broker/agent
furrther informaation. The bro
oker/agent caan also visit thhe company’s physical add
dress to
determine if it is actually the
ere.
262
Chapter 12: Application Analysis – Borrower Documents
 Contacting the employer using the contact information found in the job letter to verify its
contents.
Regardless of whether the broker/agent finds any reasons to suspect that the letter is not
authentic, he or she should verify the information found in the job letter.
Legend
A: Company Letterhead, including logo (if applicable) and contact information. Ensure that this
information is correct by verifying it using Canada 411, calling the contact number(s) and/or
visiting the physical location.
B: Date: The job letter needs to be recent in relation to the application. If the job letter was
written before the broker/agent took the application a current pay stub should also be
obtained to ensure that the applicant is still employed by this employer. If the job letter is
over one month old the lender may require an up‐to‐date job letter.
C: Re line. This line may or may not be present, depending on the policy of the employer.
D: To line. If it is addressed to a specific individual, that individual should be the broker/agent
or lender. If it is addressed to another individual the broker/agent should confirm the
identity of that person and the reason for the other name. It may be a job letter that was
supplied to another broker/agent or lender.
E: Position. The job letter must contain the applicant’s position, and if he or she is full‐time,
part‐time, seasonal, temporary, contract or on probation.
F: Date of employment. The job letter must contain the date that the applicant was first hired.
G: Income amount. The job letter must contain the amount of annual income earned by the
applicant, and if it is salary, hourly or commission based. Any additional income, such as
bonus income, must be listed separately from the salaried income.
H: Writer’s information. The writer of the job letter should be clearly identified so that he or
she may be contacted to verify the letter’s information.
Chapter 12: Application Analysis – Borrower Documents
263
Figure 48 – Sample Job Letter
A
A
B
August 29, 2012
C
Re: Employment Verification of Mr. John Q. Public
D
To Whom It May Concern,
1234 John Street,
Somewhere, ON
M4M 4M4
Tel: (416) 555‐1212
Fax: (416) 555‐2121
As requested by Mr. John Q. Public this letter is to verify that Mr. John Q. Public is employed at
E
ABC Manufacturing Inc. as a salaried Assembly Line Operator.
He has been employed in this position since January 17th, 2009
F
and earns $75,500 per
year.
If you have any questions please do not hesitate to contact the undersigned.
Sincerely,
H
Sarah Public
HR Assistant
ABC Manufacturing INC.
G
264
Chapter 12: Applicatio
on Analysis – Borrower Do
ocuments
Pay stub
A payystub is a docu
ument provid
ded to an individual by his or her emplo
oyer and is offten required
by a le
ender in addiition to a job letter and/orr other incom
me verification
n. A paystub is generally
used to
t prove thatt the applican
nt is still active
ely employedd by the employer since a jjob letter mayy
be on
ne or more we
eeks old. In addition,
a
the paystub
p
can bbe used to en
nsure that thee applicant’s
earnin
ngs on the job
b letter are acccurately reflected in the yyear‐to‐date section of the paystub.
For exxample, if the
e job letter indicates that the
t applicant earns $60,0000 per year an
nd the
paystub is obtained precisely att the middle of
o the year, itt should indiccate a year‐to
o‐date incomee
of $30
0,000.
Figure 49 – Sample Paystub
265
Chapter 12: Application Analysis – Borrower Documents
Employee # 0004
STATEMENT OF EARNINGS
BULLETIN DE PAIE
Rate
Amount
Y.T.D.
DEDUCTIONS
RETENUES
1,303.95
NET PAY
PAIE NETTE
Period From
To
2008/10/31
2008/11/14
711.03
2,049.30
16.587.57
21.60
DEPOSIT
Y.T.D
Payday 2008/11/21
0004 12345 12345678911
NET PAY ALLOCATION
DETAILS DE LA PAIE NETTE
477.37
EMPLOYER DEDUCTIONS AND CONTRIBUTIONS
RETENUES DE L'EMPLOYE ET COTISATIONS PATRONALES
Current
Y.T.D.
Type
Current
Department # 99
Type
1,303.95
20 UNION/LOCAL
15 FED. TAX
14. E.I.
56,736.60 13 G.P.P
GROSS PAY
PAIE BRUTE
477.37
37,367.10
1,781.32
1,781.32
19,369.50
Hours
BOB BORROWER
Type
00 Salary
Current
Courant
56,736.60
SUMMARY
SOMMAIRE
Year-to-date
Cumul annuel
Employer # 1234-b TEST COMPANY, 1234 COMPANY LANE, TORONTO, ON, M1M 1M1
266
Chapter 12: Applicatio
on Analysis – Borrower Do
ocuments
Notiice of As sessmen
nt (NOA)
An NO
OA is issued by
b the federall governmentt when a perssonal tax retu
urn has been ccompleted
and fiiled. This doccument provid
des a breakdo
own of the yeear’s income along with th
he balance
owingg or refund du
ue. A broker//agent will typically obtainn this documeent when pro
ocessing an
appliccation using a “Stated Inco
ome” program
m to provide pproof that theere are no ou
utstanding
back taxes
t
owing to
t the Canadaa Revenue Aggency. This doocument mayy also be requ
uired in otherr
circum
mstances, as determined
d
by
b each lende
er.
Figure 50 – Sample NO
OA
Canad
da Revenue
Agenccy
Agence du
u revenu
du Canadaa
NOTICE O
OF ASSESSMEN
NT
T451 E (08)
2
Date
me
Nam
Sociaal Insurance no.
Tax Year
Tax centrre
Aug 6, 2016
RTGAGE CLIENT
MOR
000 000 000
2015
ON P3A 5C1
Sudbury O
Summary
Line
150
236
260
350
6150
420
428
435
437
486
482
Desccription
Total Income
e
Deductions from
f
total inco
ome
Net Income
Taxable Inco
ome
Total federal non‐refundab
ble tax credits
Total Ontario
o non‐refundable tax credits
Net federal tax
t
Net Ontario tax
Total payable
Total income
e tax deducted
d
Payment on filing
Total creditss
(Total payab
ble minus Totall credits
Balance from
m this assessment
Balance Due
e
$ Amountt
Not ice that figures up
to section 61500 are
wh ole numbers only
andd do not havee any
centts. Have a loo
ok for
this when review
wing a
borrrower’s document
to ensure it iis
authentic.
DR
DR
65,00
00
10,50
00
55,00
00
55,00
00
2,00
00
65
50
7,500.0
00
4,000.0
00
11,500.0
00
11,000.0
00
200.0
00
11,200.0
00
300.0
00
300.0
00
300.0
00
Chapter 12: Applicatio
on Analysis – Borrower Do
ocuments
26
67
Bus iness Lic
cense
A Bussiness License
e may be requ
uired by a lender to prove an applicant’’s ownership of a businesss.
Figure 51 – Business Liicense
Maaster Bu
usiness Licencee
Date Issued:
I
2013
3−01−16
Bu
usiness Numb
ber: 1234567899
(yyyy−m
mm−dd)
Business Name and
d Mailing Add
dress:
REMIIC MORTGAG
GES,
2175 Sheppard
S
Aven
nue East, Suite 213,
TORO
ONTO, ONTA
ARIO CANAD
DA M2J 1W8
Business
Addreess:
SAM
ME AS ABOVE
E
Teleph
hone:
Ext:
Fax:
Emaill:
Legal
Namee(s):
JOH
HN ADAM PU
UBLIC
Type of
Legal
Entity
y:
LE PROPRIET
TORSHIP
SOL
Business
Activiity:
TRA
AINING OF MORTGAGE
M
BROKERS/AG
B
GENTS
Business Informatio
on
BUSIN
NESS NAME
REGIS
STRATION
Number
456789
1234
Effectivee Date
Expiry Date
(yyyy−mm
m−dd)
(yyyy−mm−d
dd)
2013−01−16
2018−01−116
Page 1 off 1
To the Client:
C
When the Master
M
Business Lic
cence is presented to any Ontario bussiness program, yo
ou are not required to repeat
informattion contained on th
his licence. Each Ontario
O
business pro
ogram is required tto accept this licencce when presented
d as part of its
registrattion process. Call th
he Ontario Busines
ss Connects Helplin
ne at 1−800−565−1
1921 or (416) 314−
−9151 or TDD (416
6) 326−8566 if you
have an
ny problems.
To the Ontario
O
business program: A client is not required to repeat
r
any informattion contained in th
his licence in any otther form used in
your reg
gistration process.
268
Chapter 12: Applicatio
on Analysis – Borrower Do
ocuments
Fina
ancial Sta
atements
s
Financial Statemen
nts can be defined as the presentation
p
of financial d
data, includingg balance
sheets, income staatements and other supporting statemeents intended
d to communicate an
entityy's financial position at a point in time.
Typicaally a bookkeeper or the owner
o
of a business will re cord and sum
mmarize the ttransactions o
of
the bu
usiness. These transaction
ns include the
e sale of mercchandise, payyroll, inventorry purchases
and other
o
financial transactionss throughout the year. Th is information is then com
mpiled and
financcial statemen
nts are preparred. These statements connsist of the Baalance Sheet and Income
Statem
ment, the two
o primary documents, and
d are accomp anied by the Statement off Retained
Earnin
ngs, Statemen
nt of Changess in Financial Position (SCFFP) and the Notes to the Financial
Statem
ments.
A balaance sheet, illustrated in the following figure,
f
is a deetailed snapsh
hot of the financial health
st
of a business
b
on a specific date,, typically Deccember 31 ; however thiss date might b
be different iff
the bu
usiness is, forr example, seasonal. Balan
nce sheets shoow the relatio
onship betweeen the dollarr
amou
unt of assets (what
(
the bussiness owns), liabilities (whhat a business owes) and o
owner's equitty
(whatt the owner or
o stockholderrs own). The totals must bbalance based
d on the form
mula:
Assets
A
= Liabilities + Owneer’s Equity
The in
ncome statem
ment, also refferred to as th
he profit and loss statement, illustrated
d in next
figure
e, details the amount of money
m
that the business m ade or lost ovver a specific period of
time, typically a month, a quartter or a year. The income statement is based on thee formula:
Net income = Revenues ‐ EExpenses
Manyy brokers and agents will only
o occasionaally come intoo contact with financial staatements and
d
may not
n have the training
t
or exxpertise to pro
operly interp ret them. Th
he brokerage should have a
policyy in place to have
h
financial statements reviewed,
r
whhen necessaryy, by a staff m
member or
anoth
her broker wh
ho understand
ds and can prroperly interppret these staatements.
Chapter 12: Application Analysis – Borrower Documents
269
Figure 52 – Sample Balance Sheet
Mortgage agent Inc.
Balance Sheet
as at December 31, 2015
Assets
2015
2014
Cash
Accounts Receivable
Inventory
Loans to Shareholders
$85,333
172,500
18,364
12,328
$51,276
129,657
4,888
‐
Total Current Assets
288,525
185,821
Office Equipment
Machinery
15,055
29,580
8,992
21,960
Total Non‐Current Assets
44,635
30,952
$331,160
$216,773
2015
2014
Current Liabilities
Accounts Payable
Income Tax Payable
Salaries Payable
$72,166
17,125
75,000
$93,554
14,387
45,000
Total Liabilities
164,291
152,931
Shareholders' Equity:
Common Stock
Retained Earnings
100,000
66,869
50,000
13,842
Total Shareholders' Equity
166,869
63,842
Total Liabilities & Equity
$331,160
$216,773
Total Assets
Liabilities
270
Chapter 12: Application Analysis – Borrower Documents
Figure 53 – Sample Income Statement
Mortgage agent Inc.
Income Statement
For the year ended 2015
Income
Revenue
Cost of Goods Sold
2015
$2,375,590
879,566
2014
$1,713,054
611,055
1,496,024
1,101,999
5,000
25,885
8,500
38,066
2,115
800
2,889
75,000
4,511
14,400
3,487
2,000
13,944
3,078
15,226
1,238
800
3,101
45,000
3,489
14,400
2,433
180,653
104,709
Net Income before Taxes
Provisions for Income Taxes
1,315,371
328,900
997,290
219,404
Net Income
$986,471
$777,886
Gross Profit
Expenses
Operating Expenses
Depreciation
Advertising and promotion
Accounting and legal
Automotive
Bank charges and interest
Dues and licenses
Insurance
Management fees
Office supplies
Rent
Telephone and utilities
Total Operating Expenses
27
71
Chapter 12: Applicatio
on Analysis – Borrower Do
ocuments
12.3
3 Properrty Docum
mentation
n
A broker/agent will be required
d to submit ad
dditional docuuments to a llender based on the
purpo
ose of the mo
ortgage. For example,
e
an MLS
M listing annd purchase aand sale agreeement will
most often be requ
uired by a len
nder in a purcchase transacction, while a property tax bill will be
requirred for a swittch or refinance.
Multtiple List ing Serviice (MLS )
MLS allows
a
real estate salespeo
ople to see prroperties beinng sold by oth
her agents, a benefit to
both buyers and se
ellers of real estate.
e
The Multiple
M
Listinng Service effficiently distributes
inform
mation so thaat, when a reaal estate salessperson is inttroduced to a potential home buyer, the
salesp
person may search the MLLS system and
d retrieve infoormation abo
out all homes for sale in a
given area or price
e range, whether under a listing contracct by that saleesperson’s brrokerage or b
by
any of the other paarticipating brokers.
MLS, then, functions as a huge database that allows real estate salesp
people repressenting sellerss
underr a listing contract to widely share inforrmation abouut properties w
with real estaate
salesp
people who may
m representt potential bu
uyers. The M
MLS combines the listings o
of all availablee
prope
erties that are
e represented
d by brokers who
w are bothh members off that MLS sysstem and of
CREA,, the Canadian Real Estate
e Association. Many lendeers require thee borrower to
o provide a
copy of
o the MLS do
ocument to prove
p
that it iss an arm’s lenngth transaction – in otherr words, the
prope
erty has been offered to th
he public. The
e following iss a sample of an MLS document.
Figure 54 – Sample MLLS listing
Civicc Address
1234 Borro
ower Lane
$32
29,900 For Sale
Toronto, O
Ontario M1M1M1 W20 457‐‐32‐D
Pt Lt 00R PPlan M1234
SPIS:N
Legal
Deescription
Semi‐Detacched
Frontting
E
On
n:
2‐Storey
Acreaage: < .49
Dir/Cross
SSomewhere/Anywhere
St:
Lot:
66.85X34 Metrees
Last
New
w
Status:
Rooms:
MLS#: W12345
Open House Notes:
6+2
B
Bedrooms: 3
W
Washrooms:
3
2xx4, 1x2
TB
BA means
To Be
A
Advised
Lot Irreg: B
Backs Westerlyy Sun
Open House: Oct 1
Property
Taxes
Taxes: $3,,100/2014
Occup: Owner
From: 9 am
m To: 5 pm
DOM: 10
Please leave shoes on porch
Holdover: 90
Possessio
on:
Nov 29 / Tbaa
/ Flx
PIN#:
272
Chapter 12: Applicatio
on Analysis – Borrower Do
ocuments
Exterio
or:
Kitcchens:
1
Fam
m Rm:
N
Other
Drive
e:
Full
Parkin
ng
Space
es:
Firepllace/Stv: N
CAC:
C
Mutual
Zoning:
GarType
e/Sp Attache
acess:
d/1
Base
ement: Finished
Heat:
H
Brick
Cable TV:
Gas:
2
UFFII:
No
Force
ed Air
Pooll:
None
6‐15
Apxx Sqft:
1100
0‐1500
Phonee:
Municipal
Water Supplly:
Sloping
Apxx Age:
Hydro
o:
Water:
Gas
Y
Residential
Sewers:
Sewers
Spec Desigg: Unknown
Farm/Agr::
Public
Transit
Assesssment:
Rec
Centre
# Roo
om
Level
Dimensions (fft)
1 Livin
ng
Ground 10.99 x
2 Dining
Ground 9.91
x 11.3
38 Hardwood
d Floor Comb ined W/Living Open Concept
3 Kitcchen
Ground 9.88
x 10.0
01 Ceramic Floor
B/I Disshwasher
x
10
0.1 Ceramic Floor
Familyy Size Kitchen W/O To Deck
10
0.1 Semi Ensu
uite
His/Heers Closets
Broadloom
Broaddloom
Large Closet
4 Breakfast Ground 10.5
14
4.8 Hardwood
d Floor Open Concept
Overlook Patio
Ceramic Back Splash
5 Masster
2Nd
18.01 x
6 2nd
d Br
2Nd
10.99 x 10.0
01 Wainscottting
7 3rd Br
2Nd
10.01 x
9.5
55 Closet Orgganizers Windoow
Broadloom
8 Recc
Bsmt
15.49 x
10
0.2 Finished
Stuccoo Ceiling
Broadloom
9.42
6.3
33 Partly Finished
Fluoreescent
4 Pc Bath
9 Laundry Bsmt
x
Immaaculate&Clean Thru‐Out Hom
me&Area,Brightt Home,Upgraddes Galore, Beeautiful Strip Hdwd
Flrs&C
Ceramics,Outstanding Finished Bsmt With Rec Romm&4 Piece Bath&Ln
ndry
Area&
&Cantina,Interlocking Stone Front
F
Walkwayy&Front&Rear Gardens*Fron
nt Porch,Huge Private Rear
Deck*
*Wroght‐Iron Gate
G
Fridge
e,Stove,Bi Dw,Bi Microwave,Cac,El.Grg.Ope
ener&2 Remottes,All Shutterss&Blinds&Wind
dow
Coverrings,Elfs,High Eff Furn&Hwt,Surrond‐Sound
d Spkrs,Mirr.C lst.Drs,Bi Shelvves,Hot&Cold H
H2O Outside
Frnt&
&Back,Brss&Glsss Door Insrt,Sh
hower&Closet Valences
Excellent Layout,Completely Finish
hed Top2Botto
om With Qualitty Extras&Upggrades Thru‐Ou
ut,Quiet
Streett,Walk To Pub//Sep School,Exxcellent Home&
&Neighbourhoood,Great Family Home,Easy To
Show&
&Sell*Lockboxx*
Contrract Date: 5/10
0/2015 Sunil Liister 416‐555‐‐1212 REMIC R
REAL ESTATE BR
ROKERAGE
Exp
piry Date: 9/30
0/2015
Tel: 4166‐555‐1212
Fax: 4166‐555‐2121
Agre
eement of
o Purcha
ase and Sale
S
The agreement of purchase and
d sale is a doccument used when real esstate in Ontarrio is being
purch
hased or sold. In all cases, where the ap
pplicant is ap plying for a m
mortgage to p
purchase a
new or
o resale hom
me, the lenderr will require a fully compl eted purchasse and sale aggreement. Th
he
Chapter 12: Application Analysis – Borrower Documents
following sample form is used to demonstrate how a typical purchase and sale agreement
should be completed by the real estate salesperson.
Figure 55 – Sample Agreement of Purchase and Sale
273
274
Chapter 12: Application Analysis – Borrower Documents
Chapter 12: Application Analysis – Borrower Documents
275
276
Chapter 12: Application Analysis – Borrower Documents
Chapter 12: Application Analysis – Borrower Documents
277
278
Chapter 12: Applicatio
on Analysis – Borrower Do
ocuments
12.4
4 Other Documen
ntation
As pre
eviously mentioned, the documents thaat the mortgaage agent mu
ust obtain in aany given
transaaction will be based on the
e purpose of the mortgagee. In addition
n, other documentation
may be
b required to
o prove inform
mation provid
ded in the appplication. We’ve already reviewed thee
incom
me and property documenttation, now itt’s time to revview the otheer documentss that may bee
reque
ested by a len
nder or that a mortgage aggent may find useful.
Gift Letter
A gift letter is a document that outlines the terms
t
of a giffted down payment in a pu
urchase
transaaction. Mone
ey provided by
b a family me
ember to be uused as a dow
wn payment, as long as it iis
not re
epayable to th
hat family me
ember, can be
e used in lieu of the borrower having to
o use his or
her ow
wn funds for the down payyment. This form
f
must bee completed b
by both the recipients, or
the pu
urchasers, an
nd the donorss, who are the
e family mem
mbers providin
ng the gift to the recipientts.
This form will be re
equested by the
t lender to prove to thee lender that tthe down payyment has no
ot
been borrowed.
Figure 56 – Sample Gifft Letter
GIFT LEETTER
R
_____
___________
____________
__
(date))
To Wh
hom it may concern:
This le
etter confirms that the undersigned is making
m
a finaancial gift of $$________________
to: __
____________
___________
____________
_______________________________________
(printt names of reccipients)
for usse toward the
e purchase of the propertyy located at:
_____
___________
____________
___________
________________________________________
(address of properrty being morttgaged)
We, the undersigned Recipientss and Donors, hereby certify that:
a) These funds are
e a genuine gift from the Donors;
D
as succh, are not reequired to be repaid at anyy
tim
me, and
b) No
o part of the financial
f
gift is being provided by any thhird party havving any interrest (direct o
or
ind
direct) in the sale of the su
ubject property, and
c) The Donor is an
n immediate family
f
membe
er.
Recipients
Name
e:
__
____________
__________
Name:
________________________
Chapter 12: Applicatio
on Analysis – Borrower Do
ocuments
Signatture:
__
____________
__________
Signatur e:
________________________
Date:
__
____________
__________
Date:
________________________
e:
Name
__
____________
__________
Name:
________________________
Signatture:
__
____________
__________
Signatur e:
________________________
Date:
__
____________
__________
Date:
________________________
Relatiionship:
__
____________
__________
Relation ship:
________________________
Addre
ess:
__
____________
__________
Address::
________________________
P
City, Prov.:
__
____________
__________
City, Proov.:
________________________
Telephone:
__
____________
__________
Telephonne:
________________________
27
79
Don
nors
Prop
perty Ass
sessmentt
A Property Assessm
ment is a document provid
ded by the M unicipal Prop
perty Assessm
ment
Corpo
oration (MPAC) to homeow
wners to illusttrate the valuue of a home,, as assessed or
determined by MP
PAC, for the purposes
p
of caalculating prooperty taxes.
A broker/agent maay find this usseful in assisting to determ
mine a value o
of a property in a switch or
refinaance transaction, before an
n appraisal haas been comppleted, if the homeowner does not havve
any in
nformation on
n the potentiaal value of the home.
It’s im
mportant to note that MPA
AC uses an automated valuuation model or AVM to caalculate the
value. This assessm
ment is typicaally not accep
pted by lendeers to prove p
property valuee, and the
broke
er/agent shou
uld be aware that
t
the value
e shown on t his documentt may differ ffrom the value
as dettermined by an
a appraisal. It is, howeve
er, valid to bee used to provvide a generaal idea of whaat
the vaalue of the prroperty may be
b for use by the mortgagee agent.
280
Chapter 12: Applicatio
on Analysis – Borrower Do
ocuments
Figure 57 – Sample Pro
operty Assessmeent
Chapter 12: Applicatio
on Analysis – Borrower Do
ocuments
28
81
Morrtgage St atement
A morrtgage statem
ment is a docu
ument provid
ded by a homeeowner’s currrent mortgagge provider to
o
the ho
omeowner de
etailing the cu
urrent financial standing oof the mortgaage, includingg its
outstaanding balancce, interest raate, time rem
maining in the term and oth
her important financial
inform
mation. This document is typically obtaained by a brooker/agent in
n a switch or rrefinance
transaaction to show
w the outstan
nding balance
e of the existiing mortgagee. While the m
mortgage
statem
ment may be several weekks or months old, the brokker/agent can
n calculate thee current
balance at the date
e of the appliication by using the outstaanding balancce at the datee of the
statem
ment. This is vital to deterrmine the exaact amount o f principal that must be reepaid to the
current lender on closing.
c
While
e it is important for the bro
oker/agent to
o obtain a moortgage statem
ment to calcu
ulate the
current outstandin
ng balance of the applicantt’s mortgage,, this documeent is not used by the new
w
lende
er to determin
ne the amoun
nt required to
o pay off the m
mortgage. Th
he new lendeer will requestt
a statement directtly from the current lenderr before closi ng, to ensuree that the info
ormation is
accurate and that there
t
are no arrears on th
he current moortgage.
282
Chapter 12: Application Analysis – Borrower Documents
Figure 58 – Sample Mortgage Statement
SUPERBANK INC.
November 21, 2011
Mr. J. Borrower
123 Kingston Street, Southwest,
Toronto, ON, M1M 1M1
Mortgage Number: 1155667898
Annual Mortgage Statement
Statement Period:
Property Address:
January 1, 2011 to December 31, 2011
123 Kingston Street, Southwest, Toronto, ON, M1M 1M1
Mortgage Details
Maturity Date
Interest Rate (as at statement date)
Payment Frequency
Principal, Interest and Tax Payment
July 28, 2014
6.89%
Monthly
$1,550.47
Transaction Summary
Opening Principal Balance
Advances During Statement Period
Principal Paid (including any privilege payments)
Closing Principal Balance
Interest Paid (during statement period)
$199,920.42
$0.00
$2,180.78
$197,739.64
$13,515.94
Tax Account Summary
Opening Tax Balance
Tax Payments Received
Taxes Paid to Authority
Closing Tax Balance
$493.13 CR
$2,293.00
$2,307.15
$478.98 CR
Please Note: DR is a Debit = Minus to your account. CR is a Credit = Plus to your account
If you have any questions, please feel free to contact our
Customer Service Toll‐Free Number at 1‐866‐555‐1212
If any of the balances, interest rates or other financial data appear
incorrect, please contact our auditors detailing any discrepancies:
Pricewatershed
rd
Suite 1000, 123‐53 Ave
Toronto, ON
Attention: Joseph Blank
Tel: (416) 555‐9900
Fax: (416) 555‐9911
28
83
Chapter 12: Applicatio
on Analysis – Borrower Do
ocuments
Tax Bill
A tax bill is a docum
ment provide
ed to a homeo
owner by thee municipal taax authority in
n the
jurisdiction in whicch the properrty is located. A mortgagee agent must o
obtain a copyy of this
docum
ment in a switch or refinan
nce transactio
on to ensure tthat the prop
perty taxes arre up to date.
While
e the lawyer closing
c
the traansaction willl confirm thiss information,, it is importaant for the
mortggage agent to
o confirm this information as soon as poossible to preevent a situation whereby
the bo
orrower doessn’t have enough money on
o closing to ppay any back taxes owing.
Figure 59 – Sample Ta
ax Bill
T
City of Toronto
TAX
X BILL
012 Final Tax Bill
20
Mortgaage Company: SuperBank Inc.
Mortgaage Number: 1155667898
Billing D
Date
Sep
ptember 1, 20
012
Roll No.
00‐010‐04700
0‐0000
1234‐00
Borrower, JJohn
Borrow
wer, John
123 Kin
ngston Street,, Southwest,
Toronto
o, ON, M1M 1M1
1
123 Kingstoon Street, Sou
uthwest,
Toronto, ON
N, M1M 1M11
Pt. Lot 2,
RP 11R68166 Part 1
66.00 FR 1775.00D .20AC
C
Asssessment
Tax
Class
RTEP
Sub Tottals
Municipal
Ed
ducation
Value
Municipaal Levies
Tax
T Rate (%)
Amount
Tax Rate ((%)
Amou
unt
365,468
Reside
ential
0.6109226
2,237.72
0.264000
00
964.8
84
Municipal Levy
Sp
pecial Charge
es/Credits
2,237.72
CV
VA Phase‐In
0.0
00
Summ
mary
Municcipal + Educattion
Speciaal Charges
964
4.84
3,197
7.56
0
0.00
2008 TTax Cap Adj
Final 22008 Taxes
Less In
nterim Billing
0
0.00
3,197
7.56
‐1,598
8.78
Total A
Amount Due
1.598
8.78
284
Chapter 12: Applicatio
on Analysis – Borrower Do
ocuments
nto tax rates
2011 City of Toron
The fo
ollowing charrt illustrates the tax rates for
f the City off Toronto for the year 201
11. While tax
rates vary from mu
unicipality to municipality this is a sampple of how municipal ratess are
calcullated.
Final 2011 Propertty Tax Rates
Descrription
City
C
Tax
T Rate %
Educcation Tax Raate
%
Total
Tax Ratte %
Reside
ential
0.5619218%
0
0.23310000%
0.7929218%
Multi‐‐Residential
1.8635584%
1
0.23310000%
2.0945584%
Comm
mercial Generral
1.8257360%
1
1.54404080%
3.3661440%
Example: Estimate
ed taxes on a residential prroperty with an Assessed V
Value of $427
7,177:
Estimated propertyy tax = Assesssed Value x Residential
R
Taxx Rate = $4277,177 x 0.792
29218%=
$3,387.18
Con
ndominium
m Status Certifica
ate
A Stattus Certificate
e, formerly kn
nown as an Esstoppel Certifficate, is a do
ocument provvided by a
condo
ominium corp
poration (the entity that ru
uns the condoominium) to tthe owner off the
condo
ominium unitt. This docum
ment is require
ed by lenderss to confirm tthat the condominium
corpo
oration has su
ufficient reserrve funds for its continuedd operation; aand reveals th
he amount of
the co
ondominium maintenance
e fee, and whe
ether there aare any legal p
proceedings aagainst the
condo
ominium corp
poration, amo
ong other info
ormation. Thhe mortgage aagent should inform the
appliccant that this document is required as soon
s
as possi ble, since it m
may take seveeral days for
the co
ondominium corporation to
t provide. There
T
is typicaally a fee charrged to the ho
omeowner to
o
obtain
n this docume
ent, which caannot exceed $100 as per tthe Condominnium Act.
Sam
mple Stat us Certif icate
(Under subsection 76(1)) of the Condomiinium Act R.S.O. 1998,
1
as amendeed)
TORO
ONTO STANDA
ARD CONDOM
MINIUM CORP
PORATION NO
O. 1234
The Corporation
C
hereby certifie
es that as of the date here of:
1. Th
he owner(s) of
o Unit (Suite #), Level (Floo
or #), Unit (Loocker #) Level (Floor #) and
d Unit
(Paarking #) Leve
el (Parking Levvel #), Torontto Standard CCondominium
m Plan No. 123
34, registered
d
in the Land Title
es Division off the Toronto Registry Officce (No. 66), iss:
on element exxpenses, pendding clearancce from the bank.
[ x ] not in default of commo
[ ] in default of
o common element expen
nses in the am
mount of ($______)
2. A payment
p
on account
a
of common expen
nses of ($Monnthly Condo FFees) in respeect of the
above‐noted un
nit(s) is due on (Date) to co
over the periood from (Datee – Date)
3. The Corporation has the amount of ($___
___) in prepaiid expenses ffor the unit.
4. There are no am
mounts that the
t Condomin
nium Act, 19998 requires to
o be added to
o the common
expenses payab
ble for the unit.
5. The current bud
dget is accuraate, however,, the Corpora tion cannot aaccurately determine at
thiis time wheth
her the budge
et will result in a surplus orr a deficit as iit has no conttrol over any,,
Chapter 12: Application Analysis – Borrower Documents
285
as yet, unannounced increases in utility rates, increased labour and material costs, and any
other cost factors which are beyond the normal budgetary controls of the Corporation,
including any costs which might impact on the budget.
6. Since the date of the budget of the Corporation, for the current fiscal year, the common
expenses for the unit:
[ x ] have not been increased, or
[ _ ] have been increased by (% increase) and by (Amount in dollars) per month for the unit
due to increased utility rates.
7. Since the date of the budget of the Corporation for the current fiscal year, the Board:
[ x ] has not levied any additional assessments against the unit, or
[ _ ] has levied the following assessment(s) against the unit, to increase the contribution to
the reserve fund or the Corporation’s operating fund or for any other purpose.
8. The Corporation has no knowledge of any circumstances that may result in an increase in the
common expenses for the aforesaid unit(s), save and except for any usual budgetary
increases.
Reserve Fund
9. The Corporation’s unaudited reserve fund amounts to (Amount in dollars) as at (Date)
10. A comprehensive reserve fund study will be conducted (Expected Date)
11. The balance of the reserve fund at the beginning of the current fiscal year was (Amount in
dollars). In accordance with the budget of the Corporation for the current fiscal year, the
annual contribution to be made to the reserve fund is annual (Contribution in dollars) and
anticipated expenditures to be made from the reserve fund for the current fiscal year, are
(projected figure in dollars). The Board of Directors anticipates that the reserve fund:
[ x ] will be adequate;
[ _ ] will not be adequate in the current fiscal year for the expected costs of major repair and
replacement of the common elements and assets of the Corporation.
12. There are no plans to increase the reserve fund under a plan proposed by the Board under
subsection 94(8) of the Condominium Act, 1998 for the future funding of the reserve fund.
Legal Proceedings, Claims
13. There are no outstanding judgments against the Corporation.
14. The Corporation is not a party to any proceedings before a court of law, an arbitrator or an
administrative tribunal.
15. The Corporation has not received a notice of, or made an application for, an order to amend
the declaration and description where the court has not made the order, under section 109
of the Condominium Act, 1998.
16. The Corporation has no outstanding claim for payment out of the guarantee fund under the
Ontario New Home Warranties Plan Act.
17. There is not currently an order of the Superior Court of Justice in effect appointing an
inspector under section 130 of the Condominium Act, 1998, or an Administrator under
section 131 of the Condominium Act, 1998.
Alteration / indemnity Agreements
18. With respect to Agreements with owners relating to changes, additions or improvements to
the common elements as per clause 98(1 )(b) of the Condominium Act, 1998.
[ x ] The unit is NOT subject to any Agreement;
[ _ ] The unit is subject to one or more agreements. To the best of the Corporation’s
information, knowledge and belief, the agreements have been complied with by the parties.
286
Chapter 12: Application Analysis – Borrower Documents
Leasing of Units
19. With respect to leased units, during the fiscal year preceding the date of this Status
Certificate and as per section 83 of the Condominium Act, the Corporation:
[ _ ] Has not received notice that any unit within this Corporation was leased;
[ x ] Has received notice that (number of units) units were leased.
Insurance
20. The Corporation has secured all policies of insurance that are required under the
Condominium Act, 1998.
Additional Information
21. It is the purchaser’s responsibility to review the declaration and description pertaining to
the unit, including any exclusive use common element area, to determine whether or not the
vendor or any previous owner or occupant of the unit has carried out a structural change to
the unit or has modified the common elements in circumstances where the Board has not
given its prior written consent. If, following an inspection of the unit by the purchaser, there
is any question as to whether or not a breach of the declaration and/or the rules has/have
occurred, the purchaser is advised to address a specific inquiry to the Corporation by
describing such change or modification in writing to the Corporation at is mailing address,
following which the Corporation will carry out an inspection of the unit and respond
appropriately.
Unit purchasers (and their solicitors) are required to notify, in writing, this Corporation at its
current mailing address immediately following the completion of the transfer of title and
change of ownership to the Unit(s). Until and unless such notification is provided to the
Corporation, its records shall remain in the name of the present owner as prescribed under
the Condominium Act, 1998, and the new owner may not receive notices of any meetings
and other written communication from the Corporation.
Substantial changes to the common elements, assets or services
22. There have been no additions, alterations or improvements to the common elements,
changes in the assets of the Corporation or changes in a service in the Corporation.
Rights of Person Requesting Certificate
23. The person requesting this certificate has the following rights under subsections 76(7) and
(8) of the Condominium Act, 1998 with respect to the agreements listed on the attached
Schedule “A” — Attachments.
Upon receiving written request and reasonable notice, the Corporation shall permit a person,
who has requested a Status Certificate and paid the fee charged by the Corporation for the
Certificate, or an agent of the person duly authorized in writing, to examine the agreements
listed in Schedule “A”— Attachments, hereto, at a reasonable time and at (address).
The Corporation shall, within a reasonable time, provide copies of the agreements to a
person examining them, if the person so requests and pays a reasonable fee to compensate
to the Corporation for the labour and copying charges.
24. The Property Manager of this Corporation is: (Property Management Company Name and
Address)
25. The Directors and Officers of the Corporation are: (List Directors names and positions)
26. The Address of Service, for the Directors and Officers is: (Address and other contact info
followed by signature of president and date. I have authority to bind the Corporation. )
Chapter 12: Applicatio
on Analysis – Borrower Do
ocuments
28
87
ollowing docu
uments are ussually attache
ed to this Stattus Certificate and form part of it:
The fo
1. Certificate of In
nsurance
2. Current Operating Budget
3. De
eclaration of the
t Condomin
nium (to whicch Schedules “A,” “B,” “C,”” “D,” “E,” and “G” are
atttached)
4. By‐Law No. 1 (G
General)
5. By‐Law No. 2 (SShared Facilitiies Agreemen
nt)
6. By‐law No. 3 (D
Driveway Entrance Agreem
ment)
7. By‐law No. 4 (M
Mediation/Arb
bitration Proccedure)
8. By‐law No. 5 (Sttandard Unit))
9. By‐law No. 6 (Amended Sharred Facilities Agreement)
10. Co
ondominium Managemen
nt Agreement with (Managgement Comp
pany Name)
Certtificate o f Indepen
ndent Le gal Advicce (ILA)
In cerrtain cases the
e lender will require
r
that the
t borrowerr (or Guaranto
or, as the case may be)
meet with his or her own lawye
er to discuss the
t terms andd conditions o
of the propossed mortgagee.
m occur in situations
s
where the individual is actingg as a Guaran
ntor for a frien
nd or family
This may
memb
ber, or where
e the mental state
s
of the borrower
b
mayy be in question. The lawyyer acting on
ding ILA, and
behalf of the lende
er will send th
he closing mo
ortgage docum
ments to the lawyer provid
this laawyer will me
eet with the client
c
and exp
plain the morttgage to him or her. Oncee done, this
lawye
er will comple
ete a Certificaate of Indepen
ndent Legal A
Advice, which basically stattes that the
lawye
er has met witth the client, explained the terms and cconditions of the mortgagge, and that
the client attests that he or she
e is not takingg the mortgagge under dureess or undue influence.
Sam
mple Certtificate off Indepen
ndent Leg
gal Advicce
CERTIFICA
ATE OF IND
DEPENDEN
NT LEGAL A
ADVICE
TO:
SU
UPBERANK INC..
T
AND TO:
SU
UPERLAW INC., their solicitorss
UPBANK INC. MORTGAGE
M
LO
OAN TO Mr. J. Borrower,
B
123 Kingston Streeet, Southwest, Toronto, ON,
RE: SU
M1M
M
1M1
r
to the above‐noted transaction, on this 23RD day of NOVEMBER
R, 2012 , I was cconsulted by
With respect
Mr. J. Borrower, in his
h presence alo
one as to the effect
e
of his ex ecuting:
M
Loan
n Commitmentt issued by SUP
PERBANK INC., in his capacityy as Guarantor;
1. A Mortgage
2. A Mortgage/Char
M
rge of Land in favour
f
of SUPEERBANK INC. o ver the lands m
municipally known as 123
Kin
ngston Street, Southwest,
S
Toronto, ON, M1
1M 1M1 (the “M
Mortgage”) in his capacity ass Guarantor;
3. Authorization to insert dates an
nd other incorrrect data;
G
Assignment of Rents and Leases in favour of SUP ERBANK INC. rrespecting the lands
4. A General
mu
unicipally 123 Kingston
K
Streett, Southwest, Toronto,
T
ON, M
M1M 1M1
5. Acknowledgement of receipt off Standard Chaarge Terms andd Direction re: funds;
o Personal Pro
operty Securityy Act Financing Statements;
6. Acknowledgement of Receipt of
on‐Merger Ackn
nowledgementt.
7. No
8. Re‐Direction of fu
unds;
288
Chapter 12: Applicatio
on Analysis – Borrower Do
ocuments
9. Certain Statutoryy Declarations, Warranties, Directions
D
and U
Undertakings iin connection w
with the abovee‐
n; and
notted transaction
10. Any other docum
ments ancillary to the above
(collecctively the "doccuments").
d
andd advised him fully as to the liability which
I explaained to Mr. J. Borrower the nature of the documents
he wo
ould incur by exxecuting them.. I also advised
d him fully as too the manner iin which such lliability could
be enfforced. Mr. J. Borrower
B
informed me, and I am satisfied tthat he fully un
nderstands thee nature and
effect of executing the documentss and that in exxecuting the Doocuments is accting freely and
d voluntarily
ot under any undue influence
e exercised by SUPERBANK IN
NC, or any other person.
and no
orrower as his solicitor and inn his interest o
only and without regard to, o
or
I have given this advvice to Mr. J. Bo
deration for the
e interest of SU
UPERBANK INC
C., or any otherr person.
consid
n acting on be
ehalf of SUPER
RBANK INC., or any other perrson in connecttion with this m
matter.
I am not
o Solicitor: ___
____________
________________
Name and Address of
he statements made in this CCertificate are ttrue and that M
Mr. Borrower’ss
I hereby acknowledgge that all of th
m herein was consulted by me
m as my persoonal solicitor aand in my interrest only.
lawyer, in advising me
WITNESS:
)
)
_____________
____________
______
) ____
)
Cre ditor Insu
urance A pplicatio n
This iss a documentt used by an Insurance Com
mpany to dettermine the eeligibility of an
n applicant fo
or
credittor insurance. Creditor inssurance has become
b
a regular offering in a mortgage transaction
n.
Used to ensure thaat applicants have protection against thhe perils asso
ociated with d
death,
disability or job losss, it is importtant to consid
der.
Failurre of the morttgage agent to adequatelyy advise the ppotential borrrower of his o
or her option
to obttain creditor insurance can
n result in the
e agent beingg sued by the borrower if tthe borrower
was not
n adequatelly insured and
d one of the covered
c
perilss occurred. TTo protect bo
oth the
borro
ower and the agent, the aggent must info
orm the borroower of the aavailability of the insurancee
and have the borro
ower either waive
w
the insu
urance or appply for it.
Su
uccess Tip – Answer honestly in
n the crediitor insura
ance appliccation
Be
e sure to advisse your appliccant to answe
er all of the qquestions in th
he application
n honestly. Iff
yo
our applicant answers
a
“no”” to any of the
e health quesstions the app
plicant must p
provide
furrther informaation and explanations. Once the insurrance compan
ny has review
wed the
ap
pplication it may
m then requ
uest additionaal informationn or medical iinvestigation,, such as a
do
octor’s report.
plication.
The fo
ollowing docu
ument is a sam
mple of a typical creditor iinsurance app
Chapter 12: Applicatio
on Analysis – Borrower Do
ocuments
Sam
m ple Cred
ditor Insu
urance Ap
pplication
n
28
89
290
Chapter 12: Applicatio
on Analysis – Borrower Do
ocuments
These are the three
e health
question
ns. The applicant must
answer th
hese question
ns honestly
to ensurre that a claim
m is paid in
the futture. If not an
nswered
honestly the insurer may
m decline
to
o pay the claiim!
Chapter 12: Applicatio
on Analysis – Borrower Do
ocuments
29
91
292
Chapter 12: Application Analysis – Borrower Documents
12.5 Summary
Under the MBLAA and its Regulations the brokerage has a significant responsibility, which falls
on the shoulders of the principal broker, to ensure that its brokers and agents take all
reasonable steps to provide mortgages that are suitable to its borrowers, lenders and investors.
This requires that brokers and agents be able to prove the information provided to them by
their borrower by obtaining the proper documentation.
In addition the MBLAA requires the brokerage to have policies and procedures in place that
detects and prevents fraud, whenever possible, and ensures the accuracy of information and
documentation gathered by its brokers and agents.
The successful implementation of these policies and procedures requires that the brokerage’s
brokers and agents understand what constitutes fraud and are vigilant in watching for the
warning signs typically associated with fraud. It is critical that a broker/agent take the proper
steps to verify a borrower’s identity and assess all of the information and documentation
obtained from the borrower.
The proper employment of these safeguards will ensure that the brokerage remains compliant
and that its borrowers, lenders and investors are protected from being exposed to potentially
harmful transactions. These steps will also ensure that the brokerage, its brokers and agents are
adequately protected from being involved in potential criminal wrongdoing and minimize the
likelihood of civil prosecution when, as will undoubtedly happen, a transaction is deemed to be
fraudulent through no fault of the brokerage.
Chapter 12: Application Analysis – Borrower Documents
293
12.6 Key Terms and Definitions
Agreement of Purchase and Sale
A document used in the purchase of real estate in Ontario
Certificate of Independent Legal Advice (ILA)
A document that states that the borrower’s lawyer has met with the borrower, explained the
terms and conditions of the mortgage, and that the borrower attests that he or she is not taking
the mortgage under duress or undue influence
Creditor Insurance Application
A document used by an insurance company to determine the eligibility of an applicant for
creditor insurance
Employment Insurance (EI) premiums
Premiums deducted from an employee’s earnings which go into a general fund; EI premiums
are automatically deducted from wages but are not paid by self‐employed workers
Estoppel Certificate
See Status Certificate
Gift Letter
A document that outlines the terms of a gifted down payment in a real estate purchase
transaction; in other words, the down payment came from a source other than the purchaser.
Job Letter
A document provided to an individual by his or her employer. This document is often required
by a lender, in addition to other documentation, to verify an applicant’s employment as well as
income
Mortgage Statement
A document provided by a homeowner’s current mortgage provider to the homeowner which
outlines the details of the current mortgage
Multiple Listing Service (MLS)
One or more databases available to real estate agents/brokers which allow real estate brokers
representing sellers under a listing contract to widely share information about the seller’s
property with other real estate brokers who may represent potential buyers. In some, but not
all cases, real estate listings involve MLS at the outset because of the clear marketing
advantages.
Notice of Assessment (NOA)
A form that the federal government issues when a personal tax return has been completed and
filed. This document provides a breakdown of the year’s income along with the balance owing
or refund.
Paystub
A document provided to an individual by his or her employer each time the employee is paid (by
cheque, direct deposit or other), and is often required by a lender in addition to a job letter
294
Chapter 12: Application Analysis – Borrower Documents
and/or any other document used to verify the employee’s income
Property Assessment
A document provided by the Municipal Property Assessment Corporation (MPAC) to
homeowners to illustrate the value of a home, as assessed or determined by MPAC, for the
purposes of calculating property taxes; although homeowners might argue about the value of
their home, it is the MPAC Property Assessment Value that is used to determine the property’s
value for tax purposes
Self‐employed commissions
Commissions paid to an independent agent, in other words, someone working not as an
employee but on a contract or self‐employed basis, who earns commission based directly on
production, such as sales volume. This amount will be shown on a T4A
Status Certificate
Formerly known as an Estoppel Certificate, this is a document provided by a condominium
corporation (the entity that runs the condominium) to the owner of the condominium unit to
indicate the current status of the corporation, among other items
TBA
To Be Advised. This abbreviation is typically used when information is currently unavailable but
will be available at a later date.
T4
A document provided to an individual by his or her employer, typically when there is
employment income, such as salaried or hourly income. Employers are required by law to
provide the T4 so that employees may file their income tax returns. The T4 indicates, among
other things, the amount of money the employee earned in the one year period, as well as the
deductions from earnings
T4A
A document provided to an individual by his or her employer, typically when there is self‐
employed commission income or other income not listed on a T4. Employers are required by
law to issue the T4A when applicable so the individual may file his/her income tax return. The
T4A indicates, among other things, the amount of money the individual earned in this manner
in the one year period
Tax Bill
A document provided to a homeowner by the municipal tax authority in the jurisdiction in which
the property is located. The tax bill reflects, for the mortgage agent, the amount of taxes
payable by the homeowner
Chapter 12: Applicatio
on Analysis – Borrower Do
ocuments
29
95
12.7
7 Review
w Questio
ons
Answers to the Revview Questio
ons are found at www.REM
MIC.ca
Sho
ort Answe
er Questio
ons
1. Briiefly describe
e when a morttgage agent would
w
be req uired to obtaain the following
do
ocuments from
m an applican
nt.
a) T4
b) T4A
c) Job lette
er
d) Paystub
b
e) NOA
f) Agreeme
ent of Purchaase and Sale
g) Gift letter
h) Property assessmentt
i) Propertyy tax bill
j) Mortgagge statement
k) Status certificate
2. De
escribe the infformation fou
und in an MLSS document.
3. Wh
hat is a certificate of indep
pendent legall advice and uunder what ciircumstancess would it be
req
quired?
4. Un
nder what circcumstances must
m a mortgaage agent com
mplete a cred
ditor insurancce
application?
5. Wh
hat information must be in
n a job letter for it to be accceptable to a lender?
6. The next section contains blaank documen
nts found in t his chapter. TTest your kno
owledge of
the
ese documen
nts by writing the appropriate informatiion in documents’ blank fields without
refferring to the chapter. On
nce done, refe
er to the chappter to review
w the accuraccy of your
answers.
296
Chapter 12: Applicatio
on Analysis – Borrower Do
ocuments
Chapter 12: Application Analysis – Borrower Documents
297
298
Chapter 12: Application Analysis – Borrower Documents
Chapter 13: Application Analysis – Application Ratios
299
Chapter 13: Application Analysis – Application
Ratios
Learning Outcomes
Successful understanding of the concepts presented in this chapter will enable the learner to:
 Perform a loan to value calculation in a given scenario
 Calculate the maximum mortgage amount using the loan to value ratio
 Calculate the GDS and TDS ratios in a given scenario
 Calculate the maximum mortgage amount using the TDS ratio
 Indicate the industry standards regarding the GDS and TDS ratios
Introduction
The mortgage agent has three basic ratios that must be applied to virtually every transaction:
the loan to value (LTV), the gross debt service ratio (GDS) and the total debt service ratio (TDS).
The LTV is used to determine the maximum loan possible based on the value of the property,
while the GDS and TDS ratios determine the maximum loan possible based on the borrower’s
income. The lender will then use the lowest of these three loan amounts as the mortgage
amount.
While the majority of lenders will use all three of these ratios, the GDS is not typically used in
sub‐prime transactions or by private lenders.
In this chapter, the mortgage agent will be introduced to these three ratios and taught how to
apply them in a mortgage transaction.
13.1 Loan to Value Ratio (LTV)
The LTV is the amount of the loan, in dollars, in relation to the value of the property, in dollars,
expressed as a percentage that is typically rounded off to two decimal places (unless it is an
exact number). For example, if the LTV is exactly 90% there is no need to show any decimal
places. Lenders use this ratio to determine the maximum loan amount for a given property
based on the specific type of loan product that is offered by the lender.
There are two calculations when using the LTV. The first is calculating the LTV of a mortgage. To
accomplish this we divide the amount of the loan by the value of the property. For example, if
we had a $200,000 mortgage and a $400,000 house, the equation would look like this:
$200,000 / $400,000
Loan
Amount
Value of the
house
The second use for the loan to value is to determine a maximum mortgage amount. To
accomplish this we multiply the loan to value by the value of the house. For example, if we have
a loan to value of 90% and a $400,000 house, the equation would look like this:
300
Chapter 13: Applicattion Analysis – Application
n Ratios
Loan to
Value
90%
% x $400,000
Value of the
house
Pa
ause for cla
arification
n – The “/”” characterr
Th
he calculations in this chap
pter use the “//” character tto represent tthe division ssign.
e these calculations let’s lo
ook at a few eexamples.
To better illustrate
Calc
culating the
t
LTV of
o a 1 s t Mortgage
M
Example 1
ount of $270, 000. The pro
operty he is purchasing is
A client would like a 1st mortgagge in the amo
st
0. What is the LTV of the proposed
p
1 mortgage?
valued at $300,000
Solutiion
LTV
L = (Propossed 1st mortgaage amount / Property vallue) x 100
LTV = (270,0
000 / 300,0000) x 100
LTV
V = .90 x 100
LTV
L = 90%
Therefore, the loan
l
to value of the propoosed 1st mortggage is 90%.
Pa
ause for cllarification
n – Converrting decim
mals to perrcentages
When
W
you calcculate a perceentage the de
ecimal numbeer must be multiplied by 1
100 to obtain
the percentage
e. For example, 10 is 10% of 100. We ccan calculate this by dividing 10 by 100
(10/100). Thatt, however, eq
quals 0.10. The answer is not 0.10 perccent. To convvert the
de
ecimal to its percentage
p
yo
ou must multiply it by 100 . Therefore, 0.10 multiplied by 100
eq
quals 10. Thiss (10) is the percentage.
Example 2
mount of $1885,000. She h
has told you
A client would like to refinance her 1st mortggage in the am
that her
h home is worth
w
$222,00
00. What is th
he LTV of thiss proposed m
mortgage?
Solutiion
LTV
L = (Propossed 1st mortgaage amount / Property vallue) x 100
LTV = (185,0
000 / 222,0000) x 100
LTV = (8.33333333E‐1) x 100
Chapter 13: Applicattion Analysis – Application
n Ratios
30
01
LTV = .8
833333333 x 1100
LTV = 83.33%
Therefore the loaan to value off the proposeed 1st mortgagge is 83.33%.
Pa
ause for cllarification
n – “E” in your
y
displa
ay
Although this was
w discussed
d in chapter 8, remember tthat if you evver get an ansswer on your
caalculator’s display that lookks like our lasst example,
8.3
33333333E‐1
this means thatt you must move
m
the decim
mal place onee place to thee left, or the n
number of
places indicated by the num
mber followingg the E. In th is example th
he actual answ
wer would
e .833333333
3
be
Calc
culating the
t
LTV of
o a 2nd Mortgage
e
To calculate the LTTV of a 2nd mo
ortgage the mortgage
m
agennt must comp
plete the sam
me process as
above
e; however he
e or she mustt also include the first morrtgage in the calculation.
Example 1
A client has a 1st mortgage
m
in th
he amount of $270,000, annd would like an additionaal $15,000 as a
2nd mortgage to co
onsolidate cre
edit card debtt. The properrty is valued aat $300,000. The loan to
value would be callculated as fo
ollows:
Solutiion
LTV = [(1sts mortgage amount + Prop
posed 2nd moortgage) / Pro
operty value] x 100
LTV = [(270,000 + 15,000) / 3000,000] x 1000
LTV = (285,0
000 / 300,0000) x 100
LTV = 0.95 x 100
LTV
L = 95%
The
erefore the lo
oan to value of
o the propossed 2nd mortggage is 95%.
Example 2
A client has a 1st mortgage
m
in th
he amount of $185,000 an d would like aan additionall $20,000 as a
2nd mortgage to re
enovate her house. The prroperty is valuued at $222,0000. The loan
n to value
would
d be calculate
ed as follows:
Solutiion
LTV = [(1sts mortgage amount + Prop
posed 2nd moortgage) / Pro
operty value] x 100
LTV =[(185,000 + 20,000) / 2222,000] x 100
302
Chapter 13: Applicattion Analysis – Application
n Ratios
LTV = (205,0
000 / 222,0000) x 100
LTV = 9.23423423E‐1 x 100
LTV = 0.9
923423423 x 100
LTV = 92.34%
Therrefore the loaan to value off the proposeed 2nd mortgage is 92.34%..
Calc
culating the
t
LTV of
o Additio
onal Morttgages
If the applicant is applying
a
for a 3rd mortgage
e (or any morrtgage other tthan a 1st mo
ortgage) the
mortggage agent must complete
e the same prrocess as abovve; however he or she mu
ust also includ
de
all mo
ortgages that rank before the
t proposed
d mortgage inn the calculatiion.
Example
A client has a 1st mortgage
m
in th
he amount of $270,000, annd a $15,000 2nd mortgagee and would
like to
o borrow an additional
a
$7,,500 to repayy a loan that hhas been placced in collections. The
appliccant believes that this is th
he best option
n since both tthe 1st and 2nnd mortgages are closed an
nd
canno
ot be refinancced before their respective
e renewal dattes. The prop
perty is valued at $300,000
0.
The lo
oan to value would
w
be calcculated as folllows:
Solutiion
LTV = [(1st mortgage + 2nd mortgage + Proposed 3rd mortgage) / Property valu
ue] x 100
LTV = [(2
270,000 + 15,,000 + 7,500) / 300,000] x 100
LTV = (292,5
500 / 300,0000) x 100
LTV = 0.975 x 1000
LTTV = 97.5%
erefore the lo
oan to value of
o the proposeed 3rd mortgaage is 97.5%.
The
Usin
ng the LT
TV to Cal culate a Maximum
m Mortga
age Amou
unt
When
n using the LTTV to calculate
e a maximum
m mortgage am
mount, the m
mortgage agen
nt needs to
know the LTV that is offered byy the lender as well as the value of the p
property. Knowing the
lende
er’s LTV is straaightforward and involves understandinng the lenderr’s products. Knowing the
value of a propertyy can be difficcult unless there has beenn an appraisal performed o
or it is a
hase (under normal circum
mstances the value
v
of a prooperty being p
purchased is the purchasee
purch
price)).
Chapter 13: Applicattion Analysis – Application
n Ratios
30
03
ormula for de
etermining the maximum mortgage
m
am
mount using th
he LTV calculaation is as
The fo
follow
ws:
M
Amo
ount = LTV / 1100 x Propertty Value
Maximum Mortgage
The LTTV is divided by 100 since it is a percentage and the calculation rrequires it be converted to
o
its decimal equivallent.
Example
A borrower wishess to purchase a new home
e and has askeed his mortgaage agent to aadvise how
much of a down paayment he re
equires. The purchase
p
pricce is $400,0000. The mortggage agent haas
determined that th
his borrower qualifies with
h a lender whho offers a maaximum loan to value of
95%. Our next step is to calculaate the mortggage amount based on thiss loan to valu
ue.
Solutiion
Maximum
m Mortgage Amount
A
= 95%
% / 100 x $4000,000
Maxim
mum Mortgagge Amount = .95 x $400,0000
Maximum Mortggage Amountt = $380,000
Therefore the maxim
mum mortgage amount baased on the LLTV is $380,00
00.
To answer the borrower’s question, the borrrower would need a $20,0000 down payyment which is
the pu
urchase price
e minus the mortgage
m
($40
00,000 ‐ $3800,000 = $20,0000).
13.2
2 Gross Debt
D
Serrvice (GDS
S) and To
otal Debtt Service (TDS)
Ratiios
The GDS
G and TDS are
a debt service ratios thatt are designeed to determine whether a mortgage
payment can be affforded by the
e potential bo
orrower. A d ebt service raatio is the rattio of debt to
incom
me expressed as a percentaage. While th
hese ratios haave not changged in several decades,
they remain
r
the fu
undamental calculations in
n determiningg affordabilityy.
Calc
culating the
t
Gross
s Debt Se
ervice Ra
atio (GDS
S)
Indusstry Standard – 32%
The GDS
G is designe
ed to determiine if the pote
ential borrow
wer can afford
d the proposeed mortgage
payment based on
n his or her income (or a co
ombined incoome, if there iis more than one
appliccant). The GD
DS combines the
t costs thatt a potential borrower hass regarding sh
helter and
divide
es that cost by his or her gross income (the
(
income bbefore taxes aare deducted
d).
The maximum
m
ratio that is typiccal in the morrtgage industtry is 32%. Th
his means thaat 32% of a
poten
ntial borrower’s gross income may be used
u
to servic e his or her shelter costs. The GDS hass
one main
m purpose: to determin
ne if the prop
posed mortga ge payment iis within the lender’s
maxim
mum GDS ratio. The GDS is
i calculated using
u
the folloowing equatiion:
GD
DS = [(PITH + ½ Condo Maiintenance feee) / Gross Income] x 100
304
Chapter 13: Applicattion Analysis – Application
n Ratios
The Compon
nents of GDS
G
To understand how
w to calculate
e the GDS, lett’s break it doown into each
h of its compo
onents.
PITH
The PITH represents the Princip
pal, Interest, Property Tax es, and Propeerty Heat. Leet’s have a
look at
a what each letter of PITH
H represents.
nterest)
PI (Principal and In
The Principal and Interest consiist of the amo
ount of the m
mortgage paym
ment necessaary to repay
the bllended principal and intere
est for the paayment periodd.
T (Pro
operty Taxes)
The property taxess consist of th
he actual amo
ount of propeerty taxes payyable on the p
property.
H (Pro
operty Heat)
CMHC
C states that mortgage
m
pro
ofessionals arre expected too ask the prospective borrrower what
the monthly
m
heatin
ng costs are for
f the subjecct property annd use the acttual heat cost records, if
provid
ded by the prrospective borrower. Where no history is readily avaailable, the heeat costs used
d
must be a reasonable estimate taking into co
onsideration factors such as property ssize, location
and/o
or type of heaating system. Such estimattes are to be based on a so
ound rationalle, providing
an acccurate estimaate that is refflective of the
e characterist ics of the pro
operty being p
purchased. 1
a
a stand
dard amount of $100 per month for heeat for most p
properties,
Most lenders will accept
while a higher amo
ount may be used for a larrge property. Although heeat varies from
m property to
o
prope
erty, this standard amountt is applied to
o all debt servvice ratio calculations unleess advised
otherwise by the le
ender.
he purposes of
o this course $100 will be assumed unl ess otherwisee noted.
For th
Condo
ominium Maintenance Fe
ee
The co
ondo maintenance fee is the
t fee that a condominiu m unit ownerr pays to the condominium
m
corpo
oration for the
e maintenancce of the com
mmon elemen ts. Common elements aree those itemss
that are
a common to
t all unit owners such as upkeep of thee building, lobby, hallwayss, pool,
gymnasium, etc. The
T GDS uses fifty percent of this expennse. Naturallyy, if the property being
mortggaged is not a condominium, this part of
o the formulaa is excluded.
Grosss Income
The gross income is
i the potentiial borrower’ss total incom e before payiing income taaxes.
Conve
erting to a Pe
ercentage
The entire amountt must be multiplied by on
ne hundred too provide a peercentage.
1
http:://www.cmhc‐schl.gc.ca/en/hoficlincl/molo
oin/mupr/muppr_015.cfm
30
05
Chapter 13: Applicattion Analysis – Application
n Ratios
Example 1
Mr. Borrower wish
hes to purchase a home vaalued at $3500,000. He hass $87,500 as a down
payment, leaving a required mo
ortgage in the
e amount of $$262,500. Yo
ou have deterrmined that
his monthly mortggage paymentt will be $1,67
79.50. This iss not a condominium and ttherefore
there is no maintenance fee. Mr.
M Borrower has an annuaal income of $$77,500 and p
pays $3,100
per ye
ear in propertty taxes. What is Mr. Borrrower’s GDS??
Solutiion
GDS
G = [(PITH) / Gross Incom
me] x 100
Annual
Property Taxes
DS = [(($1,679
9.50 x 12) + ($
$100 x 12) + $$3,100)/ $77,,500] x 100
GD
Monthly
mortgage
payment x 12
= the annual
mortgage
payment
GDS = [($
$20,154 + $1,200 + 3,100)) / $77,500] x 100
GDS = ($24,454 / $77,5000) x 100
Monthly heat
x 12 = the
annual heating
payment
GDS = 3.1
15535484E‐1 x 100
GDS = 0.315535484 x 100
DS = 31.55%
GD
The
erefore Mr. Bo
orrower’s GD
DS is 31.55%.
In thiss case Mr. Bo
orrower’s GDSS is within the
e acceptable iindustry standard of 32%, meaning thaat
his GD
DS will qualifyy with most le
enders.
Pa
ause for cllarification
n – Frequen
ncy of payyments in G
GDS
All figures in th
he GDS calcullation must be
b based on thhe same freq
quency. In Exxample 1 the
mortgage paym
ment is month
hly and the in
ncome is annuually. It is theerefore necesssary to
an
nnualize all figgures, which is why the mo
ortgage paym
ment and heat is multiplied
d by twelve.
Example 2 – Condo
ominium Uniit
Ms. House
H
owns a condominium
m unit valued
d at $200,0000 that has a m
mortgage with
h an
outstaanding balancce of $120,00
00. She would
d like to refinnance this mo
ortgage, increasing it to
$145,000. Ms. House has informed you thatt the monthlyy condominiu
um maintenan
nce fee is $35
50
and her property taxes
t
are $1,9
900 per year while
w
she hass a monthly in
ncome of $5,0
000. Based o
on
your calculations
c
you
y have dete
ermined that her monthly mortgage paayment based
d on this
propo
osed mortgagge will be $927.72. What is her GDS?
Solutiion
½ of the condo
nce fee
maintenan
DS = [(PITH + ½ Condo Maiintenance feee) / Gross Income] x 100
GD
GDS
G = [(($927
7.72 x 12) + ($
$100 x 12) + (.50
( x $350 x 12) + $1,900)) / ($5,000 x 1
12)] x 100
306
Chapter 13: Applicattion Analysis – Application
n Ratios
GD
DS = [($11,132.64 + $1,200
0 + $2,100 + $$1,900) / $600,000] x 100
GDS
G = ($16,33
32.64 / $60,0000) x 100
GDS = 2.7
72210667E‐1 x 100
GDS = 0.272210667 x 100
GD
DS = 27.22%
Th
herefore Ms. House’s GDSS is 27.22%.
ouse’s GDS is within the accceptable induustry standarrd of 32%, meeaning that
In thiss case Ms. Ho
Ms. House’s
H
GDS will
w qualify with most lende
ers.
Su
uccess Tip – If GDS iss above ind
dustry stan
ndard
If the GDS is higgher than the
e allowable in
ndustry stand ard it will be necessary to consult
further with the client to eitther bring the
e GDS within acceptable lim
mits by decreeasing the
paayment or sugggest a lender that may allow a GDS th at is higher th
han the indusstry standard.
GDS
S and Se cond Mo rtgages
Since the debt servvice ratio includes all costss for shelter, w
when you aree calculating tthe GDS for a
2nd mortgage appliication, you must
m include in
i the GDS thhe 1st mortgagge payment aas well as the
propo
osed 2nd morttgage paymen
nt.
Example – 2nd Morrtgage
Tedro
os is applying for a 2nd morrtgage in the amount
a
of $117,000. You h
have determined that the
mortggage payment for this morrtgage will be
e $200.88 perr month. Tedros has inform
med you thatt
he live
es in a single family detach
hed home and that his 1st mortgage payment is $25
55.92 per weeek
and his property taaxes are $2,400 per year. Tedros earnss $6,350 per m
month. Whatt is Tedros’
nd
GDS under
u
this pro
oposed 2 mo
ortgage?
Solutiion
Since Tedros lives in a single fam
mily detached
d home theree is no condom
minium maintenance fee
nd
st
payab
be included in
ble. Since thiss is a 2 morttgage the 1 mortgage payyment must b
n this
calcullation.
GDS
G = [(PITH) / Gross Incom
me] x 100
GDS = [(($255.92 x 52) + ($200.88 x 12) + ($100 x 112) + 2,400) / ($6,350 x 12
2)] x 100
1st mortgage
e
payment
GDSS = [($13,307..84 + $2,410.5
56 + $1,200 + $2,400) / $776,200] x 100
GDS
G = ($19,31
18.40 / $76,2200) x 100
GDS = 2.5
5352231E‐1 x 100
Prroposed
mortgaage payment
Chapter 13: Applicattion Analysis – Application
n Ratios
30
07
GDS = 0.25352231 x 100
DS = 25.35%
GD
Therefore Te
edros’ GDS is 25.35%.
In thiss case Tedross’ GDS is withiin the acceptable industryy standard of 32%, meanin
ng that his GD
DS
will qualify with most lenders.
Calc
culating the
t
Total Debt Se
ervice Ra tio (TDS ): Pre-Qu
ualifying
Indusstry Standard ‐ 40%
Like the GDS the TDS is designe
ed to determine if the borrrower can affford the poten
ntial mortgagge
payment, howeverr this calculattion also inclu
udes all otherr debts that th
he borrower has.
The TDS has two main
m functions. It can be used
u
to:
1. Pre
e‐qualify the borrower by determining the maximum
m mortgage p
payment thatt the borroweer
caan afford.
2. Ve
erify that the payment
p
quaalifies by determining if thee potential m
mortgage paym
ment falls
within
w
the lend
der’s TDS ratio.
e‐qualify a po
otential borro
ower it is nece
essary to deteermine the am
mount of a m
mortgage
To pre
payment that he or
o she can affo
ord based on the TDS calcuulation, and tthen use thatt payment
amou
unt to determ
mine the maxim
mum mortgage amount.
Pre‐qualifying a po
otential borro
ower based on
n the TDS is ccalculated by using the folllowing
equattion:
Maxximum Mortgage Paymentt = (Income x Max TDS / 1000) – (Propertty Taxes + Heeat + ½ Condo
o
Maintenancce Fee + Othe r Debts)
nce the TDS Ratio
R
is a percentage, it is necessary
n
to cconvert it to iits decimal eq
quivalent by
 Sin
divviding the num
mber by 100.
n be defined as
a other obliggations that, iif the borrow
wer failed to m
make a
 Other debts can
d require monies to be paid to anotherr party. For eexample, if a b
borrower had
d
payment, would
a car
c loan and failed
f
to make
e his or her monthly
m
paym
ments, the carr would be rep
possessed and
the
e borrower would
w
still owe
e the balance
e of the loan. If the borrow
wer failed to make his or
her monthly car insurance payment, on the other han d, the borrow
wer would no
ot owe any
furrther money since
s
the car insurer would cancel the iinsurance policy.
Examples of items included in the TDS ratio:
 Loans
 Mo
ortgage paym
ments
 Cre
edit cards
 Child support
 Alimony
ny payment th
hat, if disconttinued, would
d result in a b alance owingg.
 An
Examples of items not included
d in the TDS raatio:
308





Chapter 13: Applicattion Analysis – Application
n Ratios
RR
RSP contributiions
Car insurance
Pro
operty insuraance
Life insurance
An
ny payment th
hat, if disconttinued, would
d not result inn a balance ow
wing
Su
uccess Tip – Outstanding balan
nce or cred
dit limit in the TDS?
Lenders will typ
pically use 3%
% of the outstaanding balan ce on a creditts cards and o
other types o
of
un
nsecured revo
olving credit as
a the paymen
nt amount w hen calculatin
ng the TDS, although this
can vary from le
ender to lend
der. For secured debts CM
MHC suggests lenders calcu
ulate what the
mo
onthly payme
ent would be if the debt was
w amortizedd over 25 yearrs. It is imporrtant to know
w
ho
ow a lender caalculates the TDS before submitting an application tto that lenderr.
Example 1 – Condo
ominium Uniit
Ms. House
H
owns a condominium
m unit valued
d at $200,0000 that has a m
mortgage with
h an
outstaanding balancce of $120,00
00. She would
d like to refinnance this mo
ortgage, and w
wishes to
know how much sh
he qualifies to
o borrow. Ms. House has informed you
u that the mo
onthly
ominium maintenance fee
e is $350 and her property taxes are $1,,900 per yearr while she haas
condo
a mon
nthly income of $5,000. Further investigation showss that Ms. Ho
ouse has a carr payment of
$310 per month, credit
c
card payments of $1
145 per monthh and a loan payment of $
$225 per
month. Ms. House
e also makes weekly contrributions of $550 to her RRSSP, spends $1
185 per month
for he
er car insuran
nce, and has a life insurancce policy that costs her $300 per month.
What is the maxim
mum monthly mortgage paayment for whhich Ms. House qualifies b
based on a TD
DS
of 40%
%?
Solutiion
The first step is to determine which
w
payments are includeed in the TDSS calculation aand which aree
not. The
T car paym
ment, credit caard payment, and loan payyment must b
be included as other debtss,
while the weekly RRSP
R
contribu
ution, car insu
urance, and liffe insurance payments aree not.
The se
econd step is to determine
e whether the
e calculation will be done based on mo
onthly or
annuaal numbers. This
T example has a mixture of monthly income, mon
nthly paymen
nts, and an
annuaal amount of property taxe
es. For the saake of simpliccity in this exaample the annual propertyy
taxes will be divide
ed by twelve to
t determine
e the monthlyy payment and all other deebts will be
m
Heaat is standard
dized at $100 per month.
kept monthly.
Maximum
M
Mo
ortgage Payme
ent (MMP) = Income x (MA
AX TDS / 1000) – (Property Taxes + ½
Condomin
nium Mainten
nance Fee + H
Heat + Other D
Debts)
MM
MP = ($5,000 x 40% /100) – ($1,900 /12
2) – (.50 x $3550) – $100 (heeat) ‐ $310 ‐ $
$145 ‐ $225
MP = ($5,000 x .40) ‐ $158.3
33 – $175 – $$100 ‐ $310 – $145 – $225
MM
MMP = $2,000 ‐ $158.33 ‐ $175 ‐ $1000 ‐ $310 ‐ $1445 ‐ $225
Other Debts
Chapter 13: Application Analysis – Application Ratios
309
MMP = $886.67
Therefore the maximum mortgage payment that Ms. House qualifies for is $886.67 per month.
Example 2
Mr. Orange would like to apply for a mortgage to purchase a new home valued at $400,000.
Mr. Orange has stated that the property taxes are $2,900 per year. His income is $73,000 per
year. Further investigation shows that Mr. Orange has a car payment of $275 per month, credit
card payments of $195 per month and a loan payment of $300 per month.
a) What is the maximum monthly mortgage payment for which Mr. Orange qualifies based on a
TDS of 40%?
b) What is the maximum loan amount for which Mr. Orange qualifies based on an interest rate
of 6% compounded semi‐annually, not in advance, and a 25‐year amortization?
Solution
a) For the sake of simplicity in this example the annual property taxes and annual income will be
divided by twelve to determine the monthly amount and all other debts will be kept monthly.
Heat is standardized at $100 per month.
Maximum Mortgage Payment (MMP) = Income x (MAX TDS / 100) – (Property Taxes + ½
Condominium Maintenance Fee + Other Debts)
MMP = [($73,000 / 12) x (40% /100)] – ($2,900 /12) – $100 (heat) – $275 ‐ $195 ‐ $300
MMP = ($6,083.33 x .40) ‐ $241.67 – $100 ‐ $275 – $195 – $300
MMP = $2,433.33 ‐ $241.67 ‐ $100 ‐ $275 ‐ $195 ‐ $300
MMP = $1,316.66
Therefore the maximum monthly mortgage payment for which Mr. Orange qualifies is
$1,316.66.
b) To determine the maximum mortgage amount, based on the payment that was calculated
above, it is necessary to complete the following calculation:
6 SHIFT NOM%
2 SHIFT P/YR
SHIFT EFF% 6.09
12 SHIFT P/YR
SHIFT NOM% 5.92634643744
1,316.66 +/‐ PMT
O FV
12 X 25 N
PV 205,790.304644
The difference between this
calculation and calculating a
mortgage payment in chapter 8 is
simply that here we enter the
payment and solve the PV
310
Chapter 13: Applicattion Analysis – Application
n Ratios
efore the maxximum loan amount based
d on these terrms is $205,790.30
There
Calc
culating the
t
Total Debt Se
ervice Ra tio (TDS ): Verifyi ng
If the mortgage aggent has alreaady determine
ed the mortg age paymentt that the potential
borro
ower requires, it is then necessary to de
etermine if th at payment m
meets the ind
dustry
standard 40% TDS ratio or whattever the ratio is for the leender we’ve cchosen or aree considering..
Example 1
Malikk and Nancy Borrower
B
are purchasing a house valuedd at $450,0000 and have $8
80,000 as a
down
n payment, resulting in a re
equired mortgage of $3700,000. You haave reviewed their
appliccation and have determine
ed that the le
ender best forr them is currrently offeringg a rate of
4.75%
% with a 25‐ye
ear amortizattion and monthly paymentts. You have calculated th
hat the
monthly mortgage
e payment on this propose
ed mortgage w
will be $2,0999.59.
From their application you know
w that they have a combinned monthly income of $8
8,355. They
have car paymentss of $175 and
d $300 per mo
onth, credit c ard payments of $190 perr month and a
stude
ent loan paym
ment of $100 per
p month. The
T property taxes for thiss home are esstimated to be
$3,10
00 per year. Based
B
on the lender’s TDS ratio of 40%,, will they quaalify for this p
proposed
mortggage?
Solutiion
Heat is standardize
ed at $100 pe
er month.
TDS = [(PITH + Oth
her Debts) / I ncome] x 1000
TDSS = [($2,099.5
59 + $100(heaat) + $175 + $300
$
+ $190 + $100 + ($3,1100 / 12)) / $8
8,355] x 100
TDS = [($2,969.59
9 + 258.33) / $$8,355] x 1000
TDS = ($3,22
27.92 / $8,35 5) x 100
TDS = 3.8
86345901E‐1 x 100
TDS = .3
386345901 x 100
TD
DS = 38.63%
There
efore Malik an
nd Nancy quaalify for this mortgage
m
baseed on the lender’s TDS req
quirement.
Su
uccess Tip – If TDS is above ind
dustry stan
ndard
If the TDS is higgher than the
e allowable industry standaard, it will be necessary to
o consult
further with the client, eithe
er to bring the TDS within acceptable limits by reduccing debt or
de
ecreasing the payment, or to suggest a lender that m
may allow a TTDS that is higgher than
industry standaard.
Chapter 13: Application Analysis – Application Ratios
311
Example 2
Anna and Ronin own a home and would like to obtain a $31,000 2nd mortgage to consolidate all
of their current debts. Their property is valued at $450,000 and they currently have a 1st
mortgage that has monthly payments of $1,454.02. You have reviewed their application and
have determined that the lender best for them is currently offering a rate of 12.75% with a 15‐
year amortization and monthly payments. You have calculated that the monthly mortgage
payment on this proposed mortgage will be $380.55.
From their application you know that they have a combined monthly income of $7,400. They
have car payments of $175 and $300 per month, credit card payments of $190 per month and a
student loan payment of $100 per month. The property taxes for this home are $2,800 per
year. Based on the lender’s TDS ratio of 40%, will they qualify for this proposed mortgage?
Solution
It is necessary to include the first mortgage payment in this calculation. Since this is a debt
consolidation and all of the applicants’ debts will be paid off from the proceeds of this proposed
2nd mortgage, they must not be included in this calculation. Heat is standardized at $100 per
month.
TDS = [(PITH + Other Debts) / Income] x 100
TDS = [(($1,454.02 + $380.55 + $100 + ($2,800 / 12)) / $7,400] x 100
TDS = [($1,939.57 + 233.33) / $7,400] x 100
TDS = ($2,172.90 / $7,400) x 100
TDS = 2.93635135E‐1 x 100
TDS = .293635135 x 100
TDS = 29.36%
Therefore Anna and Ronin qualify for this mortgage based on the lender’s TDS requirement.
13.3 Calculating the Maximum Mortgage Amount
The lender will use either the LTV or GDS/TDS calculation when determining the maximum
mortgage amount. The lender’s decision will be based on the lower of the two. For example, if
a property is valued at $400,000 and a lender’s maximum LTV is 90%, the maximum loan based
on the LTV would be $360,000 (.90 x $400,000). However, if after using the GDS/TDS calculation
the maximum mortgage amount for which the borrower qualifies was $340,000, then the lender
would base the mortgage on the lowest value, or $340,000.
312
Chapter 13: Application Analysis – Application Ratios
13.4 LTV, GDS and TDS Quick Reference Guide
Loan to Value (LTV)
LTV of a 1st mortgage
LTV = Mortgage Amount / Property Value
LTV of a 2nd mortgage
LTV = (1st Mortgage Amount + 2nd Mortgage Amount) / Property
Value
LTV calculating the
maximum loan amount
Maximum Mortgage Amount = LTV x Property Value
Gross Debt Service Ratio (GDS)
GDS: verifying that a
payment meets the lender’s
GDS ratio
GDS = (PITH + ½ Condo Mtc. Fee) / Income
Total Debt Service Ratio (TDS)
TDS: verifying that a
payment meets the lender’s
TDS ratio
TDS = (PITH + ½ Condo Mtc. Fee + Other Debts) / Income
TDS: calculating a maximum
mortgage payment
Maximum Mortgage Payment = (MAX TDS x Income) – Taxes ‐
Heat ‐ Other Debts
Chapter 13: Application Analysis – Application Ratios
313
13.5 Key Terms and Definitions
Gross Debt Service Ratio (GDS)
A debt service ratio that measures the amount of shelter (housing) payments in comparison to
the amount of gross income, expressed as a percentage. The industry standard is 32%.
Industry Standard
An amount that the mortgage industry will typically use in a calculation or a practice
Loan to Value (LTV)
The amount of a loan to the value of the property expressed as a percentage.
Loan to Value (%) = Loan / Property Value
Percentage
A fraction or ratio with 100 understood as the denominator; for example, 0.98 equals a
percentage of 98
Property Value
The value, in dollars, of a property, usually determined by independent verification such as an
appraisal
Total Debt Service Ratio (TDS)
A debt service ratio that measures the amount of shelter payments (PITH and condo
maintenance fees, when applicable) and other debt payments in comparison to the amount of
gross income, expressed as a percentage. The industry standard is 40%. The formula is (PITH
[Principal + Interest + Taxes + Heating] + other debts + ½ condo maintenance fee [when
applicable]) / Gross Income.
314
Chapter 13: Application Analysis – Application Ratios
13.6 Review Questions
Answers to the Review Questions are found at www.REMIC.ca
1. A house has been appraised at a value of $550,000. The owner requires a 1st mortgage in the
amount of $255,000 and a 2nd mortgage in the amount of $70,000.
a) What is the LTV of the 1st mortgage?
b) What is the total LTV of the combined 1st and 2nd mortgages?
2. Tedros has been approved for a mortgage in the amount of $262,500 on a 1st mortgage. The
property he is buying is worth $350,000. What is the LTV of this mortgage?
3. Adela and Carlos are applying for a mortgage through you, their local mortgage agent. They
have requested a mortgage in the amount of $455,000 with weekly payments for a 3 year
term at 5.95% compounded semi‐annually with a 25 year amortization. They have told you
that they also have a car payment of $385 per month, annual car insurance of $2,712, a
weekly loan payment of $45 and total monthly credit card payments of $510. Their property
taxes are $2,100 per year. Their combined income is $126,966 per year and heat on this
house is $100 per month.
a) What is their mortgage payment?
b) What is their GDS?
c) What is their TDS?
4. Hisa and Botan are applying for a mortgage through you, their local mortgage agent. They
have requested a mortgage in the amount of $300,000 with monthly payments for a 5 year
term at 4.95% compounded semi‐annually with a 25 year amortization. They have told you
that they also have a car payment of $275 per month, annual car insurance of $2,000, a
weekly loan payment of $95 and total monthly credit card payments of $300. Their property
taxes are $2,100 per year. Their combined income is $95,000 per year and heat on this
house is $100 per month.
a) What is their mortgage payment?
b) What is their GDS?
c) What is their TDS?
5. Joe and Mary are applying for a mortgage through you, their local mortgage agent. They
have requested a mortgage in the amount of $640,000 with bi‐weekly payments for a 5 year
term at 3.75% compounded semi‐annually with a 25 year amortization. They have told you
that they also have a car payment of $405 per month, annual car insurance of $3,000, a
weekly loan payment of $55 and total monthly credit card payments of $400. Their property
taxes are $2,100 per year. Their combined income is $145,000 per year and heat on this
house is $100 per month.
a) What is their mortgage payment?
b) What is their GDS?
c) What is their TDS?
6. Lin and Shen have been approved for a mortgage through you, their local mortgage agent in
the amount of $200,000 with monthly payments for a 1 year term at 8.25% compounded
semi‐annually with a 25 year amortization. They have told you that they also have a car
payment of $405 per month, a Line of Credit payment of $180 per month and total monthly
Chapter 13: Application Analysis – Application Ratios
315
credit card payments of $400. Their property taxes are $2,100 per year. Their combined
income is $75,000 per year and heat on this house is $100 per month.
a) What is their mortgage payment?
b) What is their GDS?
c) What is their TDS?
7. Dalila has been approved for a $30,000 2nd mortgage with monthly payments, a 1 year term,
10 year amortization at 12.5% compounded semi‐annually. She has a first mortgage with an
outstanding balance of $220,000 (down from $230,000 when she first took out the
mortgage) with bi‐weekly payments of $700. The second mortgage is going to consolidate
her credit cards for which she currently pays $390 per month. She has a car lease of $360 per
month, annual car insurance payments of $2,300 and monthly home insurance premiums of
$150. Her property taxes are $3,500 per year and it costs $100 per month to heat her home,
which has been appraised at $350,000. Dalila earns $78,000 per year as a manager.
a) What is the LTV of the 1st mortgage?
b) What is the LTV of only the 2nd mortgage (excluding the 1st mortgage)?
c) What is the total LTV of the 2nd mortgage?
d) What is her mortgage payment for the 2nd mortgage?
e) What is her GDS?
f) What is her TDS?
8. Your clients, Aarav and Anika have applied for a mortgage with you. They are buying a high‐
rise condo and need a mortgage in the amount of $320,000. You’ve suggested that they take
a mortgage with monthly payments for a 5 year term at 3.35% compounded semi‐annually
with a 20 year amortization. They have told you that they also have a car payment of $310
per month, annual car insurance of $2,000, a weekly loan payment of $80 and total monthly
credit card payments of $275. The property taxes are $2,100 per year while the condo
maintenance fees are $418 per month. Their combined income is $117,000 per year and
heat, which is not included in the maintenance fee, is estimated at $100 per month.
a) What is their mortgage payment?
b) What is their GDS?
a) What is their TDS?
316
Chapter 14: Application Analysis – Borrower Credit
Chapter 14: Application Analysis – Borrower
Credit
Learning Outcomes
Successful understanding of the concepts presented in this chapter will enable the learner to:
 Differentiate between the credit report a consumer receives and the report a mortgage
agent receives
 List the main credit bureaus in Canada
 Interpret and analyze a credit report
 Explain the components of a credit score
Introduction
Lenders use an applicant’s current and past repayment history to determine the likelihood of
future repayment. Although there is no way to perfectly predict an applicant’s future
repayment of debt, reviewing the applicant’s current and past repayment history provides a
fairly accurate indicator of future repayment trends.
Lenders rely on a credit bureau or credit agency, a company that compiles information provided
to its members. The credit bureau’s members consist of credit grantors such as banks, trust
companies, finance companies, loan companies, and so on. These members provide the credit
bureau with information on the individuals to which credit has been granted or who have
applied for credit through the credit grantor.
This information is compiled into two distinct reports. One report is available to consumers.
This report is designed to be read by consumers and is therefore compiled in a fashion that is
easy for the average consumer to understand. The other type of report is the one provided to
the credit bureau’s members. This report is more detailed and relies heavily on codes that are
typically only understood by its members.
This chapter will discuss the different Canadian credit bureaus and the impact of credit reports
on the mortgage application.
14.1 Credit Bureaus
There are currently two credit reporting agencies operating in Canada: Equifax and Transunion,
with Equifax holding the majority of the market share. Headquartered in Atlanta, Georgia,
Equifax Inc. employs approximately 7,000 people in 15 countries through North America, Latin
America and Europe. Its Canadian operations are headquarted in Toronto, Ontario.
Equifax was founded in Atlanta, Georgia, as the Retail Credit Company in 1899 and by 1920 had
offices throughout the US and Canada. By the 1960s, the Retail Credit Company was one of
America’s largest credit bureaus, holding files on millions of American and Canadian citizens.
Even though they still did credit reporting the majority of their business was making reports to
Chapte
er 14: Applicaation Analysiss – Borrower Credit
31
17
insuraance companies when individuals applied for new innsurance policcies, such as life, auto, firee
and medical
m
insuraance.
70, when the company mo
oved to comp
puterize its re cords, which would lead to much wider
In 197
availaability of the personal
p
information it held, the Unitedd States’ Congress held heearings to
determine any pottential consum
mer protectio
on issues. Theese hearings lled to the creeation of the
Fair Credit
C
Reporting Act which gave consum
mers rights re garding inforrmation storeed about them
m
in corrporate datab
banks.
For most
m of its exisstence, Equifaax has operatted primarily in the busineess‐to‐businesss sector,
sellingg consumer credit
c
and insu
urance reports and relatedd analytics to
o businesses in a range of
industries. In 1999
9, it began offfering credit fraud
f
and ideentity theft prrevention pro
oducts to
consu
umers. More information can be found
d on Equifax bby visiting its w
website at ww
ww.equifax.cca
Operaating out of Burlington,
B
On
ntario, Transu
union Canadaa provides thee same types of products
and se
ervices as its main compettitor, Equifax Canada. Theey also markeet their creditt reports
directtly to consum
mers, in additio
on to their co
ore business oof providing tthese reports to their
memb
bers. More in
nformation caan be found on
o Transunionn by visiting its website at
www.transunion.cca
14.2
2 Credit Reports
A cred
dit report is the documentt that presentts the informaation that thee credit bureaau has
comp
piled on the ap
pplicant and comes
c
in two
o forms. The first is the creedit report prroduced for
the co
onsumer, whiile the other is
i the credit report
r
producced for the crredit bureau’ss members.
To illu
ustrate the differences bettween a crediit report provvided to the cconsumer and
d one
provid
ded to a credit bureau member, both are
a illustratedd in the follow
wing figures.
Sam ple Credi t Report Provided
P
to Consum
mers
Example of an Equ
uifax Credit Re
eport provide
ed to a consuumer.
Figure 601 – Sample Crredit Report Pro
ovided to Consum
mers
CONSSUMER RELATTIONS P.O. BO
OX 190 STATIION JEAN TALLON
MON
NTREAL QUEB
BEC H1S 2Z2
JANEE DOE
10 PLLEASANT ST.
TORO
ONTO ONTAR
RIO
M2N 1A2
CONFFIDENTIAL INFORMATION
NOT TO BE USED FOR CREDIT PURPOSES
P
1
Equiffax Canada
318
Chapter 14: Application Analysis – Borrower Credit
RE: EQUIFAX UNIQUE NUMBER: 3140123054
Dear JANE DOE,
Further to your request, a disclosure of your personal credit file as of 03/27/01 follows:
PERSONAL IDENTIFICATION INFORMATION:
The following personal identification information is currently showing on your credit file.
Your date of birth and social insurance number have been partially masked to protect your
personal information (i.e.: Birth Date/Age: 01/xx/60, Social Insurance Number: 123‐xxx‐789).
DATE FILE OPENED: 07/04/92
NAME: Doe, Jane
CURRENT ADDRESS: 10 PLEASANT ST. TORONTO,ON
DATE REPORTED: 12/96
PREVIOUS ADDRESS: 2 AVENUE ST,TORONTO,ON
DATE REPORTED: 12/93
PRIOR ADDRESS: 3 DU BOULEVARD,MONTREAL,PQ
DATE REPORTED: 07/92
BIRTH DATE/AGE: 10/XX/1968
SOCIAL INSURANCE NUMBER: 123‐XXX‐789
OTHER REFERENCE NAMES:
CURRENT EMPLOYMENT: EDITOR
PREVIOUS EMPLOYMENT: TRANSLATOR
PRIOR EMPLOYMENT: CHEF
OTHER INCOME:
CREDIT INQUIRIES ON YOUR FILE:
Following is a list of Equifax members who have received a copy of your credit file for credit
granting or other permissible purposes. Addresses are available by calling Equifax at 1‐800‐
465‐7166.
DATE
03/02/00
02/22/00
01/16/00
REQUESTOR NAME
CANADA TRUST MTG
TD BANK
BQE NATIONALE
TELEPHONE
(416) 361‐8518
(800) 787‐7065
(450) 677‐9122
The following inquiries are for your information only and are not displayed to others. They
include requests from authorized parties to update their records regarding your existing
account with them.
DATE
REQUESTOR NAME
TELEPHONE
03/23/00
SOC ALCOOLS (not displayed)
(514) 873‐6281
03/22/00
CANADA TRUST MTG (not displayed)
(416) 361‐8518
02/16/00
CMHC SCHL (not displayed)
(888) 463‐6454
01/16/00
AMERICAN EXPRESS (not displayed)
(416) 123‐4567
CONSUMER INTERVIEWS AND OTHER SERVICES:
You contacted our office in 12/98 to request a review of your credit file.
Chapte
er 14: Applicaation Analysiss – Borrower Credit
31
19
CRED
DIT HISTORY AND/OR
A
BANKING INFORM
MATION:
The following
f
info
ormation was reported to us by organizzations listed below.
Information is recceived every 30
3 days from most credit ggrantors. All aaccount numb
bers with
your creditors havve been maskked to protectt your personnal account in
nformation an
nd only the
t
digits will
w be displaye
ed (i.e.: xxx...123).
last three
AC last reporte
ed to us in 01
1/01 rating yo
our installmennt account ass I1, meaning paid as
GMA
agree
ed and up to date. The rep
ported balancce of your acccount was $10000. Your acccount
numb
ber: xxx...345
5. The account is in the sub
bject's name oonly. Date acccount opened: 04/99.
Credit limit or high
hest amount of credit advanced: $44000. DATE OF LA
AST ACTIVITY meaning
mments:
o transaction
n made on th
his account waas in 12/00. A
Additional com
the laast payment or
auto loan. Monthly payments.
ADA TRUST MC
M last reportted to us in 01
1/01 rating yoour revolvingg account as R
R1, meaning
CANA
paid as agreed and up to date. At the time the
t reported balance of yo
our account w
was $285.
mber: xxx...234. Date accou
unt opened: 006/99. Credit limit or higheest amount
Your account num
of cre
edit advanced
d $2000. DATTE OF LAST AC
CTIVITY meanning the last p
payment or trransaction
made
e on this acco
ount was in 12
2/00.
PREV
VIOUS PAYMEENT STATUS:
30 DA
AYS: 1 time (ss) account pre
eviously R2 meaning
m
one ppayment pastt due
ON:
PUBLLIC RECORDS AND OTHER INFORMATIO
The following
f
info
ormation was reported to your
y
file on t he date indiccated.
A CO
OLLECTION waas assigned in
n 10/96 to Com
mmercial Creedit by Transaamerica Finan
ncial in the
amou
unt of: $2675
5. Date reportted paid: 07/9
97. Collectionn status: PAID
D. DATE OF LA
AST
ACTIV
VITY was in 04/96. Collection agency re
eference num
mber: 222222..
A JUD
DGEMENT waas FILED IN 01
1/96 in Min Govt
G
Serv. Plaiintiff and/or ccase number: Chrysler
Canaada 4444. Deffendant/other info: joint with
w Dossier. A
Amount repo
orted: $7525. Status
reported: Satisfied
d. Date satisfied: 09/97.
A BANKRUPTCY was
w FILED IN 08/97
0
in SC Ne
ewmarket. Caase number aand/or trusteee: 5555555
SYND
DIC & ASS. Liaabilities: $250
0000.Assets: $8900000.Item
$
m classificatio
on: individual.
Information reporrted on: The subject
s
only. The item is reeported as: D
DISCHARGED. DATE
SETTLED: 05/98. Additional
A
com
mments: abso
olute dischargge from bankkruptcy.
THE CONSUMER
C
PROVIDED
P
A PERSONAL
P
STTATEMENT too us in 12/98. The statement has been
recorrded as follow
ws:
RE: BANKRUPTCY,
B
, CONSUMER DECLARED BANKRUPTCY DUE TO DIVO
ORCE This stattement is to
be re
emoved from the file in: 12
2/04.
Sam ple Credi t Report Provided
P
to Equifaxx Membe rs
The fo
ollowing figurre is an example of an Equ
uifax credit re port provided
d to an Equifaax member.
This report is for trraining purpo
oses only. The
e code in the left hand column of the reeport
corressponds to the
e Equifax Lege
end in next figure, which ffollows this reeport.
320
Chapter 14: Application Analysis – Borrower Credit
Figure 612 – Sample Credit Report Provided to Credit Bureau Members
Equifax Consumer Credit Report (provided to credit bureau members)
This report shows a sample of potential information found on a credit report. This is not an actual report.
CONSUMER REPORT
[1] 1 800 465‐7166
[2] 6/16/2004
[3] File Requested by: NTREM
Identification
Name:
Current Address:
Previous Address:
Date of Birth, SIN:
Reference:
TEST, FILE,P.
110, SHEPPARD AVE, NORTH YORK, ON,M2N6S1
60, BLOOR ST W, TORONTO,ON,M4W3C1.
1942/02/16, 999‐999‐998.
NTREM
Employment
Employer, Occupation: OWNER TESTS HAIR SALON
[4] Subject 1: Alert, Score, Identification, Inquiries, Employment, Summary, Public,
Trades, Banking, Declaration.
Consumer Alert (Subject 1)
[5] Warnings
Invalid Social Insurance Number
[6] SAFESCAN
SF‐9 Possible True Name Fraud
[7] Product Score (Subject 1)
Risk Score
509
Serious delinquency and public record or collection filed
Time since delinquency is too recent or unknown
Number of accounts with delinquency
Length of time revolving accounts have been established
Bank. Nav. Index
230
Age of derogatory public records.
Average age of retail trades.
Number of recent inquiries.
Average age of trades.
2
Equifax Canada
Chapter 14: Application Analysis – Borrower Credit
Identification (Subject 1)
[8] Unique Number
3455234199
[10] Date File Opened: 01/23/1975
[12] DOB/Age:
02/16/1942
[14] Name:
[15] Current Address:
[16] Since, R/O/B:
[17] Reported:
[18] Former Address:
Since, R/O/B:
Reported:
[19] 2nd Former Address:
Since, R/O/B:
Reported:
[20] Also Known As:
[9] File Number
00‐0008095‐00‐037
[11] Date of Last Activity:
06/03/2004
[13] SIN:
** Consumer Declaration **
TEST, FILE, EQUIFAX
110, SHEPPARD, TORONTO, ON, M2B 6S1
01/2003
STS Reported
1231, 15 TH AVE, CALGARY, AB, T3C 0X6
01/2003
Tape Reported
2314, 11 TH AVE 1201, TORONTO, ON, M4W 3C1
01/2003
Verbally Reported
PRETEND, FILE, EQUIFAX
Inquiries (Subject 1)
[21] Subject shows 3 inquiries since 03/17/2004
[22] Member Inquiries:
Date
Member No
06/03/2004
001BB05697
05/08/2004
481FF00722
05/02/2004
057ON00374
10/13/2002
481BB99080
[23] Total number of inquiries: 4
[24] Foreign Bureau Inquiries:
Date
06/02/2002
Member No/City
INTLUSA 401BB17978
Employment (Subject 1)
Employment Information:
[25] Current Employer:
[26] Since, Left, Position, Salary:
[27] Former Employer:
Since, Left, Position, Salary:
[28] Second Former Employer:
City, Province:
Since, Left, Position, Salary:
Verified, Status:
Member Name Telephone
BANQUE SCOTIA (222) 333‐3333
ASSOCIATES FINANCIAL (111) 222‐2222
PRESIDENTS CHOICE MC (333) 777‐7777
SCOTIABANK (444) 555‐5555
Province and Description
TD/GM VISA
TESTS HAIR SALON
, , OWNER,
HILTON HOTEL
, , HAIR STYLIST,
DISNEY CRUISE LINE
TOR, ON
04/1999, 02/2001, HAIR STYLIST, 1900
02/2001,
321
322
Chapter 14: Application Analysis – Borrower Credit
[29] Summary (Subject 1)
Pub/Other
Trade Oldest‐Newest
Total
High Credit
Rating for R/O/I/M/C
4
01/2001 ‐ 06/2004
3
2800 ‐ 28K
1‐One, 1‐Two, 1‐Other
[30] Public Records/Other Information (Subject 1)
[31] Information from Bankruptcy Superintendent :
Filed
Type
01/2000
Ind
Case No/Trustee:
Disposition:
Description:
Court Name
Court No
MIN OF ATTORNEY GEN
472VF00022
22855 MORRIS ETAL
Discharged. 10/2000
Bankrupt Absolute Discharge
Liab
28000
Asset
480
Filed By
Subject
[32] Collection:
Rptd
NORDON COLLECTION,
04/2002
Verified Date:
Acct/Creditor:
Description:
Type
Amt DLA
Bal Reason
481YC00036
Unpaid 482 01/2002 482 Unknown
04/2002
55555 SEARS
Subject disputes this account
Ledger Number
1111111
[33] Secured Loan :
Filed
08/2002
Creditor/Amt:
Description:
Court Name
Court No
CENT REG TOR
481VC00214
SUPERIOR CREDIT 9 ELLIS AV TOR 3600
Security Disposition Unknown
Maturity
12/2004
[34] Judgment :
Filed
05/2002
Defendant:
Case No:
Plaintiff:
Description:
Type Court Name
Court No
Jdgm
481VC00297
Test File
55555/02
TRANS CANADA CREDIT
Disposition Unknown
Amt
4800
Status Date Vrfd
[35] Trade Information (Subject 1)
Member Trades:
Bus/ID Code
Rptd
Opnd
HC
Terms
CIBC (999) 999‐9999
*J 007BB01351
06/2004 04/2001 28K 555
Prev Hi Rates: I3‐07/2002, I4‐06/2002, I5‐02/2002
BAL
PDA
Rt
30/60/90
MR
DLA
4200
555
I2
4/3/1
21
04/2004
323
Chapter 14: Application Analysis – Borrower Credit
Account:
Description:
ZELLERS
*I 650DV00014
Account:
Description:
8454545
Personal Loan
Semi‐Monthly Payments
01/2004 06/2001 2800 26
2555
845555555
Amount in H/C Column is credit limit
Monthly Payments
TD VISA (999) 999‐9999
*650ON00044
06/2004
Status:
Lost or stolen card
[36] Credit Utilization: 22%
R1
0/0/0
16
0/0/0
30800
6755
[37] Banking (Subject 1)
Checking/Saving:
Rptd
Opnd
Amount
BANQUE SCOTIA, 001BB05697, (999) 999‐9999
06/2004
09/1999
L5F
Nb NSF, Status:
4 NSF 2002,
Account No
Account Type
Checking/Saving
[38] Consumer Declaration (Subject 1)
Rptd, Purge:
06/2004, 06/2005
Declaration:
*****WARNING*****CONFIRMED TRUE NAME FRAUD/FRAUDULENT
CREDIT APPLICATIONS HAVE BEEN SUBMITTED USING THIS NAME/ IF YOU ACCESS THIS FILE AS
PART OF A CREDIT CHECK, PLEASE VERIFY WITH THE CUSTOMER THAT IT IS LEGITIMATE BEFORE
EXTENDING CREDIT/PHONE (123)456‐7890
End Of Report
05/2004
324
Chapte
er 14: Applicaation Analysiss – Borrower Credit
Figure 623 – Equifax Le
egend
Equ ifax Cred
dit Reporrt Legend
d
ONSUMER REEFERRAL TELEEPHONE NUM
MBER:
[1] CO
Tells credit
c
grantorr where consumers may caall if they are denied crediit.
[2] Daate file was acccessed (mm//dd/yy).
NQUIRY DATA
A: Shows inforrmation used to inquire onn the file.
[3] IN
[4] Su
ubject 1: Detaails sections of
o the file thatt are populateed and displaayed.
[5] CO
ONSUMER FILLE ALERT: Info
ormation input on inquiryy does not maatch
file orr is invalid.
[6] SA
AFESCAN WARNING: Fraud
d alert messaage warns youu of potentiall
appliccation fraud. (Available only to SAFESCA
AN subscribe rs.)
CORES AND REASON
R
CODEES: A risk scorre accompaniied by up to ffour reason codes appearss
[7] SC
in thiss section. Reaason codes indicate the maain reasons foor the score. (Available on
nly to risk
score subscribers.))
IDENT
TIFICATION SECTION:
S
[8] Un
nique Numbe
er: for Equifaxx internal use
e only.
[9] Fille Number: fo
or Equifax intternal use only.
D
file was established.
e
[10] Date
[11] Date
D
of last acctivity on file..
[12] Date
D
of birth or
o age of Subjject (mm/dd//yy).
[13] SIN:
S Social Inssurance Numb
ber (will only display here if provided o
on input and m
matches with
h
inform
mation on file
e).
[14] Subject
S
name.
[15] Current
C
addre
ess.
[16] Since:
S
Date ad
ddress was re
eported and added
a
to the Equifax Repo
ort. R/O/B: Indicates if thee
subject Rents Own
ns or Boards their
t
current address.
a
3
Equiffax Canada
Chapter 14: Application Analysis – Borrower Credit
325
[17] Reported: Indicates type of customer that reported the address information, STS = direct
link customer, Tape = monthly tape reporting customer, DAT= Internet customer ‐ verbal
internal Equifax person.
[18] Former address ‐ Previous address of subject.
[19] Second former address.
[20] AKA or name subject is also known as ‐ this credit report will contain the information under
both the name information and this section, therefore, no need to make additional credit report
inquiries under this name.
INQUIRIES SECTION:
[21] Alert message appears if there have been three or more inquiries within the past 90 days.
[22] Date, member number and member name for inquiries in the past 36 months. Member
phone number will display for inquiries in past 12 months.
[23] Total Number of Inquiries: Total number of inquiries since file was established.
[24] Foreign Bureau Inquiries: Date, Member number and name of U.S. inquiring customers.
EMPLOYMENT SECTION:
[25] Current Employer: Company name of most recent reported current employer.
[26] Since, Left, Position, Salary: Occupation of subject and when verified start date, left date
and salary.
[27] Former Employer: Company name of previous employer. Since, Left, Position, Salary:
Occupation of subject and when verified start date, left date and salary.
[28] Second Former Employer: Company name of second or previous employer. Since, Left,
Position, Salary: Occupation of subject and when verified start date, left date and salary.
[29] SUMMARY SECTION (provides synopsis of file items):
Pub/Other‐ Number of Public Record or Other information found in the Public Record section.
Trade Oldest ‐ Newest: Oldest opening date of trade and most recent reporting date of trade.
Total ‐ Total number of trades on the file.
High Credit ‐ High credit range of trades on file.
Rating for R/O/I/M/C: Ratings of the trades on file. R = Revolving account, I = Installment
account O = Open account, M = Mortgage account and C = Line of Credit
[30] PUBLIC RECORDS OR OTHER INFORMATION: Information obtained from Public Sources.
326
Chapter 14: Application Analysis – Borrower Credit
[31] Bankruptcies: A person legally declared to be unable to pay debts (date filed, type of
action, [IND for personal; BUS for business], court name, court code, liability, assets, filer
[subject, spouse or both], case number and trustee, disposition of bankruptcy and description of
the bankruptcy).
[32] Third‐party collections: A debt which a creditor is unable to collect and hires a third party
to do so (name of third‐party collection agency, collection agency member number, reported
date, type of collection [UP CL ‐ unpaid collection or PD ‐ paid collection], original amount of
collection, date of last activity with credit grantor, balance as of date reported, reason, ledger
number, verified date, credit grantor and account number, description).
[33] Secured loans: A chattel mortgage, registered loan, or registered lien is a loan where the
debtor has given personal property as collateral and the loan is registered with the provincial
government. This is not derogatory information. (Secured loans are not extended in the
province of Quebec.) [Date reported; name of reporting government agency; member number
of reporting agency, maturity date of the loan, name and address of creditor; amount of loan;
description of loan status].
[34] Judgments: A court order against a debtor for payment of monies owing (date judgment
granted or date filed; judgment status [ST JD ‐ satisfied judgment, JD GT ‐ judgment]; court
identification number/name of court; amount of judgment; defendant; judgment number;
plaintiff; status of judgment [satisfied, unsatisfied or disposition unknown] and
date, when applicable). Other public record information may include foreclosures, credit
counselling, and orderly payment of debt (OPD).
[35] TRADE INFORMATION
Bus/ID Code: Company name and/or telephone number and/or customer number.
RPTD ‐ Date item was reported to Equifax.
OPND ‐ Date account was opened with credit grantor.
H/C ‐ High credit on the account; the highest amount owed or credit limit.
TRMS ‐ Monthly repayment amount.
BAL ‐ Balance owing as of date reported.
PDA ‐ Past due amount as of date reported (shown if applicable).
RT ‐ Type of account and manner of repayment: see Trade Information Descriptions and Manner
of Payment (North American Standard ratings) for detailed rating descriptions.
30/60/90 ‐ Number of times subject has been 30, 60 or 90 days past due with this account.
MR ‐ Months Reviewed ‐ the number of times or months this account has reported.
DLA ‐ Date Last Activity ‐ Date of last activity with this account, could be purchase date, last
payment date or in worst case, write‐off date.
Chapte
er 14: Applicaation Analysiss – Borrower Credit
32
27
ormation wass updated by an accounts receivable tape.
* Indicates the info
Prev Hi
H Rates ‐ relaates to the 30
0/60/90 section; provides ratings and d
dates of the 3 most recentt
delinq
quencies
Descrription ‐ Provides additional information about the aaccount.
[36] Credit
C
Utilizattion: Providess the percenttage that the customer hass utilized theiir credit by
dividing balances by
b high creditt. The total off all open highh credit amou
unts and all o
open account
balances are also displayed.
d
[37] BANKING
B
INFORMATION SECTION:
S
Type of account, name and tele
ephone numb
ber of instituttion; date item
m was reported to Equifaxx;
o account; cu
ustomer’s me
ember numbe
er; date accouunt was open
ned with credit grantor;
type of
balance of accountt (approximatte range); add
ditional infor mation on acccount.
[38] CONSUMER
C
STATEMENT
S
SECTION:
S
Rptd, Purge: Datte reported and date inforrmation will b
be
delete
ed from the credit
c
report ‐ Declaration: Statement tthe consumerr or subject ad
dded to the
file to
o explain discrrepancies or other
o
comme
ents.
Trad
de Inform
mation De
escription
ns
When
n viewing a trade line it is important
i
to be able to unnderstand wh
hat the codingg is telling you
u.
The fo
ollowing is a list of the cod
des used in rating a trade l ine.
Figure 634 – Equifax Trrade Informatio
on Descriptions
Typess of accounts::
O:
R:
I:
C:
M:
4
Open acco
ount (30 dayss or 90 days). This indicatees that the acccount has jusst been
opened an
nd the borrow
wer hasn’t eve
en made his oor her first paayment yet, so it cannot bee
rated.
Revolving or option (op
pen‐end acco
ount). An exaample of this would be a credit card
such as a Visa,
V
Mastercard, departm
ment store carrd, etc. The w
word revolving refers to th
he
fact that as the borrower makes a paayment, that amount is aggain availablee as part of th
he
credit limitt. For example, if you have a credit carrd with a $5,0000 limit and you owe
$4,000 and
d you make a payment of $4,000, that aamount is again available to you to
borrow.
nt (fixed num
mber of payme
ents). An exaample of this would be a ccar loan,
Installmen
personal lo
oan, etc. Thiss type of cred
dit has equal ppayments thaat will eventu
ually fully
repay the loan. Unlike a credit card when the boorrower makees a payment that amount
is not available to be re
e‐borrowed.
Line of Cre
edit
Mortgage
Equiffax Canada
328
er 14: Applicaation Analysiss – Borrower Credit
Chapte
Trad
de Inform
mation Ra
atings
Figure 64 – Trade Information Ratingss
Mann
ner of payment (North Am
merican Stand
dard account ratings):
0‐
o rate; approved but not used.
u
Too new to
1‐
Pays (or paaid) within 30
0 days of paym
ment due datte or not overr one paymen
nt past due.
2‐
Pays (or paaid) in more than
t
30 days from paymennt due date, b
but not more than 60 dayss,
or not morre than two payments
p
passt due.
3‐
Pays (or paaid) in more than
t
60 days from paymennt due date, b
but not more than 90 dayss,
or not morre than three
e payments paast due.
4‐
Pays (or paaid) in more than
t
90 days from paymennt due date, b
but not more than 120
days, or fo
our payments past due.
5‐
Account is at least 120 days overdue
e but is not yeet rated “9.“
7‐
nts under a co
onsolidation oorder or similar arrangement.
Making reggular paymen
8‐
Repossession (voluntarry or involuntary return of merchandisee).
9‐
ollection; skip.
Bad debt; placed for co
Cre dit Rating
g Examp les
Let’s say
s that your borrower haas a credit carrd that is currrently up to date. The rating on this
card will
w be an R1. R represents a revolving type of debt,, while 1 indiccates that thee account is u
up
to datte with no past due amoun
nts. If, howevver, this borr ower is behin
nd two month
hs, which is
two payments,
p
the
e rating will be an R3.
If the borrower has a loan, such
h as a car loan
n, and it is up to date it will be rated as an I1. I
represents an instaallment type debt which tyypically has fiixed paymentts, while 1 ind
dicates that
the acccount is up to
t date with no
n past due amounts. If, hhowever, this borrower is behind four
months, which is four payments, the rating will
w be an I5.
If the lender decides to reposse
ess the car be
ecause of thesse missed payyments, it hass the right to
reposssess, or take the security and
a sell it. In
n this case his rating on this car loan wo
ould be an I8.
If, afte
er the car was sold there was
w still an ou
utstanding am
mount owing to the lenderr, and the
lende
er didn’t feel it could get th
hat money fro
om this borroower, it would
d change the rating to an
I9. Th
his means thaat the lender does not expect to get thi s money and has thereforre written off
this debt.
Chapte
er 14: Applicaation Analysiss – Borrower Credit
32
29
Equ ifax Glos
ssary of Terms
T
Us
sed in a C
Credit Re
eport
Figure 655 – Equifax Glossary
G
The fo
ollowing key words
w
are spe
ecific abbreviiations used i n various secctions of the ccredit file. Pleease use
this lisst to interpre
et the abbreviiations when you see them
m. The highligghted terms aare typically tthe ones
that a mortgage aggent will most frequently encounter.
e
A Spou
usal account
ACC Account
A
numbe
er
AGE Age
A of subject
AKA Also
A known as
B Both
h
BAL Baalance
BDS Birth date ‐ Subject
BKRPT
T Bankruptcy
BRN Creditor’s
C
name
e and/or
addresss
BUS Business
BUS Business industry code
CA Current address
CASE NO.
N Case number
CDC Consumer debt counseling
CF Co‐‐subject’s form
mer
emplo
oyment
CHKAC
C Chequing acccount
CRCLD
D Court consoliidation
CRT Update by in‐ho
ouse operator
D Divo
orced
DAPA Debtor assistaance pool
account
DEF Defendant
DEPS Dependents
DIS Dispute following resolution
DLA Date
D
of last activity
DN De
eath notice
DVFD Divorce filed
DVFL Divorce
D
final
EC Spo
ouse’s current employment
EF Spo
ouse’s former employment
e
5
Equiffax Canada
EMP Date employed
e
ES Employm
ment ‐ subject
E2 Subject’ss second formeer
Employmen
nt
FA Former address
a
FAD File acttivity date
FB Foreign bureau
b
FN File num
mber or former name
(depends
on line)
NV
V Not Verified
O Own or open account
OP
PD Orderly payyment of debt
OP
PND Date Opeened
PD
D Date paid
P//D Past due am
mount
PR
R/BK Proposal under bankruptcy
FORCL Foreclosure
PR
R/OI Public reccords or other
information
R Revolving acco
ount
FS Date file was establisheed
GARN Garnishment
H/C High Crredit
I Installmen
nt (account/inddividual)
ID Identificaation informatiion
IND Individu
ual
RP
PTD Date reported
RTT Current ratin
ng (i.e R1, I1, ettc.)
S SSingle
SA
AVAC Savings aaccount
SEECLN Secured loan
SINCE Date file w
was established
INQS Inquirries
IN VOL Invo
oluntary
INVER Indirectly verified
J Joint
JUDG Judgm
ment
SP
PECL Special no
otice item
SSSC Social insuraance/spouse
SSSS Social insuraance/subject
STTJD Satisfied ju
udgment
STTS System‐to‐system customer
LEFT Date le
eft employmennt
LIAB Liabilitties (amount)
LWR Lawyer
M Married
MAR Maritaal status
MATURE Daate of maturityy
MR Monthss reviewed
N/RES Non‐‐responsibility notice
NSF Non‐sufficient funds
TR
RMS Terms (paayment amoun
nt)
U Unknown
UN
N Unique file n
number
UP
PCL Unpaid collection
VEER Date verifieed
VLLDEP Voluntaryy deposit
VO
OL Voluntary
W Widow, widower
XX
X Automatic co
ombine
330
Chapte
er 14: Applicaation Analysiss – Borrower Credit
Inte rpreting a Credit Report
R
In the
e following sections the cre
edit report se
een previouslyy in this chap
pter will be exxplained in a
detailled, section by section anaalysis.
The fo
ollowing figurre, section [1]] shows the contact inform
mation which may be provvided to the
appliccant if there are
a any questtions or conce
erns about th e file. The ap
pplicant cannot be given a
copy of
o this credit report doing so contraven
nes the contraact between the brokeragge and the
creditt bureau. Secction [2] show
ws the date th
hat the file waas accessed.
Figure 66 – Equifax: Co
ontact Informattion
CONSSUMER REPORT
[1] 1 800
8 465‐7166
6
[2] 6//16/2004
The fo
ollowing figurre is the inforrmation that was
w used to oobtain the creedit report, reeferred to in
the mortgage
m
indu
ustry as “pullin
ng the credit report”. Thiss information
n is typically eentered into
the mortgage
m
origiination softw
ware and throu
ugh the use oof that softwaare, the creditt report is
obtain
ned.
Figure 67 – Equifax: In
nformation Used
d to Obtain a Crredit Report
[3] Fille Requested
d by: NTREM
Identification
Name
e:
Curre
ent Address:
Previo
ous Address:
Date of Birth, SIN:
Referrence:
TEST, FILE,P.
110, SHEPPA
ARD AVE, NO
ORTH YORK, O
ON,M2N6S1
60, BLOOR ST
S W, TORON
NTO,ON,M4W
W3C1.
1942/02/16
6, 999‐999‐9998.
NTREM
Emplo
oyment
Emplo
oyer, Occupa
ation: OWNER
R TESTS HAIR
R SALON
The fo
ollowing figurre shows the sections of th
he file that arre populated and displayed
d in the rest o
of
the re
eport.
Figure 68 – Equifax: Su
ubject 1
[4] Su
ubject 1: Alertt, Score, Identification, Inq
quiries, Emplooyment, Summary, Public,, Trades,
Banking, Declaratio
on.
The fo
ollowing figurre show the message
m
that you will receeive if the info
ormation thatt you inputted
d
in you
ur application
n does not maatch the file in
nformation o r is invalid.
Figure 69 – Equifax: Co
onsumer File Aleert
Consu
umer Alert (SSubject 1)
[5] Warnings
W
Invalid Social Insurrance Number
Chapter 14: Application Analysis – Borrower Credit
331
The following figure is a fraud alert message that is warning you of potential application fraud.
This “Safescan” warning is available only to those brokerages that are subscribers of the
Safescan service.
Figure 70 – Equifax: Safescan Warning
[6] SAFESCAN
SF‐9 Possible True Name Fraud
The following figure indicates the Risk Score, referred to as the Beacon Score (Equifax’s credit
score), followed by the Bank Nav Index, another scoring model, with a list of reasons for the
score. The risk score and the Bank Nav Index are only available to subscribers of these services.
Figure 71 – Equifax: Beacon Score
[7] Product Score (Subject 1)
Risk Score
509
Serious delinquency and public record or collection filed
Time since delinquency is too recent or unknown
Number of accounts with delinquency
Length of time revolving accounts have been established
Bank. Nav. Index
230
Age of derogatory public records.
Average age of retail trades.
Number of recent inquiries.
Average age of trades
Identification Sections
The following figure illustrates the Identification Section of the report. Ensure that you review
the information in this section and match it with the information that you obtained when
completing the application, including information from documentation such as the applicant’s
photo ID. Discrepancies may indicate that there are errors in the report that must be corrected,
that the applicant has made an error in disclosing information or that the applicant is trying to
misrepresent him or herself.
Figure 72 – Equifax: Identification Section
Identification (Subject 1)
[8] Unique Number
3455234199 [9] File Number
00‐0008095‐00‐
037
[10] Date File Opened: 01/23/1975
[11] Date of Last Activity:
06/03/2004
[12] DOB/Age:
02/16/1942
[13] SIN:
** Consumer Declaration **
[14] Name:
TEST, FILE, EQUIFAX
[15] Current Address:
110, SHEPPARD, TORONTO, ON, M2B 6S1
[16] Since, R/O/B:
01/2003
[17] Reported:
STS Reported
[18] Former Address:
1231, 15 TH AVE, CALGARY, AB, T3C 0X6
Since, R/O/B:
01/2003
332
Chapte
er 14: Applicaation Analysiss – Borrower Credit
Reporrted:
[19] 2nd
2 Former Address:
A
Since,, R/O/B:
Reporrted:
[20] Also
A Known As:
A
Tape Reported
2314, 11 TH AVEE 1201, TORONTO, ON, M4
4W 3C1
01/2
2003
Verbally Reporteed
PREETEND, FILE, EEQUIFAX
Su
uccess Tip – Question
n discrepa
ancies
En
nsure that you
u match the information that your cliennt has provided on his or h
her
ap
pplication with the informaation contained in the creddit report. If there are disscrepancies
yo
ou must ask your client to clarify them and
a update thhe applicatio n, if necessarry, or update
Eq
quifax.
Inquirry Sections
The fo
ollowing figurre is an alert that
t
appears if there have been three o
or more inquiiries within
the last ninety dayys. In this case there have been three innquiries, resu
ulting in the alert.
Figure 73 – Equifax: In
nquiry Alert
Inquirries (Subject 1)
[21] Subject
S
shows 3 inquiries since 03/17/2004
The fo
ollowing figurre displays the date of inqu
uiries over thhe past thirty‐‐six months as well as the
creditt bureau mem
mber’s name and
a contact information foor inquiries o
over the past twelve
months. This is he
elpful for a len
nder who wishes to contacct a previous inquirer to determine if
creditt was advance
ed or declined
d.
Figure 74 – Equifax: In
nquiries
[22] Member
M
Inqu
uiries:
Date
06/03
3/2004
05/08
8/2004
05/02
2/2004
10/13
3/2002
Member No
00
01BB05697
48
81FF00722
05
57ON00374
48
81BB99080
Mem
mber Name TTelephone
BAN
NQUE SCOTIA
A (222) 333‐33333
ASSOCIATES FINA
ANCIAL (111)) 222‐2222
PREESIDENTS CHO
OICE MC (3333) 777‐7777
SCO
OTIABANK (4444) 555‐5555
ollowing figurre displays the number of inquiries sincce the file hass been openeed as well as iff
The fo
there are any inquiries by Amerrican members. In this casse we can seee that there w
was an inquiryy
from TD/GM Visa on
o 06/02/200
02
Figure 75 – Equifax: To
otal Inquiries Sin
nce File Opened
d and Foreign Buureau
[23] Total
T
number of inquiries: 4
[24] Foreign
F
Bureaau Inquiries:
Date
06/02
2/2002
Member No/Ciity
INTLUSA 401BB
B17978
Provincee and Descrip
ption
TD/GM V
VISA
Chapter 14: Application Analysis – Borrower Credit
333
The following figure displays the subject’s current employer in section 25, and his former
employers in sections 27 and 28. If information is recorded on the position, such as how long
the subject has been at his current employer, when he left, the position’s title, salary and when
it was verified, it will be included as shown below.
Figure 76 – Equifax: Employment Section
Employment (Subject 1)
Employment Information:
[25] Current Employer:
[26] Since, Left, Position, Salary:
[27] Former Employer:
Since, Left, Position, Salary:
[28] Second Former Employer:
City, Province:
Since, Left, Position, Salary:
Verified, Status:
TESTS HAIR SALON
, , OWNER,
HILTON HOTEL
, , HAIR STYLIST,
DISNEY CRUISE LINE
TOR, ON
04/1999, 02/2001, HAIR STYLIST, 1900
02/2001,
Summary Section
The following figure displays a summary of the subject’s current credit. Pub/Other indicates
that our subject has 3 Public Records (Pub) or Other Information (Other) on his file.
01/2001 indicates the oldest opening trade line, or the oldest opening date of credit that
appears in the following section. 06/2004 indicates the latest reporting date of credit.
Total‐3 indicates that there are a total of 3 trade lines (or items of credit) on the file, and they
have balances, as indicated in the High Credit column, between two thousand eight hundred
dollars and twenty‐eight thousand dollars. 1‐One, 1‐Two, 1‐OTHER indicates the ratings that our
subject’s trade lines have.
Figure 77 – Equifax: Credit Summary
[29] Summary (Subject 1)
Pub/Other
Trade Oldest‐Newest
Total
High Credit
Rating for R/O/I/M/C
4
01/2001 ‐ 06/2004
3
2800 ‐ 28K
1‐One, 1‐Two, 1‐Other
The following figure lists the Public Records or Other Information in our subject’s file. Note that
the date that this sample file was obtained or pulled is in 2004, so the dates of current and past
activity are relevant to that date. In other words, something that happened in the year 2000
was just 4 years old when this report was obtained, so it would be relevant at that time.
In this example our subject was bankrupt in January, 2000 and was discharged in October, 2000.
If he didn’t advise you of this information when taking his application, you must verify it with
him now. Obtaining an explanation as to why he went bankrupt may be helpful in explaining
the situation to your lender.
Since there were nine months between our subject’s filing for bankruptcy and his being
discharged it is safe to assume that this was his first bankruptcy. An individual’s first bankruptcy
334
Chapte
er 14: Applicaation Analysiss – Borrower Credit
e months; wh
hile a second bankruptcy iss discharged after twelve
is typically dischargged after nine
months and a third
d bankruptcy can take two
o or more yeaars before a d
discharge is ap
pproved.
Figure 78 – Equifax: Pu
ublic Records
[30] Public
P
Record
ds/Other Info
ormation (Sub
bject 1)
ptcy Superintendent :
[31] Information from Bankrup
Filed
Tyype
01/20
000
In
nd
Case No/Trustee:
osition:
Dispo
Descrription:
Courtt Name
Court No
472VF000022
MIN OF
O ATTORNEYY GEN
22855 MOR
RRIS ETAL
Discharged. 10/2000
Bankrupt Ab
bsolute Dischharge
Liab
28000
0
Asset
480
The fo
ollowing figurre displays that there is an
n account in t hird party collections. Thiis indicates
that our
o subject ow
wes an outstaanding balancce of $482 to Sears. The d
description ind
dicates that
our su
ubject disagre
ees with this, which requirres you to obttain as much information on this
collecction account as possible, and
a then explain it to yourr lender.
Figure 79 – Equifax: Co
ollections
[32] Collection:
C
Bal Reasson
Rptd
Type
Amt
A
DLA
NORD
DON COLLECT
TION, 481YC0
00036
Unpaid 48
04/20
002
82 01/200 2 482 Unkknown
04/200
Verified Date:
02
55555 SEARS
S
Acct/Creditor:
Subject disp
Descrription:
putes this account
Leedger Numbeer
11
111111
Su
uccess Tip ‐ Collectio
ons
If you see a collection on yo
our client’s file
e, ensure thatt you ask him
m or her if it has been paid
an
nd, if so, if he or she has prroof. If it has been paid, thhe credit bureau must be notified to
haave this sectio
on reflect that payment an
nd a zero outsstanding balaance.
The fo
ollowing figurre indicates th
hat our subje
ect has a secu red loan with
h Superior Creedit, when it
was fiiled (first ope
ened) and when it was to mature.
m
This is not derogaatory credit.
Figure 80 – Equifax: Se
ecured Loan
[33] Secured
S
Loan :
Filed
08/20
002
Credittor/Amt:
Descrription:
N
o
Court Name
Court No
Maturity
CENT REG
R TOR 481VC00214
12/20004
SUPERIIOR CREDIT 9 ELLIS AV TOR
R 3600
Security Disposition Unknown
Filed By
Subject
Chapte
er 14: Applicaation Analysiss – Borrower Credit
33
35
ollowing figurre shows the reader that our
o subject haas a judgment against him
m. This also
The fo
requirres that the mortgage
m
agent ask the clie
ent for clarifi cation.
Figure 81 – Equifax: Ju
udgment
[34] Judgment :
Filed
05/20
002
Defen
ndant:
Case No:
Plainttiff:
Descrription:
Tyype Court Name
N
Cou
urt No
Jdggm
481VC00297
Te
est File
55
5555/02
TR
RANS CANADA
A CREDIT
Disposition Unkknown
A
Amt
44800
Statu
us Date Vrfd
d
Su
uccess Tip ‐ Notes
All explanations from the cliient regardingg his or her credit must bee included in tthe Notes
se
ection of the application
a
be
efore submisssion to a lendder. The lend
der’s underwrriter will
no
otice negative
e information
n on the credit report and will ask for an
n explanation
n. By
prroviding it witth the submisssion you will save time annd prevent co
onfusion.
The fo
ollowing figurre is a comple
ete breakdow
wn of the cliennt’s current credit into trad
de lines. As
was seen in the Summary sectio
on, our subject has 3 tradee lines. He haas a CIBC loan
n (we can tell
e rating – I2, where
w
the “I”” stands for “IInstallment” aas well as thee fact that thee
this because of the
description describ
bes this as a Personal
P
Loan
n). He also haas a Zellers acccount, and a TD Visa that
is reported as Lost or stolen in the
t status.
For eaach trade line
e it is indicate
ed when the account
a
was l ast reported by the creditt grantor
(RPTD
D), when it waas originally opened
o
or cre
eated (OPND)), the highest credit that th
he individual
has haad on that traade line (H/C)), the monthly payments oor terms (TRM
MS), the curreent
outstaanding balancce (BAL), any past due amounts (PDA), the current rrating (RT), ho
ow many
times if any that th
he account haas been delinq
quent thirty, sixty and ninety days (30//60/90), the
MR) and finally the last daate that theree
numb
ber of monthss that this acccount has bee
en reported (M
was any
a activity on
n this accountt (DLA).
There
efore, in looking at our sub
bject’s Zellers account, it caan be seen th
hat it was origginally openeed
on Jun
ne of 2001, eight months after
a
he was discharged frrom his bankrruptcy. The laast payment
that he
h made on th
his account was
w in May of 2004 and he is currently u
up to date. W
We can see
that he
h has never been
b
late in his
h payments with his Zelleers account, w
while his CIBC
C account hass
been late several times,
t
and he is currently behind
b
on hiss payments byy one month..
336
Chapte
er 14: Applicaation Analysiss – Borrower Credit
Figure 82 – Equifax: Trrade Lines
[35] Trade
T
Informa
ation (Subjecct 1)
Member Trades:
Bus/ID Code
Rptd
Opnd
HC
H
Terms
BAL
CIBC (999) 999‐9999
*J 007
06/2004 04/2001 28K
4200
7BB01351
2
555
I3‐07/2
Prev Hi
H Rates:
2002, I4‐06/20
002, I5‐02/20002
Accou
unt:
845454
45
Descrription:
Personal Loan
Semi‐M
Monthly Paym
ments
ZELLEERS
280
00
2555
*I 650DV00014
01/2004 06/2001
0
26
unt:
845555
5555
Accou
Descrription:
Amoun
nt in H/C Column is credit llimit
Monthly Payments
PDA
Rt
30
0/60/90
MR
DLA
5555
I2
4/3/1
21
1
04/2004
R1
0/0/0
16
6
05/2004
TD VISA (999) 999‐9999
*650O
ON00044
06/2004
Lo
Status:
ost or stolen card
c
0
0/0/0
Su
uccess Tip – Question
ning creditt issues
What
W
questions should you ask our subje
ect about his credit probleems? The queestion that
sh
hould be asked is, “What caused you to miss your paayments on yo
our CIBC loan
n?” The
an
nswer must be included in the Notes se
ection of the aapplication.
The fo
ollowing figurre provides th
he percentage
e of the availaable credit th
hat our subjecct has used.
This iss calculated by
b dividing hiss balances by his high creddit, which are typically the credit limits..
Figure 83 – Equifax: Crredit Utilization
[36] Credit
C
Utilizattion: 22%
30800
6755
ollowing figurre illustrates what
w
the ban
nking section appears like. This is not normally found
The fo
on mo
ost credit rep
ports.
Figure 84 – Equifax: Ba
anking Informattion
[37] Banking
B
(Subjject 1)
Checkking/Saving:
Rptd
Amo
ount
Opnd
BANQ
QUE SCOTIA, 001BB05697,, (999) 999‐99
999
06/20
004
09/199
99
L5F
Nb NSSF, Status:
4 NSF 2002,
2
Account No
o
Accoun
nt Type
Checkking/Saving
Chapte
er 14: Applicaation Analysiss – Borrower Credit
33
37
ollowing figurre will indicatte that there is
i a statemennt that the consumer has aadded to his o
or
The fo
her fille and will pro
ovide that staatement. This is not norm
mally seen on most credit reports,
howe
ever it is vital that
t
you checck if there is a declaration included. In this examplee it is clear thaat
our su
ubject has been the victim
m of fraud and
d therefore al l information
n must be verified.
Figure 85 – Equifax: Narrative
[38] Consumer
C
Declaration (Subject 1)
06/200
Rptd, Purge:
04, 06/2005
Decla
aration:
*****W
WARNING***
***CONFIRMEED TRUE NAM
ME FRAUD/FR
RAUDULENT
CREDIT APPLICATIO
ONS HAVE BEEEN SUBMITTTED USING TH
HIS NAME/ IF YOU ACCESS THIS FILE AS
PART OF A CREDIT CHECK, PLEA
ASE VERIFY WITH
W
THE CUSTTOMER THATT IT IS LEGITIM
MATE BEFOREE
EXTEN
NDING CREDIT/PHONE (12
23)456‐7890
ollowing figurre indicates th
hat the reporrt is completee and that theere was no more
The fo
inform
mation available on this co
onsumer.
Figure 86 – Equifax: En
nd of Report
End Of
O Report
3 Credit Scores
S
and Analy
ysis
14.3
A cred
dit report con
ntains information that is kept
k
on an inddividual’s filee for a certain
n period of
time. This can difffer from province to provin
nce, but in Onntario the following chart illustrates
how long both Equ
uifax and Tran
nsunion keep specific inforrmation.
Figure 87 – Compariso
on between Equiifax and Transun
nion: Years keptt on file
Item
Creditt transactionss, from the daate of last acttivity
Judgm
ments, from the reporting date
Collecctions, from the
t first date of delinquenccy
Securred Loans, fro
om the date opened
o
Bankrruptcy, from the
t date of diischarge
Consu
umer Proposaal, from the date
d
satisfied
Creditt Counseling, from the datte paid
on file
Years kept o
Eq
quifax
Transunion
6
6
6
7
6
6
6
5
6
7
3
3
3
2
Und erstandin
ng a Credi t Score
The credit score is a numerical representatio
on of the subjject’s currentt and past creedit and can
range
e between 300
0 (the lowestt score repressenting the w
worst credit) and 900 (the h
highest score
representing the best
b credit). The
T credit‐sco
oring model uused by Equiffax and Transsunion is
based
d on the FICO (Fair Isaac Co
ompany) mod
del in the Uniited States.
Equifaax’s credit sco
ore is called the Beacon Sccore while TraansUnion’s is called Empirrica Score. Fo
or
the le
ender, the cre
edit score playys a significan
nt factor in thhe decision to
o lend, and in determining
the te
erms and conditions of thaat loan. The following
f
figuure illustrates why this is th
he case,
provid
ding a tabulattion of the rates of delinqu
uencies basedd on an indiviidual’s credit score.
338
Chapte
er 14: Applicaation Analysiss – Borrower Credit
Figure 88 – Canadian Delinquency
D
Rattes by Beacon Score
Canadian Delinquency Rates by B
Beacon Sc
core
source: Equifa
ax Canada, 2015
60%
55%
50%
40%
33%
30%
21%
20%
11%
1
10%
0%
5%
300 to 499
500 to 549
550
5 to 599
600
0 to 649
650 tto 699
2%
%
700 to 749
1%
1%
750 to 79
99 800 and ove
er
There
e are several major
m
items that
t
affect an individual’s ccredit score, aas is illustrateed by the
follow
wing figure.
Figure 89 – Breakdown
n of a Credit Sco
ore
Chapte
er 14: Applicaation Analysiss – Borrower Credit
33
39
Item
ms that afffect a Cre
edit Score
Paym
ment History
Missin
ng or late payyments will haave a negativve effect on a credit score. It is importaant to ensure
that all
a payments are
a made on or before the
eir due dates,, and in the co
orrect amoun
nt. Any
judgm
ments, bankru
uptcies, collecctions and oth
her public reccords are con
nsidered quitee serious and
have a significant detrimental
d
im
mpact on a crredit score.
Amou
unts Owed
A goo
od rule of thumb is to keep
p balances below thirty‐peercent of the aavailable cred
dit limit.
Balances over this amount mayy lower a cred
dit score. Havving several aaccounts with high balancees
in relaation to the available
a
credit may indicate that the inndividual is reelying heavily on credit to
meet his or her daily living need
ds.
Lengtth of Credit History
H
The lo
onger a trade line has been
n established, the higher tthe credit sco
ore. Thereforre if an
individual is consid
dering closingg an account he
h or she shoould consider closing the m
most recently
opene
ed account.
New Credit
C
and Inquiries
Multiple inquiries can lower a credit
c
score. The
T program can determin
ne that an ind
dividual is a
creditt seeker. How
wever, if an in
ndividual is se
eeking mortgaage or auto fiinancing, the program
allows for a thirty‐day buffer. For
F example, if an individu al applies forr a mortgage on November
th
a the creditt report show
ws three previous inquiriess in Novembeer, the prograam will ignoree
30 , and
those
e three inquiriies since theyy took place within
w
the thirrty‐day buffer zone.
In add
dition, if the individual hass mortgage orr auto inquiriees on his or h
her credit report outside of
that thirty‐day perriod, the proggram will onlyy count them as one inquirry provided th
hat they weree
e within a fourteen‐day period.
made
Howe
ever, multiple
e applications for other typ
pes of credit ssuch as perso
onal loans and
d credit cardss
will lo
ower an individual’s credit score. The program
p
also takes into acccount the len
ngth of time
since the last new account was opened.
Typess of Credit
The best mix of cre
edit is a comb
bination of a store
s
credit ccard and a maajor credit carrd such as a
Visa or
o MasterCard
d. It is importtant not to haave too manyy, however, as the numberr of trades on
n
a file can negativelly impact a crredit score.
Numb
ber of Tradess on File
Too many
m
credit caards and loan
ns may also lo
ower an indiviidual’s credit score. By haaving only a
few trrade lines, an
n individual’s credit
c
score may
m be improoved.
Creditt Inactivity
Usingg credit responsibly is one of
o the fastestt ways to incrrease a credit score. Unfortunately
those
e who only use cash to makke purchases can have a loower credit sccore than tho
ose who
regulaarly use credit. The follow
wing figure pro
ovides an exaample as to how a credit‐sscore might be
calcullated. Althou
ugh this is only part of the model that F air Isaac usess, the followin
ng was
disclo
osed by Fair Issaac when it presented
p
to the Federal TTrade Commission in Wash
hington, D.C.
340
Chapter 14: Application Analysis – Borrower Credit
on July 22. 1999. Since the credit‐scoring models used by the credit bureaus are proprietary,
and although the following chart may be modeled on them, this is only for illustration purposes
and does not insinuate nor purport to be how Equifax, Transunion, or any other credit bureau
determines a credit score.
Figure 90 – Calculating a Credit Score
Own/Rent
Years at
Address
Occupation
Own
25
Rent
15
Other
10
<.5
.5‐2.49
2.5‐6.49
12
10
15
Professional Semi‐Prof Manager
6.5‐
10.49
19
Office
23
Blue
Collar
25
No
Info
13
Retired
Other
31
22
44
<.5
.5‐1.49
2
8
19
25
30
39
None
Dept St
Maj CC
Both
No
answer
No
Info
0
11
16
27
10
12
Checking
Savings
Other
No Info
5
10
Check &
Sav
20
11
9
<15
15‐25
26‐35
36‐49
50+
22
15
12
5
0
No
Info
13
0
1
2
3
4
5‐9
3
11
3
‐7
‐7
‐20
Years in File
<.5
0
1‐2
5
3‐4
15
5‐7
30
8+
40
Number of
Revolving Trades
0
5
1‐2
12
3‐5
8
6+
‐4
% of Limit Used
0‐15%
15
16‐30%
5
31‐40%
‐3
41‐50%
‐10
Worst Credit
No Record
Department Store
(DS)/
Major Credit Cards
(MCC)
Bank
Reference
Debt Ratios
Number of Inquiries
0
Any
Derog
‐29
28
>10.49
50
Years on job
31
No Info
17
1.5‐2.49 2.5‐5.49 5.5‐12.49 12.5
Any Slow
‐14
1 Satisf
Lines
17
>50%
‐18
2 Satisf 3 Satisf
Lines
Lines
24
29
Retired
43
No
Record
0
No
Info
27
No
Info
20
Chapter 14: Application Analysis – Borrower Credit
341
14.4 Key Terms and Definitions
Bankruptcy
A legally declared inability of an individual or organization to pay their creditors
Beacon Score
A numerical representation of an individual’s credit provided by Equifax
Collections
A debt that has been placed with a collection agency which is a company assigned to collect a
debt on behalf of a third party
Consumer Proposal
A proposal made by a consumer debtor to his or her creditors under Division II of Part III of the
Bankruptcy and Insolvency Act (BIA), with the intention being to restructure the debt. A typical
proposal will result in the debtor repaying less than the full debt but more than might occur in a
bankruptcy
Credit
The granting of a money by one party to another with an arrangement to make periodic
payments to the credit grantor to retire the debt
Credit Bureau
An agency that collects information on individuals and provides that information to its members
Credit Counseling
Credit counseling involves negotiating with creditors to establish a repayment plan that will
repay the borrower’s debt with more favourable terms for the borrower than are currently in
place.
Credit Report
A report on an individual’s credit. Two types exist: one which is made available to the consumer
and one which is provided to a member of a credit bureau
Credit Score
A numerical representation of an individual’s credit
Empirica Score
A numerical representation of an individual’s credit provided by Transunion
Equifax
A Canadian credit bureau
Fair Isaac Company (FICO)
Fair Isaac, founded in 1956, is a company that provides software and consulting services. Its
software is used by credit bureaus to calculate credit scores
Judgment
A final court ruling resolving the key questions in a lawsuit and determining the rights and
342
Chapter 14: Application Analysis – Borrower Credit
obligations of the opposing parties, such as the awarding of monies to an injured party
Public Records
Information that is available to the Canadian public. Credit bureaus include publicly available
information such as bankruptcies, judgments, etc. in their credit reports
Secured Loan
A loan in which a borrower pledges an asset such as a car that may be sold if the borrower is
unable to repay the loan. This is typically registered under the Personal Property Security Act
(PPSA)
Trade Line
Information on a debt, found in a credit report, that contains the date that the credit was
granted, the balance, terms and repayment history
Transunion
A Canadian credit bureau
Chapte
er 14: Applicaation Analysiss – Borrower Credit
34
43
14.5
5 Review
w Questio
ons
Answers to the Revview Questio
ons are found at www.REM
MIC.ca
Sho
ort Answe
er Questio
ons
1. De
efine the term
m trade line.
2. Disscuss the item
ms that are involved in calcculating a creedit score.
3. Wh
hat can an ind
dividual do to
o increase his or her creditt score?
4. If an
a individual has a judgme
ent filed again
nst him or herr, in what secction of a cred
dit report
wo
ould this inforrmation be fo
ound?
5. If an
a individual has an account rated as an
n R3 on his orr her credit reeport, what type of credit
is this
t rating refferring to and
d how many months
m
in arr ears is this acccount?
6. Wh
hat is the relaationship betw
ween a creditt score and thhe delinquenccy rates of Caanadians?
7. Ho
ow long does a bankruptcyy remain on an individual’ss credit reporrt provided byy:
a) Eq
quifax?
b) Transunion?
ow long does credit counse
elling remain on an individdual’s credit rreport provideed by:
8. Ho
a) Eq
quifax?
b) Transunion?
9. If an
a individual disputes an ittem in his or her credit repport, what caan he or she d
do?
10. Can a mortgagge agent provide a copy of a client’s creedit report to the client?
344
Chap
pter 15: Application Analyssis – The Prop
perty
Ch
hapter 15:
1 App
plicatio
on Anaalysis – The Propertyy
Lea
arning Outccomes
Succcessful undersstanding of th
he concepts presented
p
in tthis chapter w
will enable the learner to:
 Describe the purpose
p
of an approved real estate app raisal
 Discuss Autom
mated Valuatio
on Models (A
AVMs) and ris k assessmentt tools and their impact
on valuing properties
 Explain the thrree main wayys of determinning the valuee of a property
 Discuss
D
the three main type
es of appraisaal reports andd the scope o
of each
Intro
oduction
A reall estate appraaisal is a key component
c
in
n a lender’s d ecision to len
nd. There aree several
purpo
oses for comp
pleting a real estate appraiisal, includingg to determin
ne:
 The cost to rebu
uild the home
e in case of damage, such as by fire (inssurable valuee)
v
so that a municipalitty can apply itts property taax rate (taxation purposess)
 A value
 The price that a real estate investor would pay for a p roperty based
d on his or heer preferred
ratte of return (iinvestment vaalue)
 The amount thaat the property can obtain
n if sold (sellinng price)
 The future value of a properrty under construction (futture price)
 The value of a property
p
being expropriate
ed by the Croown (expropriiation value)
 The market valu
ue of a prope
erty for a lend
der to decide on an approp
priate loan am
mount for
ortgage financing.
mo
The process in determining valu
ue for each re
eason differs,, since the vallue will differr based on thee
appraaisal’s purpose. This chaptter will focus on the appra isal process o
only as it relattes to
mortggage financing.
15.1
1 Apprais
sal Basic
cs
A lend
der requires an
a appraisal to
t be completted on a propperty to deterrmine the maarket value off
that property.
p
In addition,
a
an appraisal
a
can provide several other piecces of vital infformation
requirred to make an
a informed decision
d
to lend. Since lennders will lend
d based on a LTV, the
lende
er requires an exact estimaation of value to determinee the exact m
mortgage amo
ount availablee.
The Apprais er
The appraiser is the accredited individual wh
ho completess the appraisaal report. Alth
hough a
licensse to conduct appraisals is not required in Ontario, nno lender wou
uld use a non
n‐accredited
appraaiser since the
e decision to lend will typiccally involve sseveral hundred thousand
d dollars. Thee
lende
er must be con
nfident that the
t appraisal company em
mploys appraissers who are educated in
performing appraisals, have pro
oven track reccords or are ssupervised byy senior appraaisers, follow
w
ethicaal standards as
a set forth byy the industryy and are gennerally known
n to produce q
quality
reporrts.
Chap
pter 15: Application Analyssis – The Prop
perty
34
45
o list of approved appraaisal companies. These arre companies
Severral lenders will have their own
that they have deaalt with in the
e past or who have been thhrough an ap
pproval process by the
lende
er that typically involves asssessing the appraisal
a
com
mpany to ensu
ure that it meets the
lende
er’s standardss.
Acc reditation
ns
Appra
aisal Institute
e of Canada (A
AIC) ‐ www.aaicanada.ca
In Onttario, there are several accreditations provided
p
by pprofessional aassociations, eeach grantingg
its ow
wn designation. The most widely known
n and accepteed designatio
ons are offereed by the
Appraaisal Institute of Canada (A
AIC), a professsional appraissal associatio
on. The AIC provides two
design
nations, the AACI
A
and the CRA. Both de
esignations hhave educatio
onal requirem
ments such as a
university degree as
a well as exp
perience and continuing edducation requ
uirements.
 Acccredited App
praiser Canad
dian Institute,, Professionaal Appraiser (AACI, P.App))
This designation
n is the highe
est designatio
on provided b y the AIC. Th
his designatio
on certifies
thaat the holder is qualified to
o offer valuattion and conssulting servicees on all types of
pro
operties, inclu
uding residen
ntial, industriaal, commerciaal, and rural. The designee holds an
undergraduate degree from a recognized
d university annd has complleted the AAC
CI program off
stu
udies and hass fulfilled all of
o the professional require ments of the AIC.
 Canadian Resid
dential Appraaiser (CRA)
The designee ho
olds an undergraduate degree from a rrecognized un
niversity and has
completed the AACI
A
program
m of studies and
a has fulfilleed all of the p
professional rrequirementss
of the AIC. The CRA is qualiffied to offer valuation
v
and consulting seervices and exxpertise for
ind
dividual, unde
eveloped residential dwellling sites and dwellings containing not more than
fou
ur self‐contained family ho
ousing units.
The Canadian
C
Natiional Associaation of Real Estate
E
Appraaisers (CNAREEA) ‐ www.cnarea.ca
 DA
AR (Designate
ed Appraiser Residential)
This designation
n identifies a member who
o is qualified to perform appraisal and consultation
asssignments of residential tyype propertie
es consisting oof no more th
han four houssing units and
d
no
on‐complex co
ommercial properties having a residenttial component. Requirem
ments for this
designation include three thousand hours of full time appraisal exp
perience and the successfu
ul
completion of the
t required Canadian
C
Nattional Associaation of Real EEstate Appraiisers
educational pro
ogram or its equivalent.
e
 DA
AC (Designate
ed Appraiser Commercial))
This designation
n identifies a member who
o is qualified to perform appraisal and consultation
asssignments of all types of re
eal property including
i
com
mmercial, industrial, and in
nvestment. To
o
atttain this desiggnation an ind
dividual mustt have the DA
AR designatio n, five years o
of full time
appraisal experience, and co
omplete the required Canaadian Nationaal Association
n of Real
Esttate Appraise
ers educational program or its equivale nt.
AC (with a Spe
ecialty in Agrricultural)
 DA
This designation
n identifies a member who
o is qualified to perform appraisal and consultation
asssignments of all types of re
eal property. The requirem
ments for thiss specialty incclude the DAC
C
designation and
d the complettion of the required Canaddian National Association o
of Real Estatee
Ap
ppraisers educcational program or its equivalent.
346
pter 15: Application Analyssis – The Prop
perty
Chap
 CM
MAR (Certified Mortgage Appraisal
A
Revviewer)
This designation
n identifies a member who
o is qualified to perform p
professional reeviews of anyy
w
might be
b used for m
mortgage purp
poses. To attaain this
ressidential apprraisal report which
designation an individual mu
ust have a minimum of 2 yyears experien
nce in the mo
ortgage
financing professsion and com
of Real Estatee
mplete the re
equired Canaddian National Association o
Ap
ppraisers educcation prograam.
 CA
AR (Certified Appraisal
A
Revviewer)
This designation
n identifies a member who
o is qualified to perform p
professional reeviews of anyy
appraisal reportt. To attain th
his designatio
on an individuual must havee the DAR dessignation and
complete the re
equired Canadian National Association of Real Estate Appraisers educational
pro
ogram; or, be
e a registered mortgage brroker, hold thhe AMP designation of CAA
AMP, have 5
years mortgage
e financing experience, and
d complete thhe required C
CNAREA education
pro
ogram.
O
Real Estate
E
Association ‐ www.orea.com
The Ontario
 Ma
arket Value Appraiser
A
– Residential De
esignation (M
MVA)
As of July 31, 20
007 this desiggnation is no longer being offered. How
wever currentt holders of
the
e designation
n may continu
ue to use it prrovided they m
meet certificaation and edu
ucational
req
quirements.
The Real
R Estate Institute of Can
nada ‐ www.rreic.ca
 Fellow of the Real Estate Insstitute (FRI)
s
design
nation for the real estate s ales professio
onal, FRI exem
mplifies the
Canada's most senior
mo
ost educated and experien
nced real estaate salespersoon.
The Apprais al
An ap
ppraisal is a re
eport produce
ed by a design
nated appraisser that determines the m
market value o
of
an intterest in land using accepted valuation techniques bbased on the p
purpose of th
he appraisal
for a specific
s
clientt.
The client in most cases of morttgage financing is the lendder, although the applicant typically
pays for
f the appraisal report. Itt is an importtant distinctioon to make th
hat the client is paying for
the se
ervice of the appraisal
a
bein
ng completed
d, while the leender owns th
he report.
eport will basse the markett value on the
e lender’s speecific criteria aand include d
details about
The re
the prroperty that the
t lender maay require. In
n certain circuumstances, leenders will require a
different emphasiss on propertyy characteristiics, resulting in the appraisal report being acceptablle
to one
e lender while unacceptab
ble to another.
nt’s request fo
or financing aand the appliccant wishes tto provide thee
If a lender decliness the applican
appraaisal to another lender, the
e appraiser must
m re‐addre ss the appraisal to the new
w lender and
the ne
ew lender mu
ust be willing to accept it. This does noot always occu
ur since differrent lenders
have different requirements.
pter 15: Application Analyssis – The Prop
perty
Chap
34
47
The Value off a Prope
erty
It is im
mportant to distinguish
d
be
etween marke
et value and pprice. Price iss what may be paid for a
prope
erty; howeverr there are many reasons that
t
the pricee paid for a prroperty may b
be higher or
lowerr than what so
omeone else may pay for it. For exampple, if a purch
haser is buying a house
from a family mem
mber the price
e paid may be
e lower than tthe price wou
uld be if sold to a non‐
familyy member. In
n addition, a real
r estate invvestor may p ay more for a property thaat he or she
believves will provid
de a high retu
urn on his or her
h investmeent.
Market Value
A lend
der is interestted in knowin
ng what the market
m
will paay for a propeerty under no
ormal
circum
mstances. Th
herefore, the real estate ap
ppraiser mustt appraise thee market valu
ue. The
marke
et value can be
b defined as:
The amount, in Can
nadian funds,, for which a property shouuld exchangee on the date of valuation
betweeen a willing buyer
b
and a willing
w
seller in
i an arms‐lenngth transacttion after pro
oper
markeeting, where the buyer and
d seller have each acted knnowledgeablyy, prudently, and without
pressu
ure.
15.2
2 Calcula
ating the Market Value
V
of a Property
y
There
e are three ap
pproaches thaat appraisers use to calculaate the value of a propertyy:
 Inccome Approach
 Co
ost Approach
 Dirrect Comparisson Approach
h
The In
ncome Appro
oach
The In
ncome Appro
oach of appraiisal calculatess the value off income prod
ducing properties, such ass
apartment buildinggs and other commercial properties.
p
TThis method takes the net operating
incom
me that is generated by the
e property an
nd applies a caapitalization rate (a rate o
of return
typicaal for the areaa) to that inco
ome. The ressult is the pro perty’s market value. Wh
hile this
proce
ess is ideal forr income prod
ducing properrties, it holds no value in d
determining tthe market
value of a residenttial property for
f mortgage financing.
The Cost
C
Approach
h
The Cost
C Approach
h of appraisal calculates th
he value of a pproperty baseed on the cosst of replacingg
it. This method takes the cost of
o rebuilding the structuree, less depreciation, plus th
he cost of thee
land, resulting in a final value. The
T value pro
oduced by thiis method is iideal for deteermining the
cost of
o replacing a building for insurance
i
purrposes but hoolds little valu
ue in determining the
marke
et value of a residential
r
prroperty for mortgage finanncing.
This method
m
is inclluded in a typ
pical residential appraisal tto illustrate th
placing the
he cost of rep
prope
erty and assist in determin
ning the market value; how
wever it is nott heavily relieed upon in
makin
ng the final vaaluation of market value.
D
Comparison Approaach
The Direct
This approach
a
in determining th
he market value of a propeerty is the mo
ost appropriaate for
mortggage financing and is there
efore relied heavily upon i n the appraissal report. Th
his method
uses the
t principle of substitutio
on as its basis. The conceppt is that if an
n appraiser kn
nows the pricee
348
Chapter 15: Application Analysis – The Property
that was paid for a comparable property (an appraisal typically uses three comparables) that is
similar to the subject property and has recently sold in the same neighbourhood as the subject
property, the subject property should have a market value equal to that comparable property.
This method would be simple if not for the fact that properties are heterogeneous or unique.
While two houses may be located next to each other on the same street each will have
differences, from its size to such characteristics as a finished basement, the number of
bedrooms and washrooms, the type of heating, appliances, and so on.
Because of these differences, the appraiser must make adjustments to the sales price of the
comparable property. The following example illustrates this point.
Example
A 2 bedroom, 2 storey home was recently sold for $400,000. An appraiser is being asked to
appraise the house next to it for mortgage financing. The homeowner feels that, as the
property next door sold for $400,000, his home should be worth more since he has a larger back
yard. The appraiser, while using the recently sold house next door as a comparable property,
must also use two other properties that are similar to the subject and have recently sold.
In this case the appraiser will determine the characteristics of the comparable property and
compare them to the subject property and adjust the value of the comparable property to make
it more like the subject property. Once this has been completed the adjusted value of the
comparable property should be approximately equal to the market value of the subject
property. The following chart provides an example as to how this calculation is completed. In
the left column are the characteristics of the properties. In the column to the right is the
description of the subject property. The far column describes the comparable property and lists
the adjustments to the value necessary to make the comparable property more like the subject
property.
 If the comparable characteristic is superior to the subject, subtract from the comparable
property’s value
 If the comparable characteristic is inferior to the subject, add to the comparable property’s
value
Note that to compare characteristics the appraiser must obtain information from several
sources on both the subject and comparable properties.
In calculating the adjusted value the appraiser will add the total adjustments and either add or
subtract them from the sale price of the comparable property. In this example the adjustments
equal ‐$15,000 ($5,000 – $20,000 + $5,000 – $5,000) and that amount is therefore subtracted
from the sale price of $400,000, resulting in an adjusted value of $385,000.
Therefore, based on this simplified example, the market value of the subject property should be
$385,000.
In an actual appraisal, the appraiser will use three comparable properties and will either average
the adjusted values or rely more heavily on the most similar property to determine the market
value.
34
49
Chap
pter 15: Application Analyssis – The Prop
perty
m
Item
Addrress
Subject Pro
operty
123 Markett Street
Com
mparable Pro
operty 1
1255 Market Streeet
# of days on the market
m
N/A
45
Date
e of Sale
N/A
Deccember 18, 20
007
Sale Price
N/A
$4000,000
Site Size in square
e feet
40 x 100
35 x 100
Size Liveable Floo
or Area
(L.F.A
A)
Age//Condition
1,200
Sim
milar
35 +/‐ years
15 ++/‐ years
Build
ding Type and
d Style
2 story detached
Sim
milar
Room
ms/Bedrooms/Baths
7/3/2
7/22/2
Base
ement
Finished
Finiished
Garaage/Parking
2 car garagge/private drivve
Sim
milar
Othe
er
Cen
ntral Vac
The
subject
property
is
superior
+ $5,000
‐ $20,000
+$5,000
‐$5,000
Totaal Adjustmentts
‐$15,000
Adju
usted Value
$385,000
Pau
use for cla
arification – The num
mber of com
mparabless
Thre
ee comparables are used in
i an appraisaal. In the exa mple above o
only one is sh
hown, but in
an actual
a
appraissal three similar propertiess that have reecently sold w
will be compaared to the
subjject property to provide th
he appraiser with
w enough data to makee an informed
d estimate of
valu
ue.
Autom
mated Valuattion Models (AVMs)
(
Autom
mated Valuation Models are computer programs thaat typically usse public reco
ord data on
reside
ential propertties to calculaate the marke
et value of a pproperty. Theese models have been
gainin
ng in populariity throughou
ut the world and
a are curre ntly most oftten used by leenders and
mortggage default insurers,
i
as well
w as municipalities for deetermining vaalues for prop
perty tax
purpo
oses. AVMs can
c also be off significant be
enefit to real estate appraaisers in supporting valuess
calcullated in an ap
ppraisal.
The Municipal
M
Property Assessm
ment Corporaation’s (MPACC) AVM and TTeranet’s “reaavs” AVM aree
currently the two AVMs
A
availab
ble in Ontario.
The
subject
property
is inferior
350
Chap
pter 15: Application Analyssis – The Prop
perty
e AVMs can provide quick, basic properrty values, theey are not appraisals and d
do not involvee
While
a physical inspectio
on of the property. There
efore, they doo not replace the real estatte appraiser o
or
a real estate appraaisal. They arre prone to prroducing valuues that may o
or may not acctually be
representative of the
t subject prroperty since an AVM cannnot make adjjustments forr the physical
condition of the prroperty. If a lender relies on
o an AVM foor determinin
ng the value ffor mortgage
financcing, the lend
der may open itself up for abuse.
a
Theree are several examples of p
property frau
ud
where
e the propertty was mortgaaged based on an AVM va lue when thee property waas in significan
nt
disrep
pair and there
efore not worrth what the AVM indicateed. This can aallow a fraudster to obtain
n
financcing on a prop
perty in excesss of its value
e, then defaullt on the morrtgage while kkeeping the
fundss. More information on property and mortgage
m
frauud can be found in the chapter,
Mortggage Fraud.
While
e the risk of abuse is present, the use off AVMs by lennders is increasing, partly due to the
comp
petitive nature
e of the morttgage industryy. Lenders arre making deccisions faster than ever
before to maintain
n their markett share. As th
his process coontinues, incrreased care sh
hould be
taken when relyingg on AVMs fo
or mortgage le
ending.
Risk Assessment
A
Tools
T
Although not a valuation model, both CMHC
C and Genworrth use autom
mated underw
writing
system
ms that have a component of AVMs in them. CMHCC’s ‘emili’ and
d Genworth’s ‘excel’ are
autom
mated programs that will underwrite
u
an
n application from a lendeer and make a decision to
appro
ove or decline
e mortgage de
efault insuran
nce. Part of tthese program
ms determinees whether th
he
prope
erty value, as disclosed in the
t mortgage
e application, is appropriatte for the areea in which the
prope
erty resides. Since
S
there iss no physical inspection off the propertyy, the same riisks inherent
in AVMs are appliccable to these
e risk assessm
ment tools.
15.3
3 The Typ
ypes of Ap
ppraisals
s
There
e are three baasic types of appraisal
a
repo
orts, ranging iin scope from
m basic to highly detailed.
Des
sktop App
praisal (a
also refe rred to a s a Saless Data R eport)
The Desktop
D
Appraaisal is typically used when
n an AVM is uunavailable an
nd the property is located
in a marketable
m
area. This repo
ort relies on MLS
M reports, iincluding dataa on recent saales and dataa
on reccent listings. It does not provide
p
detailed informatioon on the pro
operty nor is tthere a
physiccal inspection
n of the prope
erty, which raaises the sam e issues as arre applicable to AVMs.
Driv
ve-by App
praisal
This type of appraiisal is based on
o the same information aas the Desktop Appraisal; h
however it
also in
ncludes an inspection of th
he exterior off the propertyy. While AVM
Ms and Desktop Appraisalss
canno
ot provide dettails on whether the prope
erty is actuallly in a physicaal condition n
normal for thee
neighbourhood, a Drive‐by App
praisal can at least indicatee that the pro
operty’s exterrior is typical
or con
nforms to the
e neighbourho
ood. In addittion the Drivee‐by Appraisal allows the aappraiser to
view and
a provide details
d
on the
e neighbourho
ood, which is a key elemen
nt in assessin
ng the
marke
etability of th
he subject pro
operty. The re
eport typicallly contains exxterior photographs of thee
prope
erty as well ass the immediaate neighbourhood.
Chap
pter 15: Application Analyssis – The Prop
perty
35
51
praisal resultss in the determ
mination thatt the propertty appears to be in a
If the Drive‐by App
condition that is no
ot typical of the
t neighbourhood, a Full Appraisal sho
ould be comp
pleted.
Full Appraisa
al
A Full Appraisal expands on the
e information and techniquues used in th
he Sales Data Appraisal and
the Drive‐by Appraaisal by having a full inspecction of the ssubject propeerty completeed. This
inspection allows the
t appraiser to documentt the characteeristics of thee subject prop
perty,
includ
ding any upgrrades or defeccts in the hom
me. The repoort typically co
ontains interiior and
exteriior photograp
phs of the pro
operty as well as the immeediate neighb
bourhood. Co
onsidered to
offer the most info
ormation and therefore the highest leveel of protection for the len
nder, the Full
Appraaisal is the appraisal of cho
oice for lende
ers who rely hheavily on thee property as security and
less on
o the personal covenant of
o the borrow
wer. Virtually every sub‐prrime and privaate lender wiill
insist on a Full App
praisal.
The fo
ollowing figurres are examp
ples of a Drive
e‐by Appraisaal report and a Full Appraisal report.
They illustrate the differences in the levels of
o detail contaained in the ttwo types of rreports.
352
Chapter 15: Application Analysis – The Property
Figure 91 – Drive‐By Appraisal Report
Drive‐by Appraisal Report
RESIDENTIAL APPRAISAL REPORT
"DRIVE‐BY" FORM
Client Ref. #: .................................................
File #: .............................................................
Client: .......................................................... Address of Property: ................................................... Appraiser: .......................................................
Attention: .................................................... ..................................................................................... Company: .......................................................
Address: ....................................................... ..................................................................................... Address: .........................................................
.............................................................. ..................................................................................... ........................................................................
E‐mail: .......................................................... ..................................................................................... E‐mail: ............................................................
Phone: .......................................................... Province: ..................................................................... Phone: ............................................................
Fax: .......................................... Postal Code: .............................................................................. Fax:
Applicant Name: ..................................................................................................................................................................................................................
PROPERTY & NEIGHBOURHOOD DATA
LEGAL DESCRIPTION: ..........................................................................................................................................................................................................
MUNICIPALITY AND DISTRICT: ...........................................................................................................................................................................................
ASSESSMENT: LAND $ ............................. IMP $ ................... TOTAL $ .......................... year ................. TAXES $ ................ year ..............
PURPOSE OF APPRAISAL:
To estimate market value  or Other  (describe) ....................................................................................................
INTENDED USE OF APPRAISAL: ...........................................................................................................................................................................................
PROPERTY RIGHTS APPRAISED:
Fee Simple 
Leasehold 
Condominium 
Cooperative 
Other  .......................
Is the subject a fractional interest, physical segment or partial holding?
No 
Yes  (If yes, see comments elsewhere in this report)
OCCUPIED BY:
Owner 
Tenant 
Vacant 
HIGHEST AND BEST USE:
As improved  or
Other  (describe) ................................................................................
Note: If Highest and Best Use is not the current use, or not the use reflected in the report, see comments attached.
NATURE OF DISTRICT
TREND OF DISTRICT
CONFORMITY OF SUBJECT
SUPPLY
 Residential
 Improving
AGE:
SIZE:
 Good  Fair  Poor
 Rural
 Stable
 Newer
 Larger
 Commercial/Industrial
 Transition
 Older
 Smaller
DEMAND
 Mixed
 Deteriorating
 Good  Fair  Poor
 Similar
 Similar
 Other
 Other
AVERAGE PROPERTY AGE:
DISTANCE TO:
PRICE RANGE OF PROPERTIES:
DISTRICT
Elem.School .............. Jr. Secondary ...............
IN GENERAL DISTRICT
................ to Years
High School ............... Downtown ..................
$
................ to $
IMMEDIATE AREA
Public Trans. .............. Shopping Fac. ..............
IN IMMEDIATE AREA
................ to Years
Other ................................................................
$
................ to $
SUMMARY: Includes market appeal, apparent adverse influences in area, if any (e.g. railroad tracks, unkempt properties, major traffic arteries, hydro
facilities, anticipated public or private improvements, commercial/industrial sites, landfill sites, etc.)
SUBJECT PROPERTY DESCRIPTION
ZONING DES'N: ............ SIZE DIMS: ................................ SITE AREA: .......................... TOPOGRAPHY:
PRESENT USE: ........................................................................................... DOES IT CONFORM?
Yes  No  (see comments)
ESTIMATED AGE OF SUBJECT: ...................... Years
PARKING:
Garage 
Carport 
Driveway 
CURB APPEAL: Good  Average  Fair  Poor 
EXTERIOR CONDITION: Good  Average  Fair  Poor 
EXTERIOR FINISH:
ROOFING MATERIAL:
 Brick Veneer
 Solid Brick
 Insulbrick
 Asphalt Shingle  Wood Shingle  Tar & Gravel
 Stone Veneer
 Solid Stone
 Stucco
 Slate
 Metal
 Other
 Wood Siding
 Aluminum Siding
 Vinyl Siding
.....................................................................................................................
 Other ..............................................................................................................................................................................................................................
COMMENTS: .......................................................................................................................................................................................................................
COMPARABLE SALES DATA
ITEM
Address
MLS Listing #/(if applicable)
Days on Market
Date of Sale
Sale Price
Site Size
Size L.F.A.
Age / Condition
Building Type & Style
Rooms / Bedrooms / Baths
Basement
Garage / Parking
Other
SUBJECT PROPERTY
NO. 1
NO. 2
NO. 3
/
/
/
/
/
/
/
/
/
/
/
/
Reconciliation/Conclusions: ................................................................................................................................................................................................
Chapter 15: Application Analysis – The Property
353
History and analysis of known current Agreements for Sale, prior sales, options, listings or marketing of the Subject in the past year.
Indicated Exposure Time of Similar Properties in the Area:
Under 3 months 
3‐6 months  Over 6 months 
This appraisal report represents the following value (if not current, see comments): Current  Retrospective 
Prospective 
 Update of report completed
RESIDENTIAL APPRAISAL REPORT
"DRIVE‐BY" FORM (Cont'd)
PURPOSE, SCOPE, DISCLOSURES & DEFINITIONS
PURPOSE OF THE APPRAISAL:
This "drive‐by" report has been prepared for mortgage lending purposes for the exclusive use of the client and other intended users named. The client is aware that, as the
degree of departure from a full appraisal report increases, there is a corresponding decrease in the level of reliability of the report, resulting in a higher level of risk for the user
of the report. Due to the limitations of this reporting method, it is not intended for use by third parties and liability to any unintended users is expressly denied. The appraiser
assumes diligence by all intended users.
SCOPE OF THE REPORT
1. The client has specifically requested a "drive‐by" appraisal to be reported in an abbreviated report format. The Appraiser has been requested to perform an exterior
inspection and not to disturb the occupants by entering the building. Both the client and the appraiser understands that NEITHER A PYSICAL INSPECTION OF THE INTERIOR OF
THE SUBJECT PROPERTY NOR A STREET INSPECTION OF THE COMPARIABLES HAS BEEN PERFORMED (unless stated herein).
2. It is acknowledged by both parties that a subsequent physical inspection of the subject property and/or a more in‐depth investigation could result in a different conclusion.
3. The physical characteristics used to develop this appraisal are based on documents, records, etc. described below and on other information provided by sources identified
below. The subject property was observed only from the public street and it is assumed that the information provided by the sources is accurate. Comments (on the efforts
taken to obtain, and the source of, interior and exterior inspection information): ...........................................................................................................................................................
4. Sales and listing information of physically similar properties has been obtained from sources assumed to be reliable and accurate, and/or on information from the
appraiser's files.
5. Neither the Income nor the Cost Approaches to value are appropriate methods of valuation for this assignment, considering the limited scope of the type of appraisal
requested by the client, and therefore have not been completed.
6. Sales information on physically similar properties has been gathered and analyzed on the assumption that both the interior and exterior condition of the subject property
are in average or typical condition for its age and that there are no physical or functional conditions associated with the property that would adversely affect the conclusions
contained in this report, unless otherwise stipulated. It is assumed that the subject property is in 100% complete condition unless otherwise stated and the value range
contained herein is based on this assumption.
OTHER DISCLOSURES, COMMENTS, ETC.: ..........................................................................................................................................................................................................................
DEFINITION OF MARKET VALUE
The most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently
and knowledgeably and assuming the price is not affected by undue stimulus. Note: If other than market value is being appraised, see comments attached.
DEFINITION OF HIGHEST AND BEST USE
The reasonably probable and legal use of the property, that is physically possible, appropriately supported, and financially feasible, and that results in the highest value.
ASSUMPTIONS AND LIMITING CONDITIONS
The certification that appears in the "drive‐by" residential appraisal report is subject to the following conditions:
1. The appraiser will not be responsible for matters of a legal nature that affect either the property being appraised or the title to it. No registry office search has been
performed and the appraiser assumes the title is good and marketable and free and clear of all encumbrances, including leases, unless otherwise noted in this report. The
property is appraised on the basis of it being under responsible ownership.
2. Because market conditions change rapidly and, on occasion, without warning, the estimated market value range expressed as of the date of this appraisal cannot be relied
upon as of any other date except with further advice from the appraiser confirmed in writing.
3. The subject property is presumed to comply with government regulations including zoning, building codes and health regulations and, if it doesn't comply, its non‐
compliance may affect market value.
4. The appraiser will not give testimony or appear in court concerning this appraisal unless required to do so by due process of law.
5. The appraiser has noted in this report any readily apparent adverse conditions that were observed during the street inspection of the subject property or that he or she
became aware of during the normal research involved in performing this type of appraisal.
6. Unless otherwise stated in this report, the appraiser has no knowledge of any hidden or unapparent conditions of the property or adverse environmental conditions that
would make the property more or less valuable and has assumed that there are no such conditions and makes no guarantees or warranties, express or implied, regarding the
condition of the property. The appraiser will not be responsible for any such conditions that do exist or for any engineering or testing that might be required to discover whether
such conditions exist. Because the appraiser is not an expert in the field of environmental hazards, this drive‐by appraisal report must not be considered as an environmental
assessment of the property. The bearing capacity of the soil is assumed to be adequate.
7. The appraiser obtained information, estimates and opinions that were used in this report from sources considered to be reliable and accurate and believes them to be true
and correct. The appraiser does not assume responsibility for the accuracy of items that were furnished by other parties.
8. The appraiser will not disclose the contents of this report except as provided for by the provisions of the Canadian Uniform Standards of Professional Appraisal Practice
("the Standards").
9. The appraiser has agreed to enter into the assignment as requested by the client named in the report for the use specified by the client, which is stated in the report, which
calls for things that are different from the work that would otherwise be required by the Standards. As this is a "drive‐by" appraisal, only limited inspections have been
undertaken (Extraordinary Limiting Condition). The client has agreed that the performance of this limited scope appraisal and the "drive‐by" report format are appropriate for
the intended use.
10. Written consent from the author and supervisory appraiser, if applicable, must be obtained before any part of the appraisal report can be used for any purpose by anyone
except the client and other intended users identified in the report and, where the client is the mortgagee, its insurer and the borrower, if he or she paid the appraisal fee.
Written consent and approval must also be obtained before any part of the appraisal can be altered or conveyed to other parties, including mortgages other than the client and
the public through prospectus, offering memoranda, advertising, public relations, news, sales or other media.
11. Other (including any other Extraordinary Assumptions and Limiting Conditions involved in this appraisal):
CERTIFICATION
I certify that, to the best of my knowledge and belief:
1. The statements of fact contained in this report are true and correct.
2. The reported analyses, options and conclusions are limited only by the reported assumptions and limiting conditions and are my personal, impartial and unbiased
professional analyses, opinions and conclusions.
3. I have no past, present or prospective interest in the property that is the subject of this report and I have no personal interest or bias with respect to the parties involved.
4. My compensation is not contingent upon developing or reporting a predetermined result, value range or direction in value range that favours the cause of the client, the
amount of the estimated value range, the attainment of a stipulated result or the occurrence of a subsequent event.
5. My analyses, opinions and conclusions were developed and this report has been prepared, in conformity with the Canadian Uniform Standards of Professional Appraisal
Practice. Please note the Extraordinary Limiting Condition above, indicating the property was not inspected.
6. I have the knowledge and experience to complete this assignment competently. Except as herein disclosed, no other person has provided me with significant professional
assistance in the completion of this appraisal assignment.
7. The Appraisal Institute of Canada has a mandatory Recertification Program for designated members. As at the date of this report, the requirements of this program have
been fulfilled.
SUPERVISORY APPRAISER'S CERTIFICATION:
If a supervisory appraiser has signed this appraisal report, he or she certifies and agrees that "I directly supervised the appraiser who prepared this appraisal report and, having
reviewed the report, agree with the statements and conclusions of the appraiser, agree to be bound by the appraiser's certification and am taking full responsibility for the
appraisal and the appraisal report.”
PROPERTY IDENTIFICATION:
Address: ...................................................................... City: ..................................... Province: .................................. Postal Code: .....................
Legal Description: ...............................................................................................................................................................................................................
AS A RESULT OF MY APPRAISAL AND ANALYSIS OF ALL APPLICABLE DATA AND RELEVANT FACTORS THERETO, IT IS MY OPINION THAT THE SUBJECT PROPERTY IS ESTIMATED
TO HAVE A VALUE RANGE OF
354
From $
As at
Chapter 15: Application Analysis – The Property
......................................................................................................
To $ .....................................................................................................................................
(Effective Date of the Appraisal)
APPRAISER:
Signature: ......................................................................................................
Name:
......................................................................................................
Designation: ..................................................................................................
Date signed: ..................................................................................................
License Info (where applicable): ...................................................................
NOTE: For this appraisal to be valid, an original or EDI signature is required.
SUPERVISORY APPRAISER: (if applicable)
Signature: ...........................................................................................................................
Name: .................................................................................................................................
Designation: .......................................................................................................................
Date signed: .......................................................................................................................
License Info (where applicable): .........................................................................................
Chapter 15: Application Analysis – The Property
355
Figure 92 – Full Appraisal Report
Full Appraisal Report
RESIDENTIAL APPRAISAL REPORT
"FULL" FORM
Client Ref. #: .............................................................. ...................................................................................................... File #: ............................................................................
Client: ........................................................................ Address of Property: ................................................................... Appraiser: ......................................................................
Attention: .................................................................. ...................................................................................................... Company: .....................................................................
Address: ..................................................................... ...................................................................................................... Address: ........................................................................
........................................................................... ...................................................................................................... .......................................................................................
E‐mail: ....................................................................... ...................................................................................................... E‐mail: ..........................................................................
Phone: ....................................................................... Province: ..................................................................................... Phone: ..........................................................................
Fax: ...................................................... Postal Code: ............................................................................................... Fax:
Applicant Name: .................................................................................................................................................................................................................................................................
These sections
are the same as
the Drive‐by
MUNICIPALITY AND DISTRICT: ..........................................................................................................................................................................................................................................
ASSESSMENT: LAND $ ......................................... IMP $ ......................... TOTAL $ ................................. year ...................... TAXES $ ......................
year ...................
appraisal
year ...................................................................
PROPERTY & NEIGHBOURHOOD DATA
LEGAL DESCRIPTION: .........................................................................................................................................................................................................................................................
PURPOSE OF APPRAISAL:
To estimate market value  or Other  (describe) ......................................................................................................................................
INTENDED USE OF APPRAISAL: Financing  or Other  (describe) .............................................................................................................................................................................
PROPERTY RIGHTS APPRAISED:
Fee Simple 
Leasehold 
Condominium 
Cooperative 
Other (describe)  ...............................
Is the subject a fractional interest, physical segment or partial holding?
No 
Yes  (If yes, see comments elsewhere in this report)
OCCUPIED BY:
Owner 
Tenant 
Vacant 
HIGHEST AND BEST USE:
As improved  or
Other  (describe) .......................................................................................................
Note: If Highest and Best Use is not the current use, or not the use reflected in the report, see comments attached.
NATURE OF DISTRICT
TREND OF DISTRICT
CONFORMITY OF SUBJECT
ESTIMATED AGE OF SUBJECT
AVERAGE PROPERTY AGE
 Residential
 Improving
AGE:
Years
 Rural
 Stable
 Newer  Older  Similar
DISTRICT:
 Commercial/Industrial
 Transition
CONDITION:
SUPPLY
…… to ………. years
 Mixed
 Deteriorating
 Newer  Older  Similar
 Good  Fair  Poor
SIZE:
IMMEDIATE AREA:
Comments ..............................
 Other
 Larger  Smaller  Similar
DEMAND
…… to ………. years
 Good  Fair  Poor
AREA BUILT UP
Comments: ...........................................
………………. %
DISTANCE TO:
PRICE RANGE OF PROPERTIES:
Elementary School ........................................
Jr. Secondary ....................................................
IN GENERAL DISTRICT
High School ....................................................
Downtown ........................................................
$
..................... to $
Public Transportation. ...................................
Shopping Facilities ............................................
IN IMMEDIATE AREA
Other .............................................................
$
..................... to $
SUMMARY: Includes market appeal, apparent adverse influences in area, if any (e.g. railroad tracks, unkempt properties, major traffic arteries, hydro facilities, anticipated public
or private improvements, commercial/industrial sites, landfill sites, etc.) ........................................................................................................................................................................
SITE DESCRIPTION
SITE DIMENSIONS: ............................................................................
SITE AREA: .....................................................
CONFIGURATION: ..............................................................
TOPOGRAPHY: ..................................................................................
FEATURES:
UTILITIES:
DRIVEWAY:
 Paved Road
 Gravel Road
 Telephone
 Communal Well
 Private
 Concrete
 Sidewalk
 Curbs
 Natural Gas
 Sanitary Sewer
 Mutual
 Stone
 Street Lights
 Cablevision
 Propane
 Septic System
 Single
 Asphalt
Comments: ..........................
 Municipal Water
 Storm Sewer
 Double
 Gravel
 Private Well
 Open Ditch
 None
 Other ........................
Comments: ....................
PARKING:
ELECTRICAL:
LANDSCAPING:
 Garage
 Carport
 Underground
 Overhead
 Excellent
 Good
 Driveway
 None
 Other ........................
 Average
 Fair
 Other
 Poor
 None
CURB APPEAL:
EASEMENTS:
 Excellent
 Good
 Average
 Utility
 Access
 Fair
 Poor
 Other ........................................................................
ZONING: .............................................................................................................................................................................................................................................................................
PRESENT USE: ...............................................................................................
DOES IT CONFORM TO CURRENT ZONING?
Yes  No  (see comments)
COMMENTS: (Includes any positive and negative features such as conformity with zoning, effects of known easements, known restrictions on title, such as judgments or liens,
effects of assemblage, any known documentation of environmental contamination, etc.)
These sections
are much more
detailed than the
Drive‐by
appraisal
DESCRIPTION OF IMPROVEMENTS ‐ EXTERIOR
Year Built (est'd): ...................................................................
Effective Age: ..........................................
Remaining Economic Life (est'd): .............................................
Construction Complete: ........................................................
Percentage Complete: ............................................................................................................................................
Holdback Recommended:  Yes  No ............ Comments: ............................................................................................................................................................................................
FLOOR AREA:
BASEMENT:
DESIGN:
EXTERIOR FINISH:
Source ..................................................
 Full
 One Storey  1 ‐ 1 1/2 Storey
 Brick Veneer
Main .....................................................
 Partial
 Split Level  2 Storey
 Solid Brick
Second ..................................................
 Crawl Space
 Stone Veneer
Third .....................................................
Total Area: .............................................
Other: .....................................................
 Solid Stone
Total .....................................................
Sq. M. …….... Sq. Ft. ..............................
 Stucco
Sq. M …..….. Sq. Ft. ..............................
ROOFING:
 Wood siding
TYPE OF BUILDING:
 Asphalt Shingle
 Aluminum Siding
CONSTRUCTION:
 Detached
 Wood Shingle
 Vinyl Siding
 Wood Frame
 Semi‐detached
 Tar & Gravel
 Insulbrick
 Brick
 Row/Townhouse
 Metal
Other .....................................................
 Stone
 Apartment
Other .......................................................
 Concrete
Other .....................................................
Approx. Age. ...........................................
Other ....................................................
Source: ....................................................
356
Chapter 15: Application Analysis – The Property
WINDOW SASH/GLAZING:
UFFI APPARENT:
OVERALL EXTERIOR CONDITION:
 No
 Good
 Average
 Yes
................................................
 Below Average
 Poor
Comments: .........................................................................................................................................................................................................................................................................
RESIDENTIAL APPRAISAL REPORT
DESCRIPTION OF IMPROVEMENTS ‐ INTERIOR
WALLS:
CEILINGS:
.........................................................
FOUNDATION WALLS:
 Poured Concrete
 Concrete Block
 Concrete Slab
 Brick/Stone
BATHROOMS (#):
……. 2‐pc.
…….3‐pc.
…….4‐pc.
…….5‐pc.
INSULATION:
 Ceiling
 Basement
 Walls
 Crawlspace
Other ........................................................
PLUMBING LINES:
 Copper
 PVC/Plastic
 Galvanized
 ABS
FLOORING:
 W‐W Carpet
 Sheet Vinyl
 Softwood
 Vinyl Tile
 Hardwood
 Ceramic
 Linoleum
Other .......................................................
ELECTRICAL:
 Fuses
 Breakers
Comments: ...............................................
FLOOR PLAN:
 Good
 Average
 Good
 Average
 Poor
 Custom
 Fair
 Poor
"FULL" FORM (Cont'd)
FINISH:
 Drywall
 Plaster
 Paneling
 Other ...................................................
OVERALL INTERIOR COND:
 Good
 Fair
 Average
 Poor
HEATING:
 Forced Air
 Baseboard
 Hot Water
Other ........................................................
Fuel Type .................................................
WATER HEATER:
 Gas
 Electric
Other ........................................................
BUILT‐INS & EXTRA FEATURES:
 Garbage Disposal
 Oven
 Dishwasher
 Stove
 Central Air
 Air Cleaner
 Vacuum
 Whirlpool
 Swimming Pool
 Sauna
 Solarium
 Skylights
 Fireplace(s)
 Garage Opener
 Security System
Other ........................................................
BEDROOMS (#):
……. Large
……. Average
CLOSETS:
 Good
 Average
……. Small
 Fair
 Poor
Rated capacity of main panel:
Amps
These sections
provide much
GARAGES/CARPORTS: .......................................................................................................................................................................................................................................................
more
detail than
DECKS, PATIOS, OTHER IMPROVEMENTS: ........................................................................................................................................................................................................................
....................................................................................................................................................................................................................................................................................
the
Drive‐by
COMMENTS (Building, appearance, quality, condition, services, extras, anticipated public or private improvements, etc.): ........................................................................................
appraisal
BASEMENT FINISHES, UTILITY: ..........................................................................................................................................................................................................................................
ROOM ALLOCATION
MAIN
Total Rooms
Entrance
Living
Dining
Kitchen
Full Bath
Part Bath
Bedroom
Family
Laundry
Others
SECOND
THIRD
BASEMENT
COST APPROACH
Source of Cost Data:
Land Value ...................
Building ........................
Cost . @ $
Garage .........................
Basement Finish ..........

Manual
Cost New:
$
$
$
$
$
$
$
$
$
Other Extras .................
Total Replacement Cost
 Contractor
 Other
$
Depreciated Cost:
$
$
$
$
$
$
$
$
$
.............................
The cost
approach is
included
Less: Accrued Dep. ….%
Indicated Value ............
VALUE BY COST APPROACH (rounded)
$
NOTE: The construction cost estimates contained herein were not prepared for insurance purposes and are invalid for that use. The Cost Approach is not applicable when
appraising strata type dwelling units.
DIRECT COMPARISON APPROACH
ITEM
SUBJECT PROPERTY
NO. 1
Desc. Adjmt.
NO. 2
Desc. Adjmt.
NO. 3
Desc. Adjmt.
Address
MLS Listing # (if applicable)
# of Days on Market
Date of Sale
Sale Price
Site Size
Size L.F.A.
Age / Condition
Building Type & Style
Rooms / Bedrooms / Baths
Basement
Garage / Parking
Other
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
Adjusted Values
Reconciliation/Conclusions: ...............................................................................................................................................................................................................................................
VALUE BY THE DIRECT COMPARISON APPROACH (rounded): $ .......................................................................................................................................................................................
FINAL ESTIMATE OF VALUE/COMMENT ON REASONABLE EXPOSURE TIME: ................................................................................................................................................................
Chapter 15: Application Analysis – The Property
357
History and analysis of known current Agreements for Sale, prior sales, options, listings or marketing of the Subject in the past year:
(Including sources of the data and information): ............................................................................................................................................................... .
This appraisal report represents the following value (if not current, see comments):
Current 
Retrospective 
Prospective 
 Update of report completed ...........................................................................................................................................................................................
RESIDENTIAL APPRAISAL REPORT
"FULL" FORM (Cont'd)
SCOPE OF THE REPORT, DISCLOSURES & DEFINITIONS
SCOPE OF THE REPORT:
The scope of the appraisal encompasses the due diligence undertaken by the appraiser (consistent with the terms of reference from the client, the purpose and intended use of
the report) and the necessary research and analysis to prepare a report in accordance with the Canadian Uniform Standards of Professional Appraisal Practice of the Appraisal
Institute of Canada. The following comments describe the extent of the process of collecting, confirming and reporting data and its analysis, describe relevant procedures and
reasoning details supporting the analysis, and provide the reason for the exclusion of any usual valuation procedures.
DEFINITION OF MARKET VALUE
The most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently
and knowledgeably and assuming the price is not affected by undue stimulus.
Note: If other than market value is being appraised, see comments attached.
DEFINITION OF HIGHEST AND BEST USE
The reasonably probable and legal use of the property, that is physically possible, appropriately supported, and financially feasible, and that results in the highest value.
ASSUMPTIONS AND LIMITING CONDITIONS
The certification that appears in the appraisal report is subject to the following conditions:
ORDINARY ASSUMPTIONS & LIMITING CONDITIONS
1. The report is prepared at the request of the client and for the specific use referred to herein. It is not reasonable for any other party to rely on this appraisal without first
obtaining written authorization from the client, the author or any supervisory appraiser, subject to the qualification in paragraph 10 below. Liability to any person other than the
client, designated intended users and those who obtain written consent is expressly denied and, accordingly, no responsibility is accepted for any damage suffered by any such
person as a result of decision made or actions based on this report. Diligence by all intended users is assumed.
2. Because market condition, including economic, social and political factors, change rapidly and, on occasion, without warning, the market value estimate expressed as of
the date of this appraisal cannot be relied upon as of any other date except with further advice from the appraiser confirmed in writing.
3. The appraiser will not be responsible for matters of a legal nature that affect either the property being appraised or the title to it. No registry office search has been
performed and the appraiser assumes the title is good and marketable and free and clear of all encumbrances, including leases, unless otherwise noted in this report. The
property is appraised on the basis of it being under responsible ownership.
4. The subject property is presumed to comply with government regulations including zoning, building codes and health regulations and, if it doesn't comply, its non‐
compliance may affect market value.
5. No survey of the property has been made. Any sketch in the appraisal report shows approximate dimensions and is included only to assist the reader of the report in
visualizing the property.
6. This report is completed on the basis that testimony or appearance in court concerning this appraisal is not required unless specific arrangements to do so have been made
before hand. Such arrangements will include, but not necessarily be limited to, adequate time to review the appraisal report and data related thereto and the provision of
appropriate comparisons.
7. Unless otherwise stated in this report, the appraiser has no knowledge of any hidden or unapparent conditions of the property (including but not limited to, its soils,
physical structure, mechanical or other operating systems, its foundation, etc.) or adverse environmental conditions (on it or a neighbouring property, including the presence of
hazardous wastes, toxic substances, etc.) that would make the property more or less valuable. It has been assumed that there are no such conditions unless they were observed
at the time of inspection or became apparent during the normal research involved in completing the appraisal. This report should not be construed as an environmental audit or
detailed property condition report, as such reporting is beyond the scope of this report and/or the qualifications of the appraiser. The author makes no guarantees or
warranties, express or implied, regarding the condition of the property and will not be responsible for any such conditions that do exist or for any engineering or testing that
might be required to discover whether such conditions exist.
8. The appraiser obtained information, estimates and opinions that were used in this report from sources considered to be reliable and accurate and believes them to be true
and correct. The appraiser does not assume responsibility for the accuracy of items that were furnished by other parties.
9. The opinions of value and other conclusions contained herein assume satisfactory completion of any work remaining to be completed in a good and workmanlike manner.
Further inspection may be required to confirm completion of such work.
10. The content of this report are confidential and will not be disclosed by the author to any party except as provided for by the provisions of the Canadian Uniform Standards
of Professional Appraisal Practice ("the Standards") and/or when properly entered into evidence of a duly qualified judicial or quasi‐judicial body.
11. The appraiser has agreed to enter into the assignment as requested by the client named in the report for the use specified by the client, which is stated in the report. The
client has agreed that the performance of this appraisal and the report format are appropriate for the intended use.
12. Written consent from the author and supervisory appraiser, if applicable, must be obtained before any part of the appraisal report can be used for any purpose by anyone
except the client and other intended users identified in the report and, where the client is the mortgagee, its insurer and the borrower, if he or she paid the appraisal fee.
Written consent and approval must also be obtained before the appraisal (or any part of it) can be altered or conveyed to other parties, including mortgages other than the
client and the public through prospectus, offering memoranda, advertising, public relations, news, sales or other media.
13. Other (including any other Extraordinary Assumptions and Limiting Conditions involved in this appraisal):
358
Chapter 15: Application Analysis – The Property
RESIDENTIAL APPRAISAL REPORT
"FULL" FORM (Cont'd)
EXTRAORDINARY ASSUMPTIONS & LIMITING CONDITIONS:
An extraordinary assumption is a hypothesis either supposed or unconfirmed, which, if not true, could alter the appraiser's opinions and conclusions (e.g. an absence of
contamination where such contamination is possible, the presence of a municipal sanitary sewer where unknown or uncertain). An extraordinary limiting condition is a
necessary modification or exclusion of a Standard Rule, which must be explained, justified by the appraiser (e.g. exclusion of a relevant valuation approach). The appraiser must
conclude before accepting the assignment which involves invoking an Extraordinary Limiting Condition that the scope of the work applied will result in opinions and conclusions
which are credible. Both must accompany statements of each opinion/conclusion so affected.
HYPOTHETICAL CONDITIONS:
Hypothetical conditions may be used when they are required for legal purpose, for purposes of reasonable analysis or for purposes of comparison. Common hypothetical
conditions include proposed improvements and prospective appraisals. For every Hypothetical Condition, an Extraordinary Assumption is required (see above). An analysis based
on a hypothetical condition must not result in an appraisal report that is misleading or that relies on actions or events that would be illegal or improbable within the context of
the assignment. Following is a description of each hypothetical condition applied to this report, the rationale for its use and its effect on the result of the assignment.
JURISDICTIONAL EXCEPTION:
The Jurisdictional Exception permits the appraiser to disregard a part or parts of the Standards determined to be contrary to law or public policy in a given jurisdiction and only
that part shall be void and of no force or effect in that jurisdiction. The following comments identify the part or parts disregarded, if any, and the legal authority justifying these
actions.
CERTIFICATION
I certify that, to the best of my knowledge and belief:
1. The statements of fact contained in this report are true and correct.
2. The reported analyses, opinions and conclusions are limited only by the reported assumptions and limiting conditions and are my personal, impartial and unbiased
professional analyses, opinions and conclusions.
3. I have no past, present or prospective interest in the property that is the subject of this report and I have no personal interest or bias with respect to the parties involved
with this assignment, except as specified herein.
4. My engagement in this assignment is not contingent upon developing or reporting a predetermined result, upon the amount of value estimate, upon a direction in value
that favours the cause of the client, upon the attainment of a stipulated result or the occurrence of a subsequent event.
5. My analyses, opinions and conclusions were developed and this report has been prepared, in conformity with the Canadian Uniform Standards of Professional Appraisal
Practice.
6. I have the knowledge and experience to complete this assignment competently. Except as herein disclosed, no other person has provided me with significant professional
assistance in the completion of this appraisal assignment.
7. The Appraisal Institute of Canada has a mandatory Recertification Program for designated members. As at the date of this report, the requirements of this program have
been fulfilled.
SUPERVISORY APPRAISER'S CERTIFICATION:
If a supervisory appraiser has signed this appraisal report, he or she certifies and agrees that "I directly supervised the appraiser who prepared this appraisal report and, having
reviewed the report, agree with the statements and conclusions of the appraiser, agree to be bound by the appraiser's certification and am taking full responsibility for the
appraisal and the appraisal report.”
PROPERTY INDENTIFICATION:
Address: ...................................................................... City: ..................................... Province: .................................. Postal Code: .....................
Legal Description: ...............................................................................................................................................................................................................
AS A RESULT OF MY APPRAISAL AND ANALYSIS OF ALL APPLICABLE DATA AND RELEVANT FACTORS THERETO, IT IS MY CONCLUSION THAT THE MARKET VALUE OF THE
INTEREST IN THE SUBJECT PROPERTY DESCRIBED IS:
$
....................................................................................................................................................................................................................................................................................
At
(Effective Date of the Appraisal)
APPRAISER:
Signature: ......................................................................................................
Name:
......................................................................................................
Designation: ..................................................................................................
Date signed: ..................................................................................................
License Info (where applicable): ...................................................................
SUPERVISORY APPRAISER: (if applicable)
Signature: ...........................................................................................................................
Name: .................................................................................................................................
Designation: .......................................................................................................................
Date signed: .......................................................................................................................
License Info (where applicable): .........................................................................................
NOTE: For this appraisal to be valid, an original or EDI signature is required.
ATTACHMENTS:
Photo Addendum 
Other
Additional Sales 
Map Addendum 
............................................... Other
Sketch Addendum 
Assumptions / Limiting Conditions 
..................................................... Other
Narrative Addendum 
Chapter 15: Application Analysis – The Property
359
SUBJECT PHOTO PAGE
LENDER/CLIENT: ................................................
ADDRESS OF PROPERTY
APPRAISER: ........................................................
ADDRESS: ..........................................................
ADDRESS: ..........................................................
TEL: (
TEL: (
) .........................................................
) ........................................................
Subject Front
PHOTO
Sale Price: ......................................................................................
Livable Floor Area: ........................................................................
Total Rooms: ................................................................................
Total Bedrooms: ...........................................................................
Total Bathrooms: ..........................................................................
Site: ..............................................................................................
Age: ..............................................................................................
Subject Rear
PHOTO
Subject Street
PHOTO
360
Chapter 15: Application Analysis – The Property
15.4 Key Terms and Definitions
Accredited Appraiser Canadian Institute, Professional Appraiser (AACI, P.App)
The highest designation awarded to an appraiser of the Appraisal Institute of Canada
Adjusted Value
The value of a comparable property after the appraiser has made adjustments by comparing the
comparable property to the subject property
Adjustments
The amount, in dollars, of characteristics which differentiate between a comparable property
and a subject property
Appraisal
A report produced by a designated appraiser that determines the market value of an interest in
land using accepted valuation techniques based on the purpose of the appraisal for a specific
client
Appraisal Institute of Canada (AIC)
A national professional organization that designates and represents professional real estate
appraisers and valuation consultants nationwide
Appraiser
The accredited individual who completes the appraisal report. Only reports from accredited
appraisers are acceptable in the mortgage industry.
Automated Valuation Model (AVM)
A computer program that typically uses public record data on residential properties to calculate
the market value of a property
Canadian National Association of Real Estate Appraisers (CNAREA)
A national, not for profit, independent association that certifies and regulates real property
appraisers in Canada
Canadian Real Estate Association (CREA)
One of Canada's largest single‐industry trade associations, representing more than 92,000 real
estate brokers/agents and agents working through more than 100 real estate Boards and
Associations
Canadian Residential Appraiser (CRA)
A designation awarded to an appraiser by the Appraisal Institute of Canada
Cost Approach
An approach to calculating the value of a property by determining the replacement cost of a
building, less depreciation plus the cost of the land
Desktop Appraisal (also referred to as a Sales Data Report)
A type of appraisal report that determines a value for the subject property based on MLS
reports, including data on recent sales and data on recent listings
Chapter 15: Application Analysis – The Property
361
Direct Comparison Approach
An approach to calculating the value of a property by comparing it to similar properties that
have recently sold
Drive‐by Appraisal
A type of appraisal report that combines MLS data as well as an inspection of the exterior of the
subject property
emili
CMHC’s automated underwriting system
excel
Genworth Financial’s automated underwriting system
Full Appraisal
A type of appraisal report that combines MLS data with a full interior and exterior inspection of
the subject property
Income Approach
An approach to calculating the value of an income producing property through the usage of the
net operating income and capitalization rate typical for that type of property and the area in
which it is located
Market Value
The amount, in Canadian funds, for which a property should exchange on the date of valuation
between a willing buyer and a willing seller in an arms‐length transaction after proper
marketing, where the buyer and seller have each acted knowledgably, prudently, and without
pressure
Real Estate Institute of Canada (REIC)
An association of professionals that has been providing advanced real estate education and
certifying specialists in real estate since 1955
Risk Assessment Tool
An automated underwriting program
362
Chap
pter 15: Application Analyssis – The Prop
perty
15.5
5 Review
w Questio
ons
Answers to the Revview Questio
ons are found at www.REM
MIC.ca
Sho
ort Answe
er Questio
ons
1. Lisst the differen
nt purposes fo
or which an appraisal
a
mighht be required.
2. Wh
hat is the role
e of the appraaiser in the ap
ppraisal proceess?
3. Wh
hat organizattions award designations to appraisers??
4. Wh
hat are the diifferent desiggnations that an appraiser may have?
ow does markket value diffe
er from the price for whichh a property m
may be sold?
5. Ho
6. Disscuss the thre
ee approache
es to calculating the markeet value of a p
property and describe the
mo
ost relevant approach
a
for mortgage finaancing.
e made in the
e direct compparison appro
oach.
7. Explain how adjjustments are
8. Disscuss the positives and neggatives of AV
VMs.
9. Wh
hat is the most detailed tyype of appraissal report andd how does itt differ from tthe other two
o
typ
pes of appraissal reports?
Chapter 16: Choosing a Lender
363
Chapter 16: Choosing a Lender
Learning Outcomes
Successful understanding of the concepts presented in this chapter will enable the learner to:
 Differentiate between prime, sub‐prime and private lenders
 Interpret a lender’s product and rate sheet
 Understand the factors that must be considered when choosing a lender
Introduction
Once the mortgage agent has decided on the best product type for his or her client, it is now
necessary to choose a lender. There are dozens of lenders in the mortgage market and choosing
one specific lender to submit a client’s application to can be time consuming and confusing if
the mortgage agent is not knowledgeable on lenders’ products, services and rates.
In this chapter, the different types of lenders will be explored as well as varying lenders’
guidelines. Since lenders have different methods and styles of promoting their products a
sample of a lender’s product sheet will be reviewed. However, for the mortgage agent to be
fully aware of lenders’ products, services and rates, it is necessary for him or her to develop
relationships with those lenders.
For the mortgage agent who is joining an established mortgage brokerage, those relationships
are typically already in place. In this circumstance the mortgage agent needs to ensure that his
or her contact information has been provided to the lenders with whom the brokerage deals.
The mortgage agent needs to review all of the current information that the brokerage has on
those lenders.
It is also important to note that, while most lenders will have relationships with all mortgage
brokerages, some will not. Certain lenders will only deal with specific mortgage brokerages.
Before joining a mortgage brokerage, the mortgage agent should satisfy himself or herself that
the mortgage brokerage which he or she is joining has relationships with a sufficient number of
lenders to be competitive in the market. For the new mortgage agent, this can only be
accomplished by interviewing with several different mortgage brokerages to determine the best
company with which to be affiliated.
16.1 Types of Lenders
The Ontario mortgage industry, the largest in Canada, has dozens of lenders from which the
mortgage agent may choose. It is important for the mortgage agent to know who those lenders
are and the products, services and rates offered by each to determine the best lender for his or
her client.
Many lenders have a dedicated mortgage agent sales force comprised of Business Development
Managers (BDMs) or Business Development Officers (BDOs). There are other titles that some
lenders provide to their sales force but the terms BDM and BDO are most common. These
individuals are tasked with obtaining business from mortgage brokerages and are normally a
364
Chapter 16:
1 Choosing a Lender
der’s productss, services and rates. In ad
ddition, a BDM
M
valuable source of information on their lend
can offten assist a mortgage
m
age
ent to have an
n application approved byy liaising betw
ween the
mortggage agent an
nd the underw
writer.
Lende
ers are typically categorize
ed by the type
e of business in which theyy specialize, eeither prime
mortggage lending or sub‐prime mortgage len
nding.
Prim
me Mortg age Lend
ding
Prime
e mortgage le
ending is defin
ned as lendingg to clients w
who are consid
dered to be p
prime
borro
owers. A prim
me borrower is typically an individual w ho has excellent credit, prrovable
incom
me and stable employmentt. This type of
o lending is ooften referred
d to as , “A len
nding” or
“Prim
me lending.”
The majority
m
of Canadians fall in
nto this categgory, as is eviddenced by thhe volumes off mortgage
transaactions comp
pleted by prim
me lenders. Typical prime lenders include those who
o deal directlyy
with the
t public succh as Chartere
ed Banks, Tru
ust Companiees and Credit Unions. Therre are also
several lenders wh
ho deal with the
t public only through moortgage brokeerages and th
hese
institu
utions are normally referre
ed to as non‐deposit takinng institutionss.
Some
e prime lenders also deal with
w borrowerrs who, altho ugh not a prime borrowerr, are not a
sub‐p
prime borrower either. These borrowerrs are typicallly referred to
o as Alt‐A borrrowers. An
Alt‐A borrower is normally
n
an in
ndividual who
ose credit maay be good altthough not exxcellent, and
who may
m not be ab
ble to prove his
h or her inco
ome but is stiill considered
d a good risk b
by the prime
lende
er.
Sub
b-Prime Mortgage
M
Lending (also refferred to as “Self--Insured””
Len ding)
The su
ub‐prime mortgage marke
et has developed in Canad a over the paast several yeears in
respo
onse to Canad
dians with spe
ecific mortgagge financing nneeds, and who are not seerviced by thee
lende
ers in the prim
me mortgage market.
ncreasing sub
b‐prime mortggage market provides
p
the ability for bo
orrowers who have been or
The in
who would
w
be declined by prim
me lenders to obtain financcing, either to
o purchase a h
home or
refinaance their existing mortgagge. This markket has effecttively increased the number of potentiaal
home
e buyers by prroviding finan
ncing that wo
ould otherwisee be unavailaable. Althouggh this is
viewe
ed as a positivve developme
ent in the mo
ortgage markeet, it has also resulted in b
borrowers
being approved wh
ho perhaps sh
hould not be..
The tyypical sub‐prime borrowerr is an individual who mayy have a comb
bination of the following
characteristics:
b
behind in his or her payments on
n one or moree credit cardss,
 Current poor crredit such as being
loaans or other debts
d
 Lesss than two years
y
at his orr her current job
j
 Self‐employed
 Haas a previous bankruptcy
 Haas previous po
oor credit witth no re‐estab
blished creditt
 Re
equires high LTV financing.
Chapter 16:
1 Choosing a Lender
36
65
e no single characteristic frrom the abovve list may be enough for a prime lendeer to decline
While
an applicant’s application for fin
nancing, a combination off those characcteristics typically will
resultt in being declined by a priime lender. Itt has therefo re become neecessary to p
provide
poten
ntial borrowers with altern
native financin
ng, which is ooffered by sub
b‐prime lendeers. These
lende
ers normally charge
c
a highe
er rate of inte
erest than theeir prime counterparts and
d may chargee
the bo
orrower a len
nder’s fee. A lender’s fee is
i a fee charg ed by the len
nder, normallyy paid on
closin
ng by the borrrower from th
he mortgage proceeds, as a bonus for p
providing the financing.
e lenders ofte
en refer to the
eir lender’s fe
ee as a “self‐innsurance” feee, and many w
will call
These
themsselves “self‐in
nsured” lende
ers. This simp
ply refers to tthe fact that tthey do not o
offer default
insure
ed mortgagess, rather they charge a lender’s fee thatt is designed to offset the risk of defaullt
by a borrower.
b
Maany of these lenders
l
chargge fees simila r to that of th
he default inssurers, but it iis
imporrtant to note that the term
m “self‐insure
ed” is simply uused as a wayy of explainingg their
lende
er’s fees, as th
hese lenders do
d not use an
ny type of deffault insurancce.
The Private Mortgage
e Market
Privatte lenders are
e classified ass individuals or
o groups of inndividuals wh
ho provide mortgage
financcing. These in
ndividuals have money to invest and haave decided tthat mortgagee financing
offerss a profitable rate of return
n. The typicaal private lendder will deal w
with mortgage agents or
broke
erages and use those individuals/firms to
t locate poteential clients..
A client requiring a private morrtgage will gen
nerally not quualify through
h a prime or ssub‐prime
lende
er. This client will normallyy have equity in his or her property and
d be able to o
obtain
financcing to a maximum of 85%
% LTV, depend
ding on the arrea in which tthe property is located.
nterest than pprime and sub‐prime lenders and will
Privatte lenders willl charge a higgher rate of in
normally charge a lender’s fee. The profile of
o a typical prrivate mortgaage is an interrest only
mortggage with mo
onthly payments and a one
e‐year term.
Su
uccess Tip – Sub‐prim
me lenderss
Most successfu
ul mortgage agents
a
will havve between ttwo and four prime and tw
wo and four
su
ub‐prime lend
ders with who
om they norm
mally deal. Byy choosing a h
handful of len
nders with
whom to work,, you will become familiar with their guuidelines and develop relattionships with
their BDMs and
d underwriterrs. It is, howe
ever, also impportant to know the otherr lenders’
gu
uidelines in caase your norm
mal lenders caannot fund a specific transsaction.
16.2
2 Unders
standing Lender Guidelines
G
s
Lende
ers, with the exception
e
of private lende
ers, provide m
mortgage agen
nts with summaries of
their products, serrvices and rates. These do
ocuments are often referreed to as rate ssheets and
produ
uct sheets and
d are normallly communicaated to mortggage agents vvia the lenderr’s BDMs, by
email or are provid
ded on the lender’s websitte (a usernam
me and passw
word may be rrequired to
access this informaation online). Some lende
ers have packaages that desscribe their prroducts in
detaill while otherss provide basiic summaries.
366
Chapter 16:
1 Choosing a Lender
Prod
duct She ets
A product sheet is designed to inform
i
the mortgage agennt of the term
ms and conditions that musst
be me
et for approval, as well as the features of the mortgaage being desscribed, inclu
uding the
maxim
mum LTV, the
e amortization
n and so on. While the forrmat of produ
uct sheets difffers from
lende
er to lender, the following figure
f
is a sam
mple of a prooduct sheet th
hat contains ttypical
inform
mation.
Figure 93 – Sample Pro
oduct Sheet
ABC Lender Inc. Productt Sheet
Purpose
Termss
Mortggage Amounts
Rate Hold
H / Rate Dro
op
Amorttization
Prepayyment Optionss
Payout Options
Lender’s Fees
Property Requireme
ents
Location
Appraisal
GDS/TTDS
Creditt
Beacon Score
Incom
me/Employmen
nt
Meaans the borrow
wer can
provvide a letter stating their
income without proving
p
it
Down payment
Payme
ent frequency
Property Taxes
Portab
ble
Assum
mable
Means th
he borrower can
c
provide documentatio
d
on to
prove/ve
erify their inco
ome
95%
% ‐ Purchase
90%
% ‐ Refinance
3 an
nd 5 year fixed
Minimum $50,000
0
00 ($700,000 inn GTA)
Maxximum $600,00
45 days,
d
one time rate drop 7 daays prior to closing
25, 30
3 and 35 yearrs
Up to
t 20% prepaym
ment annuallyy + 20% increasse in paymentss once per yearr
3 mo
onths interest or the Interestt Rate Differen
ntial, whicheveer is greater
2% added
a
to the mortgage
m
Own
ner Occupied only
o
Singgle family up to
o a four‐plex
High
h‐ rise condominiums
Hobby farms and rural
r
propertiees on exception
n basis
With
hin 25km radiu
us of populatioon of 25k
With
hin 30km radiu
us of populatioon of 30k
Required on all applications. Brooker may order using ABC’s aapproved list o
of
A
cost tto be paid by b
borrower
apprraisers only. Appraisal
No GDS,
G
TDS 50%
Good credit, minim
mum 2 years h istory, no majo
or derogatories, bankruptcy
wed over 2 yeaars discharged
allow
80%
% LTV or less: 58
85 ‐ 649
80.1
1 to 95% LTV: 650
6 +
Stated Income: Must meet TDS rratio.
ness license, orr
Self‐‐Employed: Must prove self‐‐employment vvia NOA, busin
Articcles of Incorpo
oration, etc. In come will not be verified.
Emp
ployed: Letter of
o employmen t, excluding saalary
Full Doc
d by most
Self‐‐employed: Based on last 2 yyears average income verified
rece
ent financial staatements and most recent N
NOAs
Emp
ployed: Must provide full incoome verificatio
on by means off job letter, T4s,
NOA
As, etc for past 2 years.
Verification requirred. Must show
w 1.5% of purcchase price for closing costs iin
bankk account no laater than 7 bussiness days beffore closing
Mon
nthly, weekly, bi‐weekly
b
Inclu
uded in mortgaage payment
Yes
Yes – with approvaal
36
67
Chapter 16:
1 Choosing a Lender
Rate
e Sheets
A rate
e sheet is designed to inform the mortggage agent off the rate charged on a pro
oduct, based
on such factors as the LTV and the
t Beacon or credit scoree. While the fformat of rate sheets
differs from lenderr to lender, th
he following figure
f
is a sam
mple of a ratee sheet that contains
typicaal information
n.
Figure 94 – Sample Ra
ate Sheet
ABC Lender Inc. – Sample R
Rate Sheet
Salaried and Business For Self (B
BFS) Rate She
eet: as of Octoober, 2012
SFD
D is a “Single Family
F
Dwelling”
ABC LENDEER INC. RATE SHEET
Credit Score
680+
6
650
0–
679
9
620 –
649
600 –
619
580 –
599
540 ‐ 5
579
SFD
Stated
Income
e
Salarie
ed/BFS
5 Year Term
LTV
90.0
01 ‐ 95%
85.0
01 ‐ 90%
75.0
01 ‐ 85%
60.1
1 ‐ 75%
0 ‐ 60%
6
Rate
R
5.9%
5
5.8%
5
5.7%
5
5.6%
5
5.5%
5
Ratte
7.4
4%
7.3
3%
7.2
2%
7.1
1%
7%
%
Ratee
7.6%
%
7.5%
%
7.4%
%
7.3%
%
7.2%
%
Rate
N/A
8.1%
%
8%
7.9%
%
7.8%
%
Rate
N/A
N/A
8.8%
8.7%
8.6%
Rate
N/A
N/A
N/A
9.1%
8.9%
SFD
Full Do
oc
Salarie
ed/BFS
5 Year Term
LTV
90.0
01 ‐ 95%
85.0
01 ‐ 90%
75.0
01 ‐ 85%
60.1
1 ‐ 75%
0 ‐ 60%
6
Rate
R
5.3%
5
5.2%
5
5.1%
5
5.0%
5
4.9%
4
Ratte
6.4
4%
6.3
3%
6.2
2%
6.1
1%
6%
%
Ratee
6.6%
%
6.5%
%
6.4%
%
6.3%
%
6.2%
%
Rate
N/A
7.1%
%
7%
6.9%
%
6.8%
%
Rate
N/A
N/A
7.8%
7.6%
7.6%
Rate
N/A
N/A
N/A
8.1%
7.9%
BFS is “B
Business for
Self”, me
eaning self‐
employed
Su
uccess Tip – If you’ree unsure...
If you are unsu
ure whether a lender will approve your client’s application or if yo
ou are unsuree
off the rate, eve
en after reviewing the prod
duct and ratee sheets, do n
not guess! Co
ontact either
the lender’s BD
DM or underw
writer and discuss the cliennt with him or her. This caan save time
an
nd effort and ultimately yo
our client!
368
Chapter 16:
1 Choosing a Lender
16.3
3 Choosiing a Len
nder
If the mortgage aggent determin
nes the best product
p
for hiis or her clien
nt and only on
ne lender in
the in
ndustry offerss that productt, the choice is
i clear. How
wever, this is n
not always the case. In all
circum
mstances it is best to rely on
o the advice
e of the brokeerage for whicch the mortgaage agent
workss; however if the brokeragge does not sp
pecifically reccommend a leender, then th
he mortgage
agentt should use the following points in determining the best lender tto choose.
 Loan to Value: Which lender(s) offer the LTV that the client requirees?
he client proviide the
 Inccome Verificaation: What income verificcation is requuired? Can th
appropriate doccument(s)?
operty Type: Does the clie
ent’s propertyy type meet thhe lender’s reequirements?? I.e., if the
 Pro
clie
ent has a renttal property, does the lend
der have a re ntal product??
 Cre
edit Score: What
W
are the lender’s
l
requirements? D oes the lendeer offer a diffferent LTV
based on creditt scores? If so
o, does the client qualify?
ender offers the
t best terms for the cliennt such as preepayment priivileges, based
 Terms: which le
he client?
on the product chosen for th
 Rates: which len
nder offers th
he best rate based
b
on the product chossen for the cliient?
ender provide
es the quickesst response too an applicatiion submissio
on?
 Speed: which le
 Service: which lender provid
des the best service to bothh mortgage aagents and clients?
 Re
eputation: which lender haas the best ovverall reputatiion in the mo
ortgage industry?
 Re
elationship: do
oes the mortggage agent haave a good reelationship with the
len
nder/BDM/un
nderwriter that creates loyyalty to that l ender
 Fin
nder’s Fees: iff everything else
e is equal and
a two or moore lenders aare appropriatte for the
clie
ent, which off those lenderrs, if any, pays the highest commission??
 Loyyalty Program
m: if everythin
ng else is equal and two orr more lenders are approp
priate for the
clie
ent, which off those lenderrs, if any, offe
ers a loyalty oor points proggram?
In all cases, the right lender mu
ust be the lend
der that is beest for the clieent, regardlesss of the
finderr’s fees or loyyalty program
m that the lend
der may or m
may not have. By consisten
ntly doing
what is in the clien
nt’s best interrests, the morrtgage agent will increase his or her chances of
ming highly su
uccessful.
becom
Pa
ause for cllarification
n – Loyaltyy or points program
A loyalty or poiints program is a program provided by a lender thatt rewards thee mortgage
aggent for funding mortgages through it.
Chapter 16: Choosing a Lender
369
16.4 Key Terms and Definitions
BDM / BDO
Business Development Manager / Business Development Officer. These are two of the titles
held by representatives of lenders who are tasked with obtaining business from mortgage
agents.
BFS
Business For Self. This term applies to those clients who are self‐employed.
O/O
Owner occupied property
Prime Lending
Refers to mortgage lending to borrowers who are considered very good risks
Private Lender
A private lender is typically an individual investor with funds who would like to invest in
mortgages. This individual will usually invest through his or her lawyer who may have clients
requiring mortgage financing or a mortgage agent. His or her purpose may vary but normally an
investor will invest in 2nd mortgages due to their higher rate of return when compared to 1st
mortgages and other potential types of investments.
Product Sheet
A document provided by a lender that outlines the terms and conditions of its products
Rate Drop
Typically refers to the practice of decreasing a client’s mortgage rate after he or she has been
approved but before the mortgage transaction has closed, when the lender’s interest rate on
the product has decreased
Rate Hold
Typically refers to the practice of maintaining a rate for a specific period of time, whereby the
lender will keep the client’s mortgage rate at the approved amount after he or she has been
approved but before the mortgage transaction has closed, when the lender’s interest rate on
the product has increased
Rate Sheet
A document provided by a lender that lists the interest rates for specific products, based on
specific terms
Self‐Insured lender
A term used to describe a sub‐prime lender that charges a lender’s fee. This fee is often
comparable in amount to the fees charged by default insurers. This fee is used by the lender to
offset amounts lost by borrowers who default on their mortgages but is not an actual insurance
premium since these lenders do not use default insurance
SFD
Single Family Dwelling
370
Chapter 16: Choosing a Lender
Sub‐Prime Lending
Refers to mortgage lending to borrowers who are considered poor risks or who do not qualify
for prime lending
Chapter 16:
1 Choosing a Lender
16.5
5 Review
w Questio
ons
Answers to the Revview Questio
ons are found at www.REM
MIC.ca
Sho
ort Answe
er Questio
ons
1. Disscuss the differences betw
ween the prim
me and sub‐prrime mortgagge market.
2. Disscuss the differences betw
ween prime an
nd sub‐primee mortgages.
3. Wh
hat factors caan cause a bo
orrower to be considered ssub‐prime?
4. Wh
hat type of bo
orrower will typically
t
requ
uire a private mortgage?
hat information is typicallyy found in a le
ender’s produuct sheet?
5. Wh
6. Wh
hat information is typicallyy found in a le
ender’s rate ssheet?
7. Wh
hat should a mortgage
m
age
ent do if he or she is unsurre if a lender will approve his or her
clie
ent’s applicattion?
8. Wh
hat factors must
m a mortgage agent consider when choosing a len
nder?
9. Wh
hich factors are
a the least important forr a mortgage aagent when cchoosing a len
nder?
10. What
W
impact does
d
a credit score
s
have on
n the ability oof a borrowerr to access a lender’s
pro
oducts?
37
71
372
Chapter 17: Sub
bmitting the Application
A
annd Obtaining a Commitmeent
Chapteer 17: Submit
S
tting the Appllicationn and
Obtaaining a Com
mmitmeent
Lea
arning Outccomes
Succcessful undersstanding of th
he concepts presented
p
in tthis chapter w
will enable the learner to:
 Discuss the iteems in an application whichh must be expplained in thee notes sectioon of the
ap
pplication
 Understand thhe differencess between subbmitting an aapplication too an institutional lender
nd a private lender
an
 Explain the importance of the
t Investor/LLender Discloosure
 Complete
C
an Investor/Lend
der Disclosure
e
 Describe
D
the specific inform
mation that must
m be discloosed in the Invvestor/Lendeer Disclosure
 Describe
D
the timing require
ements of the
e Investor/Lennder Disclosu
ure
 Describe
D
the means
m
in whicch the Investo
or/Lender Dissclosure may be made
 Liist the standaard informatioon found in a commitment letter
 Innterpret a com
mmitment lettter
 Explain the importance of meeting
m
the lender’s cond itions of apprroval
Intro
oduction
Once the needs of the borrowe
er have been determined
d
aand a lender cchosen, the p
process of
submitting an application is a siimple step. However,
H
it is a step that ccan be mishan
ndled by a
new mortgage
m
age
ent. This chap
pter will explo
ore submittinng an applicattion to both aan institutionaal
and private
p
lenderr, explaining the difference
es and similarrities of both processes.
Su
uccess Tip – Only sub
bmit to onee lender
Yo
ou should onlyy submit an application
a
to
o one lender. While this iss not a legal rrequirement iit
is a best practicce. It is your responsibility
r
y to choose thhe best lendeer for your clieent. To do so
o
yo
ou need to kno
ow the lende
ers’ guideliness so that you’ ll have a high
h expectation that the
ap
pplication will be approved
d. Lenders mo
onitor fundinng ratios (the number of ap
pplications
submitted to th
hem to the nu
umber of applications fundded by them)) and will refu
use to deal
with you if yourr ratio is unaccceptable. A high funding ratio means you are a true
professional an
nd will lead to
o greater succcess!
Once an applicatio
on has been submitted, the
e lender will, if everythingg goes accordiing to plan,
appro
ove the appliccation and pro
ovide a comm
mitment letteer. If declined
d, the mortgage agent musst
choosse a different lender and begin
b
the proccess anew.
Given
n an approval,, the commitm
ment letter will
w contain coonditions thatt must be meet. This
chaptter will discusss meeting tho
ose condition
ns and preparring for the closing processs.
Chapter 17: Submitting the Application and Obtaining a Commitment
373
17.1 Submitting the Application
Once the application has been entered into the mortgage agent’s origination software and he or
she has decided on which lender to whom to submit the application, it is as easy as choosing the
lender from a drop down menu and submitting it. However, before that step occurs the
mortgage agent must ensure that the application has been properly completed.
The most common complaint by underwriters is that the mortgage agent does not make proper
notes in the application when submitting. Every origination software has the capability of
allowing the mortgage agent to add his or her notes to an application. These notes are designed
to inform the underwriter of items that he or she might need to know to make a decision to
lend.
Before submitting the application, the mortgage agent must review the following areas and
provide the underwriter with explanatory notes if any area requires further explanation. The
areas to review are Credit, Property and Employment. Each is detailed below.
Credit
If the applicant has any derogatory credit such as missed payments in the past or is currently in
arrears on any of his or her debts, the mortgage agent must inquire as to the reason for this
derogatory credit and include this explanation in his or her notes. Explanations are required if
the applicant’s credit report contains:
 Current or previously missed payments
 Current accounts currently listed as an R9 with or without an outstanding balance
 Accounts closed by the credit grantor
 Account balances exceeding credit limits
 Excessive recent inquiries
 Any judgments
 One or more previous bankruptcies
 Any accounts now or previously in collections
 Any accounts currently listed as an R7 (which indicate a consumer proposal)
 Any accounts rated a 2 or higher (i.e. R2 or higher, or I2 or higher)
Property
If there are any issues with the property, the mortgage agent must note them in his or her
application submission. The property provides the lender with security for its loan. If that
security is compromised, the lender’s position is weakened. If the property has been valued by
an AVM or through CMHC’s or Genworth’s automated underwriting systems and no physical
inspection of the property has occurred, any defects in the property will have been omitted. If
the mortgage agent learns of any defects, he or she must investigate and include that
information in the application submission. Possible defects or areas of concern may include:
 The property having renters or boarders (if the client has not indicated that this is a rental)
 Water damage in the basement – this may be a sign of a crack in the foundation
 Water damage in the ceiling or walls ‐ this may be a sign of a burst water pipe
 Excessive interior or exterior wear and tear that might impact the value of the property
 Evidence of UFFI or insulbrick
 Signs of insect or rodent infestation
374
Chapter 17: Sub
bmitting the Application
A
annd Obtaining a Commitmeent
 Siggns of improp
per use of the property succh as the pressence of commercial mach
hinery in or on
the
e property that may indicaate that the property
p
is beeing used for b
business purp
poses.
Emplo
oyment
The applicant’s em
mployment afffects his or he
er ability to reepay the morrtgage. Itemss requiring
explanation include:
 Haaving several jobs
j
over the past two or three
t
years
 Anny periods of unemployme
u
ent
 Addditional income
 If the
t mortgage
e agent canno
ot verify employment.
By anticipating que
estions that the underwritter would askk and answeriing them in th
he notes
sectio
on of the appllication when
n submitted, the
t mortgagee agent will saave time and effort on thee
underrwriter’s behaalf and may save an appliccant from bei ng declined.
17.2
2 Investo
or/Lenderr Disclosu
ure
If the mortgage aggent has decid
ded to use a private
p
lenderr for his or heer client’s mo
ortgage
financcing, by law itt is necessaryy to provide more
m
informattion than is reequired to bee provided to
an insstitutional len
nder. This information mu
ust be provideed in the Inveestor/Lender Disclosure
Form.
Before discussing disclosure
d
req
quirements, it must be notted that a bro
okerage cann
not accept
fundss from a lende
er or investorr unless in reggards to a speecific mortgagge. In other w
words, a
broke
erage cannot accept funds from a lende
er or investor to be held on
n deposit or in trust unlesss
those
e funds are for a specific mortgage.
m
In add
dition, disclossure is require
ed to be provvided to an invvestor/lender who is not a member of a
design
nated class off lenders and investors, ass defined by leegislation.
Wha
at Must be
b Disclos
sed
The disclosure doccument prese
ented to the in
nvestor mustt include the ffollowing info
ormation:
 the
e terms and conditions
c
of the proposed
d mortgage
 bo
orrower inform
mation
 pro
operty inform
mation
 fee
es and payme
ents associate
ed with the mortgage
m
 the
e role of the brokerage
b
 the
e nature of th
he relationshiip between th
he brokerage , borrower an
nd any other party under
the
e proposed mortgage
m
 any potential co
onflicts of interest
e risks associaated with the
e proposed mortgage
 the
Termss and conditions of the prroposed morttgage
Typicaally an application submittted to an inve
estor/lender, like an appliccation submittted to an
institu
utional lender will rely on the investor//lender settin g the terms aand condition
ns of the
mortggage in his or her commitm
ment letter. However,
H
in ccircumstances where the
investtor/lender maay be an indivvidual who re
elies on the brroker/agent tto provide a ffull mortgagee
Chapter 17: Submitting the Application and Obtaining a Commitment
375
scenario that the investor/lender is being asked to invest in, it is the responsibility of the
broker/agent to provide complete details related to the terms and conditions of the proposed
mortgage. In either case the broker/agent should provide full disclosure on the mortgage being
applied for. The disclosure document must therefore include:
 the proposed closing date
 the proposed mortgage amount and frequency
 how the proposed payment can be made, i.e. pre‐authorized payment plan or post‐dated
cheques
 the proposed amortization unless the proposed mortgage is interest only
 the proposed term
 the proposed interest rate as well as its compounding frequency
 the proposed prepayment privileges
 the full civic address and legal description of the property to be mortgaged
 any proposed fees or charges payable by the borrower on default or for NSF fees
 any proposed lender and brokerage fees
 Standard Charge Terms requirements, such as payment of property taxes, maintaining the
property and maintaining fire insurance with the investor/lender assigned as first loss payee
 any proposed application fee payable to the investor/lender
 the solicitor under the proposed mortgage
 other terms and conditions as may be required by an investor of ordinary prudence
Borrower information
The following information must be provided to a prospective investor/lender before he or she
can make a decision to lend:
 section 28 of Regulation 188/08 states that a brokerage cannot sell or otherwise attempt to
sell a mortgage that has been in default at any point during the previous twelve months
unless it has the lender’s written acknowledgment that it has received this disclosure
 documentary evidence of the borrower’s ability to meet the mortgage payments
 a copy of the application for the mortgage and of any document submitted in support of the
application
 if the mortgage is a new mortgage, documentary evidence of any down payment made by
the borrower for the purchase of the property
 a copy of any agreement that the lender or investor may be asked to enter into with the
brokerage
 all other information, in writing, that a lender or investor of ordinary prudence would
consider to be material to a decision about whether to lend money on the security of the
property or to invest in the mortgage
 If the investment is in an existing mortgage, a copy of the mortgage instrument.
Property information
The following information must be provided to a prospective investor/lender before he or she
can make a decision to lend:
 if the investment is in an existing mortgage, a copy of the mortgage instrument
 if an appraisal of the applicable property has been done in the preceding 12 months and is
available to the brokerage, a copy of the appraisal
 if an appraisal of the applicable property is not available, documentary evidence of the value
of the property, other than an agreement of purchase and sale
376
Chapter 17: Submitting the Application and Obtaining a Commitment
 if an agreement of purchase and sale in respect of the property has been entered into in the
preceding 12 months and is available to the brokerage, a copy of the agreement of purchase
and sale
For renewals:
 if an appraisal of the property has been done in the preceding 12 months and is available to
the brokerage, a copy of the appraisal
 if an agreement of purchase and sale in respect of the property has been entered into in the
preceding 12 months and is available to the brokerage, a copy of the agreement of purchase
and sale
 all other information, in writing, that a lender of ordinary prudence would consider to be
material to a decision about whether to renew the mortgage
Fees and payments
As discussed under the terms and conditions, a brokerage is required to disclose any and all
payments that the borrower, investor or lender may be required to receive or make under the
proposed mortgage.
The role of the brokerage
Section 18 of Regulation 188/08 states that the brokerage must disclose, in writing to a
prospective borrower or lender the following information about the nature of its relationship
with borrowers and lenders:
1. Information about whether, and when, the brokerage is acting as a representative of the
lender but not the borrower in a transaction.
2. Information about whether, and when, the brokerage is acting as a representative of the
borrower but not the lender in a transaction.
3. Information about whether, and when, the brokerage is acting as a representative of both
the borrower and the lender in a transaction and is not giving preference to the interests of
either. O. Reg. 188/08, s. 18 (1).
(2) Subsection (1) does not apply when the brokerage is the mortgage lender. O. Reg. 188/08,
s. 18 (2).
Role of the brokerage – sample clauses
The following are samples of clauses that can be used to meet the disclosure requirements as
discussed in the role of the brokerage.
 REMIC Mortgages Inc. is acting solely on behalf of the lender in this mortgage
transaction.
 REMIC Mortgages Inc. is acting solely on behalf of the borrower in this mortgage
transaction.
 REMIC Mortgages Inc. is acting on behalf of both the lender and the borrower in
arranging this mortgage transaction.
Relationship between brokerage, borrower and others
The brokerage must ensure that any and all relationships between the brokerage, broker and/or
agent and the borrower are fully disclosed to the potential investor/lender. This disclosure is
necessary for the investor/lender to assist in determining if the proposed mortgage is suitable
Chapter 17: Sub
bmitting the Application
A
annd Obtaining a Commitmeent
37
77
of the disclossure must
for him or her. Dissclosure mustt be made in writing and t he recipient o
ackno
owledge the disclosure
d
in writing.
w
Conflicts of interesst
The brokerage must disclose to
o a borrower, lender or invvestor in the ttransaction, aany potential
conflict of interest that the brokerage may have.
h
Risks
Risk tolerance is a concept that identifies the
e investor/lennder’s accepttable level of risk. There
are tw
wo fundamen
ntal requireme
ents when co
onsidering riskk: understand
ding the invesstor/lender’s
generral level of accceptable risk and disclosin
ng the specificc risks associaated with thee mortgage
being recommended by the bro
oker/agent. This
T requirem
ment is describ
bed in section
n 25.1 of
Regullation 188/08
8, Mortgage Brokerages:
B
Standards of PPractice, and states that, ““A brokerage
shall disclose
d
in wrriting to a borrrower, lende
er or investor,, as the case m
may be, the m
material risks
of eacch mortgage or
o investmen
nt in a mortgaage that the bbrokerage preesents for thee consideratio
on
of the
e borrower, le
ender or investor.”
Risks to an investo
or/lender mayy include, butt are not limitted to:
 any risks associated with thee borrower’s ability
a
to repaay the mortgage
 pootential loss of investment if the properrty is not adeqquately insured and is dam
maged or
destroyed
 pootential loss of investment if the mortgaage is fraudul ently discharrged by anothher party
 pootential loss of investment if the properrty loses valuee and must bee sold for an amount less
thaan the outstanding balance of the morttgage
 pootential expennses associateed with recovvering a mortggage due to ddefault
 pootential expennses associateed with recovvering a mortggage due to ffraud or forgeery where title
inssurance was not
n required
 lacck of quick liquidity
 failure to enforcce collection proceedings if the investoor/lender is a member of a syndicated
ortgage
mo
How
w Disclosu re Must be
b Made
A brokerage is required to provvide detailed disclosure
d
to lenders and iinvestors invo
olved in a
mortggage transacttion, includingg a mortgage renewal, unl ess that lender or investor is a member
of a designated claass of lenderss and investorrs as previoussly defined in the Key Term
ms and
Definitions section
n of Chapter 5.
5 This disclossure must incclude a completed disclosu
ure form, in a
form approved by the Superinteendent, signed by a brokerr. The disclossure documen
nt used to
provid
de disclosure, consent or acknowledge
a
ment to an innvestor or len
nder must be clear and
concisse and presen
nted in a man
nner that is clearly understtandable.
Whe
en Disclos ure Must be Made
Regullation 188/08
8 states that disclosure
d
mu
ust be provideed to the lend
der/investor aat the earliestt
opporrtunity and, in
n any case, no
o later than two business days before tthe earliest off the followin
ng
eventts. This time period can be
e reduced to one businesss day if the invvestor/lenderr consents in
writin
ng.
1. The brokerage receives
r
mon
ney from the lender
l
or inveestor
2. The brokerage enters
e
into an
n agreement to receive mooney from the lender or in
nvestor
378
Chapter 17: Sub
bmitting the Application
A
annd Obtaining a Commitmeent
ers into an agreement to enter
e
into a m
mortgage or th
he investor en
nters into an
3. The lender ente
agreement to purchase,
p
exch
hange or sell a mortgage
4. The money is ad
dvanced to th
he borrower under
u
the moortgage
5. The trade comp
pletion date, which
w
is:
a) the date
e on which an
n investor, or a brokerage on behalf of an investor, eenters into an
n
agreem
ment to trade in the mortgaage, or
b) the date
e on which th
he trade in the
e mortgage iss completed.
The Investor//Lender D isclosure Statemennt for Bro kered Traansactionss
The fo
ollowing figurre is the Invesstor/Lender Disclosure
D
Staatement for B
Brokered Tran
nsactions. Th
his
form is given to the potential in
nvestor/lende
er before the potential invvestor/lender can provide
the aggent/broker with
w a commiitment to fund a mortgagee.
This form has been
n created by FSCO
F
and con
ntains the preescribed inforrmation as disscussed in thee
previo
ous sections.
This form was updated in 2015 and those up
pdates are refflected by higghlights and n
notes.
Chapter 17: Submitting the Application and Obtaining a Commitment
Figure 95 – Investor/Lender Disclosure Form updated 2015
379
380
Chapter 17: Submitting the Application and Obtaining a Commitment
Chapter 17: Submitting the Application and Obtaining a Commitment
381
382
Chapter 17: Submitting the Application and Obtaining a Commitment
Chapter 17: Submitting the Application and Obtaining a Commitment
383
384
Chapter 17: Submitting the Application and Obtaining a Commitment
Chapter 17: Submitting the Application and Obtaining a Commitment
385
386
Chapter 17: Submitting the Application and Obtaining a Commitment
Chapter 17: Submitting the Application and Obtaining a Commitment
387
388
Chapter 17: Submitting the Application and Obtaining a Commitment
Chapter 17: Submitting the Application and Obtaining a Commitment
389
390
Chapter 17: Submitting the Application and Obtaining a Commitment
Chapter 17: Submitting the Application and Obtaining a Commitment
391
392
Chapter 17: Sub
bmitting the Application
A
annd Obtaining a Commitmeent
17.3
3 The Co
ommitmen
nt Letter
Once the application has been submitted
s
an
nd the underw
writer has app
proved the m
mortgage
appliccation, he or she
s will send the mortgage agent a com
mmitment lettter or approvval. This
docum
ment explainss the terms and conditionss of the mortggage that thee lender is com
mmitted to
provid
ding along with the condittions that must be met beffore the lender will fund the mortgage..
The fo
ollowing is a list of informaation commonly found in a commitmen
nt letter:
 Ap
pplicants’ nam
mes
 Pro
operty address (address of the securityy)
 Mo
ortgage amou
unt
 Intterest rate
 Payment amount
ency
 Payment freque
 Term
 Clo
osing date
 Pre
epayment priivileges
 Co
onditions of ap
pproval
 Terms of the ap
pproved morttgage (such ass fees, appraiisal requirements, etc.).
These
e conditions are
a typically based
b
on the information
i
ccontained in tthe applicatio
on. For
example, if the app
plication state
es that the ap
pplicant has w
worked for AB
BC Company for six years
a earns $70
0,000 per yeaar, the lenderr will include a condition th
hat this
as an Accountant and
inform
mation be pro
oven by a job letter, T4s, pay
p stubs, etc . The requireed documentss must be sen
nt
to the
e lender and the
t lender mu
ust deem the
em acceptablee before the d
deal can be fu
unded. It is
imporrtant to note that if condittions are not met to the leender’s satisfaaction, the len
nder will
revokke the committment and caancel the morrtgage.
Su
uccess Tip –Double check
c
the commitme
c
nt letter
On
nce you receivve the commitment letterr, compare it tto your file to
o ensure that all of the
infformation is correct.
c
Lookk at the mortggage amount,, property address, and alll of the termss
an
nd conditions to confirm th
hat the comm
mitment letterr is based on what you sub
bmitted to the
len
nder. It can sometimes
s
haappen whereb
by an underw
writer will app
prove an application, but
on
n slightly diffe
erent terms an
nd conditionss then what the broker/aggent applied ffor. For
example, the le
ender may approve the application at a different ratte or loan to vvalue than
ap
pplied for. By checking thiss information
n before meetting with the client you wiill be sure nott
to be caught byy surprise whe
en discussingg the commitm
ment with your client.
ollowing figurre is an example of a comm
mitment letteer from a fictiitious lender.
The fo
393
Chapter 17: Submitting the Application and Obtaining a Commitment
Figure 96 – Sample Commitment Letter
Mortgage Commitment
Response: December 15, 2012
Page 1 of 4
Broker Information
Name:
Address:
Attention:
REMIC Mortgages Inc.
2175 Sheppard Avenue East, Suite 213, Toronto, ON, M2J 1W8
Adam Coren
Application Reference Number: 1213456‐789
Lender Information
Name:
SuperBank
Address:
2750 Yonge Street, Suite 6500, Toronto, ON, M1M 1M1
Lender Reference #: 1213456‐789 Mortgage Insurance Reference #: TBD
Applicant Information
Applicant(s): Noreen Borrower, Christopher Borrower
1234 Queen Lane, Toronto, ON, M1S 1M1
Address:
Always check the
Commitment to ensure
the information, such
as the property
address, is correct
With reference to the above noted property SuperBank is pleased to provide the following mortgage loan
offer, subject to the following terms and conditions:
Loan
Terms
Purchase Value:
$237,500.00
Mortgage Type:
Down payment:
$11,875.00
Term Type:
Amount:
$225,525.00
Interest Rate
(compounded semi‐
annually):
Insurance
Premium
$6,201.94
Term (months):
Total Loan:
$231,726.94
Amortization
(months):
Other Mortgages:
N/A
Frequency:
Product:
Supersizer
Cashback:
N/A
Closing Date:
3/1/13
Payment
Principal and
Interest:
$1,399.64
Closed
Taxes (Estimated):
$149.58
5.390%
Taxes Paid By:
SuperBank
Total Installment:
1,549.22
Commitment
Expires
1/22/13
First
60
300
Monthly
LENDER AUTHORIZATION
All of our normal requirements and, if applicable, those of the mortgage insurer must be met. All costs including
legal, survey, mortgage insurance, etc. are for the account of the applicant(s). The mortgage insurance premium (if
applicable) will be added to the mortgage. This mortgage is subject to the details and terms outlines as well as the
conditions described in the attached Schedule A.
Approved by:
John Underwriter, SuperBank Signature: _________________ Date: ________________
CLIENT ACCEPTANCE
I/We the undersigned applicant(s) accept the terms of this mortgage as stated above and agree to fulfill
the conditions of approval as outlined in the attached Schedule A to the lender’s satisfaction. I/We
further certify that the information given on the mortgage application is true and correct.
Applicant: Noreen Borrower
Signature: _________________
Date: _________________
Applicant: Christopher Borrower
Signature: _________________
Date: _________________
394
Chapter 17: Submitting the Application and Obtaining a Commitment
Mortgage Commitment – SCHEDULE A
ASSUMPTION POLICIES
Page 2 of 4
Assumption Option: The transferee or purchaser may, upon completion of a mortgage application which
meets our mortgage approval criteria then in effect, personally assume (with the consent of his or her spouse where
required by law) all of your obligations under your mortgage by executing an assumption agreement in the form
required by us.
CONDITIONS
Mortgage: The mortgage loan to be made to you shall be subject to all extended terms set forth in SuperBank’s
standard form of mortgage contract, and loans insured by a mortgage insurer will be subject to the requirements of
the Certificate of Insurance issued by the mortgage insurer.
Property Taxes: If stipulated by us, you will pay us monthly, an amount which in our opinion is sufficient to
enable us to pay the annual property taxes on your behalf by the due date for the first installment of the tax bill in
each year, based on the estimated annual taxes. We shall withhold a tax holdback from our mortgage advance
sufficient to accumulate the required credit in your tax account. Any tax bills issued and unpaid at the interest
adjustment date shall be paid from the proceeds of the mortgage loan.
Fire Insurance: We shall require evidence of replacement cost all‐risk insurance coverage acceptable to us,
taken with an insurer not disapproved by us. Such policy must contain the standard Insurance Bureau of Canada
mortgage clause and must indicate our interest as mortgagee.
 Title Insurance: A title insurance policy acceptable to us and obtained by our solicitor at your cost.
Processing Fee and Costs: Whether or not this loan is funded, you agree to pay the processing fee specified
herein, if any, and all legal, appraisal and survey costs incurred by you or us in this transaction.
CMHC/GEMICO/Canada Guaranty Insurance Fee: Insurance Fee: You agree to pay any mortgage insurance fee,
as indicated, and all applicable federal or provincial taxes thereon.
Interest Adjustment: Interest shall accrue from the date the first advance is made. Interest due to the interest
adjustment date will be simple interest calculated daily and will be deducted from the first advance
Pre‐authorized Cheque Plan: You agree to make repayment under the mortgage by a 'pre‐authorized cheque
plan' or by such other means as may be requested by us.
Commitment: This commitment is not transferable by you and the benefit may not be assigned by you. It may
be assigned by us.
Representation and Warranty: You warrant to us, and it is a condition of this loan, that all information
submitted by you or your broker to us in connection with your loan application is true and accurate, and you agree to
supply promptly, on request, any further information concerning yourself, your financial standing or the property to
be mortgaged, which may be required by us.
Title: You represent and warrant to us, and it is a condition of this loan, that you have a good and marketable
title to the property to be mortgaged, satisfactory in all aspects.
Zoning and Work orders: It is a condition of this loan that the mortgaged property and the use thereof comply
with all applicable government laws and regulations and that there are no outstanding work orders, notices or
directives against the property.
Construction Loan: In the case of a construction loan, advances will be made at our discretion and we will
always retain sufficient funds to complete construction.
New Homes: If this mortgage loan is for the purchase of a newly constructed home, our solicitor will be
required to obtain a certified copy of the New Home Enrolment endorsed by HUDAC (or the equivalent enrolment in
any governmental new home warranty program in provinces other than Ontario) before making any mortgage
advances.
Date:______________________________
Initials:__________
Initials: __________
395
Chapter 17: Submitting the Application and Obtaining a Commitment
CONDITIONS
Mortgage Commitment – SCHEDULE A Continued
Page 3 of 4
No agency: You acknowledge that we may assign this commitment or the mortgage to a third party and may
receive a fee in connection with such assignment. We may also receive a fee in connection with the servicing of this
loan. We are not acting as your agent or otherwise in any fiduciary capacity in relation to you in connection with the
loan described herein.
Solicitor and Documentation: The solicitor specified by us will act on our behalf in this transaction. You agree to
deliver to our solicitor your title documents, insurance policy and survey as soon as possible.
Entire Agreement: This commitment, when accepted by you, will constitute the entire agreement and
understanding between you and us with respect to this loan and will supercede all other agreements or
understandings, whether oral or written.
Survival: You agree that the terms, conditions & covenants contained in this commitment shall survive and will
not merge upon registration of the mortgage and the advance of funds thereunder but will remain valid and
subsisting obligations.
Information: You agree that we may conduct credit checks with consumer reporting agencies and make such
other investigations and collect such other information concerning you as we may deem advisable, all such
information to be used for the purpose of underwriting, assessing the risk associated with, and administering this
mortgage loan.
Privacy: You agree that we may share information concerning you with (a) any proposed assignee of this
commitment or the mortgage loan, (b) our duly authorized agents and representatives who are engaged in the
processing or servicing of your mortgage, (c) any parties necessary or desirable in connection with any sale or
securitization of this mortgage loan and (d) organizations with which the lender has strategic alliances who may use
such information to provide you from time to time with information on financial products which may be of interest to
you. If you prefer that your personal information not be shared with any party referred to in this document or future
documents, you may so advise us in writing at any time and we will not share the information with them.
PAYMENT FLEXIBILITY OPTIONS
Circle Payment Option:
Weekly
Bi‐weekly
Semi‐monthly
Monthly
INSTRUCTIONS
The terms and conditions of this mortgage commitment will form part of the solicitor’s instructions.
OTHER
Borrower disclosure required prior to funding
Title to be taken in the name of Borrower, Noreen and Borrower, Christopher
Subject to satisfactory confirmation of down payment.
Subject to satisfactory confirmation of income.
Subject to CMHC approval
Subject to signed and dated mortgage application
Receipt of satisfactory purchase agreement including all addendums and MLS listing.
Subject to no secondary financing.
PORTABILITY OPTIONS
If the mortgagor is not in default and has entered into an agreement to sell or transfer title to the mortgaged
property, the mortgagor may exercise the Portability Option.
Date:______________________________
Initials:__________
Initials: __________
396
Chapter 17: Submitting the Application and Obtaining a Commitment
Mortgage Commitment – SCHEDULE A Continued
PREPAYMENT POLICIES
Page 4 of 4
Privileges: 15% per year & Double Up
The Mortgagor, when not in default of any terms or conditions contained in the Mortgage, may prepay the
whole of the principal sum then outstanding without notice upon payment to the Mortgagee of the greater of
i) three months' interest at the interest rate on the principal sum outstanding; or
ii) the amount, if any by which interest at the Interest rate exceeds interest at the Mortgagee's current interest rate
for reinvestment calculated on the principal sum outstanding. Such amount to be calculated from the date of
prepayment to the maturity date of the mortgage.
RATE ADJUSTMENT POLICIES
 If five days prior to closing our interest rate is lower than the guaranteed interest rate, upon requires, the lower
rate will prevail.
ADMINISTRATION AND SERVICE FEES
NSFs, Stopped Payment, Returned Items: $150.00
Lender Administration Fee: $750.00
Date:______________________________
Initials:__________
Initials: __________
17.4 A Declined Application
If an application is declined by the lender, the mortgage agent should contact the underwriter to
gain an understanding of why it was declined. In most cases, an application should not be
declined since the mortgage agent has researched the lender and determined that the
application suits the lender’s guidelines. If this is not the case, the mortgage agent must
determine if he or she misinterpreted the guidelines or if the underwriter found something in
the application that he or she did not think met those guidelines.
If the mortgage agent disagrees with the underwriter’s decision to decline the application, he or
she may request that the BDM become involved in the process and/or request that the
underwriter’s supervisor review the application. The mortgage agent must have a good
understanding of the lender’s underwriting guidelines and feel that the application merits
approval before undertaking to challenge the decision, however, since disputing a legitimately
declined application can harm the mortgage agent’s reputation and relationship with that
lender. In cases where the application may meet the lender’s guidelines but it is not certain, the
mortgage agent should contact the BDM or underwriter to discuss the application further.
Whatever the reason for the decline, the mortgage agent must learn from the experience and
continue to attempt to obtain the financing for his or her client, if possible. Once the
application has been approved and a commitment received, it is time to prepare the borrower
disclosure (the disclosure document for the client) and meet with the client to have him or her
sign the documents.
Chapter 17: Submitting the Application and Obtaining a Commitment
397
17.5 Key Terms and Definitions
Administered Mortgage
In a private transaction, the mortgage agent or a third party is handling the collection of
payments and/or other duties related to the administration of the mortgage.
Commitment Letter
A document illustrating an offer by a lender to a borrower, including the terms and conditions of
that offer
Conditions
Terms of a lender’s commitment that must be fulfilled before the mortgage will be funded
Cooling Off Period
A waiting period in which a potential investor cannot provide a commitment letter nor advance
funds to a borrower
Face Value
The amount of the mortgage that must be repaid by the borrower
Funding Ratio (also referred to as a Pull‐Through Ratio)
The ratio of applications submitted to a lender compared to the number of fundings. For
example if a mortgage agent submitted 10 applications to a lender and got 5 funded he or she
would have a funding ratio of 50% (5 divided by 10).
Insulbrick
An inexpensive type of exterior siding designed to provide insulation that is most often found on
older homes. Inferior types of insulbrick can pose a fire hazard and are typically grounds for
declining a mortgage application.
Investor/Lender Disclosure (Form 1)
A disclosure document required under the Mortgage agents Act to be provided to a potential
private lender
Schedule (in relation to a Commitment Letter)
An addendum to a mortgage commitment that outlines additional terms and conditions of a
mortgage approval
UFFI (Urea formaldehyde foam insulation)
Urea formaldehyde foam insulation is a type of insulation that is injected as a mixture of urea
formaldehyde resin, an acidic foaming agent, and a propellant such as air. It was commonly
used in pre‐existing houses by injecting the foam into walls, where it was impractical to provide
conventional insulation.
Underwriter
An individual employed by a lender who reviews mortgage applications to determine if they
meet the lender’s lending guidelines, and who commonly provides a commitment letter when
they are deemed to meet those guidelines
398
Chapter 17: Sub
bmitting the Application
A
annd Obtaining a Commitmeent
17.6
6 Review
w Questio
ons
Answers to the Revview Questio
ons are found at www.REM
MIC.ca
Sho
ort Answe
er Questio
ons
1. Lisst the typical items
i
that mu
ust be explain
ned in the nottes section off an application and
pro
ovide an exam
mple of each..
enders should
d a mortgage agent submitt an applicatiion at the sam
me time?
2. To how many le
3. Disscuss the imp
pact of fundin
ng ratios on a mortgage aggent.
4. Wh
hat is the most common complaint by underwriters
u
when referriing to mortgaage
applications?
5. Lisst ten pieces of
o information that are com
mmonly founnd in a commitment letter.
6. Wh
hat types of documentatio
d
on might a co
ommitment leetter require aas proof of:
a) An em
mployed indiviidual’s income?
b) A self‐employed ind
dividual’s inco
ome?
7. Wh
hat options does a mortgaage agent havve if his or he r client’s application is decclined by the
len
nder?
Chapter 18: Borrower Disclosure
399
Chapter 18: Borrower Disclosure
Learning Outcomes
Successful understanding of the concepts presented in this chapter will enable the learner to:
 Explain the purpose of disclosure to a borrower
 Understand the circumstances under which disclosure must be made in accordance with
the MBLAA and its Regulations
 Describe the specific costs that must be included when calculating the cost of borrowing
for disclosure purposes
 Describe the specific information that must be disclosed
 Describe the timing requirements of disclosure
 Describe the means in which disclosure may be made
Introduction
The purpose of borrower disclosure is to ensure that there is enough information to make an
informed decision regarding the suitability of the transaction. The MBLAA and its Regulations
define what and how disclosure must be made. While trade associations or others may provide
form templates for disclosure, ensuring that disclosure is properly made is the responsibility of
the brokerage. The MBLAA and its Regulations clearly define the information that must be
disclosed and provide guidelines for borrower disclosure, however neither the MBLAA, its
Regulations nor FSCO provide borrower disclosure forms necessary to make that disclosure. In
fact, FSCO’s current policy is that it will not approve borrower disclosure documents. Rather,
the brokerage must ensure that these documents are compliant based on interpretation of the
MBLAA and its Regulations, and when a brokerage is audited FSCO will check these documents
for compliance.
Therefore while forms used by brokerages to provide disclosure may appear different, the
information to be disclosed and how it is disclosed must be the same for each brokerage.
Section 6.4 of Regulation 191/08, Cost of Borrowing and Disclosure to borrowers, states that, “A
disclosure statement, or a consent in relation to a disclosure statement, must be written in plain
language that is clear and concise and it must be presented in a manner that is logical and likely
to bring to the borrower’s attention the information that is required to be disclosed.”
In addition, if the brokerage does not require the borrower to pay for any of its services,
including disbursements, transaction or other activities in relation to the mortgage, and the
lender is a prescribed lender as found in section 1.2, and the lender provides its own disclosure
that contains the information required by this disclosure, the brokerage is not required to
provide the borrower with its own disclosure document. This is typically not the case because
most lenders do not disclose all of the information that is required by the MBLAA.
The purpose of this chapter is to explore the disclosure requirements for borrowers, including
what information must be disclosed, how it must be disclosed and when it must be disclosed.
400
Chapter 18: Borrower Disclosure
18.1 Amendments To Ontario Regulations – January, 2016
As of January 1, 2016 seven major amendments regulations 187/08, 188/08 and 189/08 took
effect. The following is the update that FSCO published summarizing these amendments.1
Amendments to Ontario Regulations 187/08, 188/08 and 189/08 Took Effect on January 1,
2016
Mortgage fraud is a growing problem that is estimated to cost hundreds of millions of dollars in
Canada each year. In a continued effort to combat mortgage fraud and raise awareness of this
important issue, the Government of Ontario made amendments to three existing regulations
under the Mortgage Brokerages, Lenders and Administrators Act, 2006 (MBLAA):
Ontario Regulation 187/08 – Mortgage Brokers and Agents: Standards of Practice
Ontario Regulation 188/08 – Mortgage Brokerages: Standards of Practice
Ontario Regulation 189/08 – Mortgage Administrators: Standards of Practice
These changes were made in response to the Report to the Minister on the Five‐Year Review of
the MBLAA [New Window]. The updated regulations came into effect on January 1, 2016. A
summary of the changes that have been made to these standards of practice regulations are
provided below. As of January 1, 2016, all mortgage brokerages, administrators, brokers and
agents must be compliant with these regulations as amended.
Summary of Changes to the Standards of Practice Regulations
Mortgage brokerages, administrators, brokers and agents are prohibited from acting, or doing
anything, or failing to do anything, in circumstances where they ought to know that they are
being used to facilitate fraud, dishonesty, crime or illegal conduct. (This is required under
section 14.2 of Ontario Regulation 188/08, section 10.1 of Ontario Regulation 189/08 and
section 3.1 of Ontario Regulation 187/08.)
Brokerages are prohibited from acting as a representative of a borrower, lender or investor if
the brokerage has "reason to doubt" that the mortgage, its renewal, or the investment in it is
lawful. (This is required under section 12 of Ontario Regulation 188/08.) Similarly, mortgage
administrators are prohibited from administering a mortgage if they have "reason to doubt"
that the mortgage, its renewal, or the investment in it is lawful. (This is required under section
10 of Ontario Regulation 189/08.)
Brokerages are required to take reasonable steps to verify a borrower's legal authority to
mortgage a property. (This is required under section 13 of Ontario Regulation 188/08.)
The brokerage's duty to inform the lender if they have to reason to doubt the accuracy of a
borrower's application or a borrower's legal authority to mortgage a property will continue after
the borrower enters into a mortgage agreement. (This is required under section 14.1 of Ontario
Regulation 188/08.)
1
http://www.fsco.gov.on.ca/en/mortgage/Pages/2015‐amendments‐to‐oregs.aspx
Chapter 18: Borrower D
Disclosure
40
01
equirement to disclose conflicts of interest was ameended to repllace "any con
nflict of
The re
intere
est" with "anyy conflict of in
nterest or pottential conflicct of interest.." (This is req
quired under
sub‐se
ections 27(1) and 40(3)5 of
o Ontario Reggulation 188//08.)
The principal amou
unt in the req
quirement concerning adv ance paymen
nt by a borrow
wer has been
amen
nded to $400,000 or less. (TThis is require
ed under subb‐section 37(11) of Ontario Regulation
188/0
08.)
es and proced
dures on frau
ud prevention
n have been aadded to the ttopics that m
must be
Policie
coverred in a broke
erage's written policies and
d procedures . (This is requ
uired under su
ubsection
40(3)((8) of Ontario
o Regulation 188/08.)
1
18.2
2 Comple
eting the Borrowe
er Disclos
sure Document
Wha
at Must be
b Disclos
sed
The MBLAA
M
states that the borrrower disclosure must incllude the follo
owing informaation:
1. Fees and payme
ents associate
ed with the mortgage
m
2. The relationship
p between th
he brokerage and lender unnder the prop
posed mortgaage
3. The role of the brokerage
4. The number of lenders the brokerage
b
rep
presented durring the previous year
5. Po
otential conflicts of interest
6. Rissks associated
d with the pro
oposed mortggage
7. Terms and cond
ditions of the proposed mo
ortgage
8. Esttimated costss
9. The cost of borrrowing
1. Fees
F
and pa
ayments associated
a
with the m
mortgage
The MBLAA
M
and Reegulations speak to severaal topics relat ed to fees an
nd other paym
ments:
representation of fees
f
and costts, disclosure of fees in wriiting to a borrrower, disclosure of the
cost of
o borrowing and acceptingg payments. Each is descrribed below.
Sectio
ons 20 – 23 off Regulation 188/08
1
speciffy that a brokkerage is not aallowed to make any form
m
of rep
presentation that
t
any fees or costs payaable to the brrokerage (in cconnection w
with carrying
on the
e business of dealing or trading in morttgages or actiing as a mortgage lender) are set or
appro
oved by any government
g
authority, unle
ess they are i n respect to d
disbursements to register
or dep
posit instrum
ments under th
he Land Titless Act or the R
Registry Act.
Pa
ause for cla
arification
n – Fees aree not regu
ulated
Th
he MBLAA maakes it clear th
hat a brokerage cannot staate or insinuaate that a bro
okerage fee is
sett or approved
d by the gove
ernment or an
ny governing body. The M
MBLAA doesn’t state what
is a minimum or
o maximum fee,
f nor does it state whatt is appropriatte to be chargged; this is up
p
to the brokeragge. However,, section 347 of the Criminnal Code makees it a criminaal offense to
nd costs payable by the
charge in excesss of 60%, which for a morttgage includees the fees an
bo
orrower in add
dition to the interest chargged by the le nder. This figgure is repressented in the
bo
orrower disclo
osure as the cost
c of borrow
wing.
402
Chapter 18: Borrower Disclosure
A brokerage must disclose, in writing, to a borrower if the brokerage, broker or agent may, or
will, receive a fee or other remuneration in connection with the mortgage or a mortgage
renewal, from whom it may or will be received and the basis for calculating the amount. The
borrower must acknowledge in writing that he or she has received this disclosure. The same
disclosure applies if the brokerage may, or will, pay any fee or other remuneration to another
person or entity in connection with the mortgage or mortgage renewal.
As per Sections 37 – 39 of Regulation 188/08, a brokerage cannot accept an advance payment
from the borrower on transactions where the principal amount of the mortgage is $400,000 or
less. If funds are received and are considered deemed trust funds (funds that are payable to
another party) the brokerage must provide a written statement to the person or entity
providing the funds.
Example:
You are arranging a mortgage for a client who requires a private second mortgage. The client
wants to pay cash for the appraisal. You have ordered the appraisal but the client has said he
won’t be home at the time of the appraisal and that his son will be giving the appraiser access to
the home. The client doesn’t want to leave the cash with his son, preferring to give the cash to
you to pay the appraiser.
Under these circumstances this money would be deemed to be trust funds because it is being
given to you but is meant for another party. Therefore you would have to deposit it into your
brokerage’s trust account and give your client a written statement that explains if interest is
being paid and when this money will be paid either to the appraiser or returned to him.
In this scenario the best solution would be for the client to leave a cheque with his son payable
to the appraiser, or be at the home with cash when the appraiser arrives. As you can see,
handling trust funds is a considerable responsibility.
Fees and Payments ‐ sample clauses
Where the brokerage is receiving a fee from the lender and/or other remunerations, such as
points or volume bonus to which the broker/agent will be paid a percentage, a clause may be
worded as follows:
 REMIC Mortgages Inc. will receive a fee and/or other remuneration by the lender on
completion of this transaction based on a percentage of the loan proceeds to which the
broker/agent is entitled a percentage.
Where the brokerage is paying a referral fee to another party for obtaining the transaction a
clause may be worded as follows:
 REMIC Mortgages will pay a fee to Mortgage Referrals Inc. on completion of this
transaction based on a percentage of the loan proceeds.
2. The relationship between the brokerage and lender under the
proposed mortgage
A brokerage is required to disclose to the borrower, in writing, the “nature of the relationship
between the brokerage and each lender” under the proposed mortgage, including if the
brokerage is the lender. Disclosure must be made in writing and the recipient of the disclosure
must acknowledge the disclosure in writing.
Chapter 18: Borrower Disclosure
403
Relationship between brokerage and lender – sample clauses
Where the brokerage is the lender a clause may be worded as follows:
 REMIC Mortgages Inc. is the lender under this proposed mortgage.
Where the brokerage is the owner of the lender, such as a separate corporation a clause may be
worded as follows:
 The lender under this proposed mortgage is a subsidiary of REMIC Mortgages Inc.
3. The role of the brokerage
Section 18 of Regulation 188/08 states that the brokerage must disclose, in writing to a
prospective borrower or lender the following information about the nature of its relationship
with borrowers and lenders:
1. Information about whether, and when, the brokerage is acting as a representative of the
lender but not the borrower in a transaction.
2. Information about whether, and when, the brokerage is acting as a representative of the
borrower but not the lender in a transaction.
3. Information about whether, and when, the brokerage is acting as a representative of both
the borrower and the lender in a transaction and is not giving preference to the interests of
either.
This does not apply when the brokerage is the mortgage lender.
Role of the brokerage – sample clauses
Clauses may be worded as follows:
 REMIC Mortgages Inc. is acting solely on behalf of the lender in this mortgage
transaction.
 REMIC Mortgages Inc. is acting solely on behalf of the borrower in this mortgage
transaction.
 REMIC Mortgages Inc. is acting on behalf of both the lender and the borrower in
arranging this mortgage transaction.
4. The number of lenders the brokerage represented during the previous
year
Section 19.1 of Regulation 188/08 states that the brokerage must disclose, “in writing to a
borrower the number of lenders on whose behalf the brokerage acted as a representative
during the previous fiscal year and shall indicate whether the brokerage itself was a lender.”
In addition, section 19.3 of Regulation 188/08 states that upon request, “a brokerage shall
disclose the following information in writing to a borrower:
1. Whether the brokerage itself was the lender for more than 50 per cent of the total number of
mortgages and mortgage renewals completed by the brokerage during the previous fiscal
year.
2. The name of the lender, if any, with whom the brokerage arranged mortgages during the
previous fiscal year if the mortgages constituted more than 50 per cent of the total number
of mortgages and mortgage renewals completed by the brokerage during the previous fiscal
year. O. Reg. 188/08, s. 19 (3).”
404
Chapter 18: Borrower D
Disclosure
ber of lenders dealt with in
i the previou
us year – sam
mple clauses
Numb
Clauses may be wo
orded as follo
ows:
ortgages Inc. acted
a
as a mo
ortgage lendeer and represented XX lend
ders in 20__.
 REMIC Mo
 REMIC Mo
ortgages Inc. acted
a
as the lender
l
in morre than 50% oof its transacttions in 20__.
 REMIC Mo
ortgages Inc. arranged
a
oveer 50% of its trransactions tthrough (nam
me of lender) in
n
20__.
5. Potential
P
Conflicts
C
off interest
The brokerage must disclose to
o a borrower, lender or invvestor in the ttransaction, aany potential
conflict of interest that the brokerage may have.
h
Pa
ause for cla
arification
n – Conflictt of interesst
A potential
p
conf
nflict of intereest is present when a brok erage, brokerr or agent has a direct or
ind
direct interest in the mortggage being arrranged resullting in a situaation where tthe
broker/agent must
m choose between
b
his or
o her best intterests and th
he interests o
of his or her
orrower, invesstor or lenderr, as the case may be.
bo
Conflicts of interesst – sample clauses
c
Wherre the brokeraage/broker/agent is relate
ed to the lendder a clause m
may be wordeed as follows:
 The brokera
age/broker/agent in this trransaction is the (state thee specific nature of the
relationship
p to the lendeer such as wifee, husband, bbrother, sisterr, director, etcc.) of the
lender.
Wherre the brokeraage/broker/agent will obtaain a benefit at a future daate a clause m
may be
worde
ed as follows:
 The brokera
age/broker/agent in this trransaction exxpects to (statte the specificc nature of th
he
benefit such
h as “obtain a stake in the mortgage”, “receive a finnancial or non
n‐financial
payment,” etc.)
e
in relatio
on to this tran
nsaction at a future date.
Wherre the broker//agent has so
old the borrow
wer a higher rrate than thee lender’s low
west rate to
obtain
n some beneffit a clause may
m be worded
d as follows:
 The broker//agent in this transaction will
w receive a higher fee annd/or other reemuneration
for providin
ng you with a rate higher than the lendeer’s lowest raate based on yyour
application.
6. Risks
R
assocciated with
h the propo
osed mortg
gage
Risk tolerance is a concept that identifies the
e borrower’s acceptable leevel of risk. TThere are two
o
fundaamental requiirements whe
en considering risk: undersstanding the borrower’s ggeneral level o
of
accep
ptable risk and
d disclosing th
he specific rissks associatedd with the mo
ortgage beingg
recom
mmended by the
t broker/aggent. This requirement is described in section 25.1 of Regulation
n
188/0
08, Mortgagee Brokerages: Standards off Practice, whhich states thaat, “A brokeraage shall
disclo
ose in writing to a borrowe
er, lender or investor, as thhe case may b
be, the materrial risks of
each mortgage or investment in
n a mortgage that the brokkerage presents for the co
onsideration o
of
the bo
orrower, lend
der or investo
or.”
Furthermore, in itss October 24, 2008 webinaar, FSCO clearrly stated thaat it if a brokeerage is using a
standardized disclo
osure form it may consider providing thhe disclosure of risks in a ccover letter.
Chapter 18: Borrower Disclosure
405
Regardless of how the disclosure is made it must be directly relevant to the specific mortgage
being recommended.
Risks – sample clauses
Variable rate mortgage:
 The mortgage being recommended is a variable rate mortgage. This type of mortgage
has inherent risks which you must be made aware of. These risks include the possibility of
the interest rate rising, based on market conditions. To prevent the possibility of negative
amortization, an increase in the interest rate may require you to increase the amount of
your periodic payment; reduce the total amount of the loan amount then owing by
making a lump sum payment sufficient to reduce such total amount to a point below the
designated amount; or convert the mortgage to a fixed rate mortgage having equal
monthly payments. If you are unable to take any of these actions then the mortgage, at
the lender’s option, may immediately become due and payable.
Extended amortization:
 The mortgage being recommended has an extended amortization (an amortization in
excess of 25 years) of XX years. If you do not reduce this amortization period on renewal
of the mortgage, you may pay substantially more in interest over the lifetime of this
mortgage than you would on a mortgage with a 25 year amortization. If you decide to
keep the extended amortization over the life of this mortgage and do not make any
additional prepayments, you will pay $_____ more than you would have on a mortgage
with a 25 year amortization.
Shortened amortization:
 The mortgage being recommended has an amortization period less than that for which
you qualify. While this will decrease the amount of interest that you pay the lender over
the life of this mortgage, you may be at risk of financial hardship due to the impact of a
higher mortgage payment on your cash flow. If your financial situation changes during
the term of this mortgage and you are unable to meet your payment obligations you may
not be able to decrease your mortgage payment without refinancing this mortgage,
which may result in additional costs to you such as prepayment penalties, legal fees
and/or other costs associated with refinancing.
High TDS ratio:
 The mortgage being recommended allows you to have a higher total debt service ratio
than typically allowed in the mortgage industry. By having a total debt service ratio of XX
you may be at risk of financial hardship due to a reduced amount of cash flow and/or
disposable income than you would have had if you had taken a mortgage with lower
payments and/or if you had fewer monthly obligations.
Interest only mortgage:
 The mortgage being recommended is an interest only mortgage. This means that you will
not be reducing the amount of your outstanding principal during the term of this
mortgage, resulting in the same amount owing at the end of the term as was borrowed at
the beginning of the term. By not reducing the principal outstanding, you may be at risk
of having less equity in your property than you would have had if you had taken an
amortized mortgage if the value of your property remains the same or decreases.
406
Chapter 18: Borrower Disclosure
Accelerated mortgage payment:
 The mortgage being recommended has an accelerated mortgage payment, which is a
payment that is higher than that of a non‐accelerated mortgage payment. This may put
you at risk of financial hardship due to a reduced amount of cash flow and/or disposable
income than you would have had if you had taken a mortgage with lower payments.
Cash back option
 The mortgage being recommended has a cash back option which provides you a lump
sum of cash on closing. This option may put you at risk of having to repay some or all of
this amount if you repay this mortgage before the end of the term. For example, if you
repay this mortgage in the twelfth month you will be required to pay to the lender, in
addition to any other penalties that may be charged, a pro‐rated amount of $____ which
may hinder your ability to repay this mortgage before the term expires.
Closed mortgage:
 The mortgage being recommended is closed. This means that you can only repay the
mortgage before the term expires if you sell your property. You cannot refinance the
mortgage before the term expires. This option may put you at risk of not being able to
refinance this mortgage if interest rates decrease, if you wish to refinance your mortgage
with another lender during the term, or if you need to repay this mortgage for any other
reason other than sale of the property during the term of this mortgage.
Failure to abide by the terms and conditions of the Standard Charge Terms:
 Every mortgage has terms and conditions which a borrower must abide by. You
understand that this mortgage contains a set of Standard Charge Terms that governs
your rights and obligations under this mortgage contract. There is a risk to you if you fail
to meet these obligations which may include penalties assessed by the lender or an action
to remedy the contravention by the lender’s use of the power of sale process.
7. Terms and conditions of the proposed mortgage
As stated in section 24 of the MBLAA, in regards to term mortgages the brokerage must disclose
the prepayment privileges, if any rebates are being made for a cost included in the cost of
borrowing, if any charges or penalties are chargeable if prepayment is made, if any regular
payment is missed, or the mortgage is not paid in full at maturity, and if the borrower has any
rights or obligations under the mortgage related to these items.
If the brokerage is also a lender, it may impose charges on the borrower, in addition to the
interest charged, for the sole purpose of recovering the costs reasonably incurred for legal
expenses and expenses related to processing a dishonoured cheque, if applicable.
If the brokerage is acting as the lender in the transaction and requires the borrower to obtain
insurance, it must inform the borrower that he or she may purchase insurance through any
lawful provider, unless the brokerage has reasonable grounds to disapprove of the provider.
Terms and Conditions – sample clauses
A clause may be worded as follows:
 This mortgage contains the following terms and conditions:
o If you repay this mortgage before the term expires you must pay a 3 month
interest penalty or the interest rate differential, whichever is higher
Chapter 18: Borrower D
Disclosure
o
o
o
o
o
40
07
Dish
honoured payyments will be charged a $$XX NSF fee bby the lender
You
u are permitteed to make a lump sum paayment, crediited directly to
o the
outtstanding prin
ncipal amount of this morttgage at the ttime of the pa
ayment, in thee
amount of XX% of
o the origina
al mortgage aamount once per calendar year
You
u are not allow
wed to rent or
o lease your pproperty withhout the writtten
autthorization off the lender.
You
u must mainta
ain your prop
perty, pay youur property taaxes and main
ntain
accceptable property insurancce at all timess. Failure to ddo so can be cconsidered
deffault by the leender.
You
u must abide by all of the terms
t
and connditions as exxpressed in th
his mortgage’’s
Standard Chargee Terms. Failure to do so ccan be considdered default by the lenderr.
8. Estimated
E
costs
c
Regullation 188/08
8, Mortgage Brokerages:
B
Standards of PPractice descrribes how info
ormation
must be disclosed if it is unknow
wn. Section 34
3 of the Reg ulation statess that:
(1) Th
he information to be disclo
osed under th
his Regulationn to a borrower, lender or investor mayy
be an estimate or may be based
d upon an asssumption if, w
when the discclosure is mad
de, the
broke
erage cannot know the acttual informatiion to be discclosed and if tthe estimate or assumptio
on
is reasonable.
(2) If the informattion disclosed
d under this Regulation to a borrower, llender or inveestor is an
estimate or is base
ed upon an asssumption, th
he brokerage shall so notiffy the borrow
wer, lender or
investtor, as the casse may be, in writing.
mated costs – sample clausses
Estim
Wherre the cost of legal fees is unknown
u
a clause may be worded as fo
ollows:
 “Estimated legal fees of $____ plus disbursementss”
 “Estimated legal fees of $____ including disbursem
ments”
9. The
T cost off borrowing
g
Disclo
osure of the cost
c of borrow
wing is critical for compliannce purposess and is covereed in
Regullation 191/08
8. The MBLAA
A outlines thaat the cost of borrowing m
must include the interest
rate and
a any amou
unt payable by the borrow
wer in connecttion with the mortgage. TThe MBLAA
allows for certain items
i
to be exxcluded from
m the cost of bborrowing, ass detailed in the Regulation
n.
Pa
ause for cllarification
n – The cosst of borro
owing: dolllars and ceents
While
W
the cost of borrowingg must be discclosed as an aannual percen
ntage rate, seection 8.1 of
Reegulation 191
1/08 states that it must alsso be discloseed in dollars aand cents oveer the course
off the term forr all fixed and variable rate
e mortgages.
The MBLAA
M
imposes requireme
ents on what constitutes thhe cost of borrowing and how it must
be expressed, as well
w as items of
o additional disclosure.
d
TThe MBLAA sttates that a brrokerage musst
disclo
ose the cost of borrowing based
b
on the assumption tthat all obligaations of the b
borrower aree
met and
a that it be expressed ass a rate per an
nnum, exceptt if indicated otherwise byy regulation.
In add
dition, section
n 27 prohibitss advertising the cost of boorrowing unleess it contains information
n
as req
quired by Reg
gulation 191/0
/08. This Regu
ulation clearlyy describes w
what informattion must be
provid
ded to borrow
wers and how
w it is to be prrovided.
408
Chapter 18: Borrower D
Disclosure
ost of borrow
wing is calculaated using the
e formula:
The co
APR = C / (T x P) x 1 00
in which,
e rate cost of borrowing,
 “APR” meaans the annuaal percentage
t
of all costs legally req
quired to be ddisclosed,
 “C” is the total
a
of the principal off the mortgagge outstandin
ng at the end of each perio
od
 “P” is the average
for the calculation of in
nterest under the mortgag e, before sub
btracting any payment that
hat time, and
is due at th
t
of the mortgage
m
in ye
ears, expresseed to at leastt two decimall points.
 “T” is the term
The APR
A may be ro
ounded off to
o the nearest eighth of a peer cent and iff the mortgagge is a variable
rate mortgage
m
(VRM), the rate as
a of the date
e of the calcuulation must b
be used. In ad
ddition, the
cost of
o borrowing for a line of credit
c
or crediit card is the aannual rate that applies on the date off
the diisclosure.
Pa
ause for cllarification
n – Calcula
ating the A
APR/cost off borrowin
ng
While
W
the form
mula to calculaate the APR appears
a
straigghtforward, itt cannot be caalculated
ussing a regular calculator. This
T is due to the fact that “P” represen
nts the averagge principal o
of
the mortgage outstanding
o
at
a the end of each
e
period. In other worrds, one mustt calculate thee
ou
utstanding baalance at the end
e of each payment,
p
addd them all and
d divide by the number of
paayments to arrrive at “P.” This
T calculatio
on is no differrent than req
quired under tthe previous
Mortgage
M
agen
nts Act; there
efore all mortggage originattion software should continue to
acccurately calculate the APR
R/cost of borrrowing for thee broker/ageent.
Cos
st of Borr owing/AP
PR – Incl uded and
d Exclude
ed Items
The general rule is that costs asssociated with
h obtaining a mortgage, su
uch as those llisted below,
must be included in the cost of borrowing, while
w
all otherr costs, such aas costs assocciated with
buying a home, are
e not included. Specifically, items that must be inclu
uded in the ccost of
borro
owing/APR calculation inclu
ude:
 administrative charges
c
including charges for services, transactions or any other activity in
m
rellation to the mortgage
 law
wyer’s fees, in
ncluding disbursements, fo
or a lawyer hiired by the leender and paid by the
bo
orrower (the majority
m
of caases)
 inssurance chargges, excludingg those below
w
 appraisal, inspeection or survey costs payaable by the boorrower, wheen required by the lender
Itemss not included
d in the Cost of
o Borrowing//APR calculattion include:
 op
ptional insuran
nce charges, or if the borrower is the bbeneficiary (su
uch as properrty insurance)
 charges for ove
erdrafts
 charges to regisster documen
nts
 penalties for prrepaying the mortgage
m
d to the transsaction or forr the borroweer’s own
 additional services of a lawyer not related
wyer
law
 titlle insurance where
w
the bo
orrower has ch
hosen the proovider and is the beneficiaary
 appraisals, inspections or surveys ordered
d directly by, and received
d by, the borrrower
Chapter 18: Borrower D
Disclosure




40
09
default insurance premiums for high‐ratio
o mortgages
charges for tax accounts that are optionaal or required for a high‐ratio mortgagee
any charges to discharge
d
a se
ecurity intere
est, or
default chargess
Disc
closure u nder Spe
ecific Cir cumstancces
The Regulation
R
is very
v
explicit about
a
the info
ormation thatt must be pro
ovided in the following
circum
mstances:
1. Fixxed interest mortgage
m
for a fixed amount
2. Variable interesst mortgage for
f a fixed am
mount
3. Lin
ne of credit
4. Cre
edit card applications
5. Cre
edit cards
Each is
i detailed be
elow. The folllowing inform
mation is takeen directly fro
om the Regula
ation and
must be included in every disclo
osure document provided to the borrower in these
mstances.
circum
1. Disclosure
D
‐ Fixed inteerest morttgage for a fixed am
mount
Regullation 191/08
8, Section 8, subsection 1 states
s
that a m
mortgage bro
okerage that eenters into orr
arranges a mortgage for a fixed
d interest rate
e for a fixed a mount, (for eexample a partially
amorttized, blended, constant payment
p
morttgage with a ffixed rate, as discussed in chapter 3) to
o
be rep
paid on a fixe
ed future date
e or by instalm
ment paymennts, must givee the borroweer an initial
disclo
osure stateme
ent that includ
des the follow
wing informattion:
1. The principal am
mount of the mortgage
2. The amount of each advance
e of the princcipal and wheen each advan
nce is to be m
made
3. The total amount of all paym
ments
4. The cost of borrrowing over the
t term of th
he mortgage, expressed in
n dollars and ccents
5. The term of the
e mortgage, and the period
d of amortizaation if it is diffferent from tthe term
6. The annual inte
erest rate and
d the circumsttances, if anyy, under which
h it is compou
unded
7. The APR, if it difffers from the
e annual interest rate
8. The date on and
d after which interest is ch
harged and innformation co
oncerning anyy period
during which interest does not
n accrue
9. The amount of each paymen
nt and when it
i is due
10.The fact that eaach payment made on the mortgage m ust be applied first to the accumulated
d
cost of borrowing and then to
t the outstanding princippal
11.An
n amortization
n schedule fo
or the term off the mortgagge showing th
he principal am
mount, the
due date and am
mount of eacch periodic paayment, the pportion of eacch periodic paayment that is
charged as interest or is app
plied on princiipal, the outs tanding balan
nce of the mo
ortgage after
each periodic payment and the
t principal amount at m
maturity
12.Infformation abo
out any optio
onal service in
n relation to tthe mortgagee that the borrrower
acccepts, the chaarges for each
h optional service and thee conditions u
under which the borrower
maay cancel the service, if thaat information is not discloosed in a sepaarate statement before th
he
op
ptional service
e is provided
13.The information
n required byy paragraphs 1 to 4 of secttion 24 of the Act, includin
ng a
description of any
a components of a formula used to caalculate a reb
bate, charge o
or penalty to
be imposed on the borrower if the borrow
wer exercisess a right to reepay the amount borrowed
d
before the maturity of the mortgage
m
410
Chapter 18: Borrower Disclosure
14.If section 16 of this Regulation applies with respect to the mortgage, the formula set out in
subsection 16 (3)
15.The particulars of the charges or penalties referred to in paragraph 5 of section 24 of the Act,
including default charges that may be imposed under section 17 of this Regulation
16.The property in which the lender takes a security interest under the mortgage
17.Any charge for a brokerage, if the brokerage charges are included in the amount borrowed
and are paid directly by the lender to the brokerage
18.The fact that there is a charge to discharge a security interest and the amount of the charge
on the day that the statement was provided
19.The nature and amount of any charge other than an interest charge. O. Reg. 191/08, s. 8 (1).
(2) If the outstanding balance of the mortgage is increased because the borrower has missed a
scheduled instalment payment or because a default charge is levied on the borrower for missing
a scheduled instalment payment, such that the amount of each of the subsequently scheduled
instalment payments does not cover the interest accrued during the period for which a payment
is scheduled, and if the brokerage is a lender under the mortgage, the brokerage must give the
borrower a subsequent disclosure statement not more than 30 days after the missed payment
or the imposition of the default charge that describes the situation and its consequences.
O. Reg. 191/08, s. 8 (2).
2. Disclosure ‐ Variable interest mortgage for a fixed amount
Regulation 191/08, Section 9, subsection 1 states that a mortgage brokerage that enters into or
arranges a mortgage with a variable interest rate for a fixed amount, (for example, the variable
rate mortgages discussed in chapter 3) to be repaid on a fixed future date or by instalment
payments, must give the borrower an initial disclosure statement that includes the following
information:
1. The information described in section 1 above for a fixed interest rate for a fixed amount
2. The annual rate of interest that applies on the date of the disclosure statement
3. The method for determining the annual interest rate that applies after the date of the
disclosure statement and when that determination is made
4. The amount of each payment based on the annual interest rate that applies on the date of
the disclosure statement and the dates when those payments are due
5. The total amount of all payments and of the cost of borrowing based on the annual interest
rate that applies on the date of the disclosure statement
6. If the loan is to be paid by instalment payments and the amount to be paid is not adjusted
automatically to reflect changes in the annual interest rate that apply to each instalment
payment (for example, a variable rate mortgage with fixed payments),
i.the annual interest rate above which the amount of a scheduled instalment payment
on the initial principal does not cover the interest due on the instalment payment, and
ii. the fact that negative amortization is possible
7. If the loan does not have regularly‐scheduled payments,
i.the conditions that must occur for the entire outstanding balance, or part of it, to
become due, or
ii. the provisions of the mortgage that set out those conditions. O. Reg. 191/08, s. 9 (1)
(2) If the variable interest rate for the loan is determined by adding or subtracting a fixed
percentage rate of interest to or from a public index that is a variable rate, and if the brokerage
is the lender under the mortgage, the brokerage must give the borrower an additional
disclosure statement at least once every 12 months that contains the following information:
Chapter 18: Borrower Disclosure
411
1. The annual interest rate at the beginning and end of the period covered by the disclosure
statement
2. The outstanding balance at the beginning and end of the period covered by the disclosure
statement
3. The amount of each instalment payment due under a payment schedule and the time when
each payment is due, based on the annual interest rate that applies at the end of the period
covered by the disclosure statement. O. Reg. 191/08, s. 9 (2)
(3) If the variable interest rate for the mortgage is determined by a method other than that
referred to in subsection (2), and if the brokerage is the lender under the mortgage, the
brokerage must give the borrower an additional disclosure statement no more than 30 days
after increasing the annual interest rate by more than 1 per cent above the most recently
disclosed rate and the disclosure statement must contain the following information:
1. The new annual interest rate and the date on which it takes effect
2. The amount of each instalment payment and the time when each payment is due, for
payments that are affected by the new annual interest rate. O. Reg. 191/08, s. 9 (3)
3. Disclosure ‐ Line of credit
Regulation 191/08, Section 10, subsection 1 states that a mortgage brokerage that enters into
or arranges a mortgage securing a line of credit must give the borrower an initial disclosure
statement that includes the following information:
1. The initial credit limit, if it is known at the time the disclosure is made
2. The annual interest rate, or the method for determining it if it is variable
3. The nature and amounts of any non‐interest charges
4. The minimum payment during each payment period or the method for determining it
5. Each period for which a statement of account is to be provided
6. The date on and after which interest accrues and information concerning any grace period
that applies
7. The particulars of the charges or penalties referred to in paragraph 5 of section 24 of the Act,
including default charges that may be imposed under section 17 of this Regulation
8. The property in which the lender takes a security interest under the mortgage
9. Information about any optional service in relation to the mortgage that the borrower
accepts, the charges for each optional service and the conditions under which the borrower
may cancel the service, if that information is not disclosed in a separate statement before the
optional service is provided
10.A local or toll‐free telephone number, or a telephone number with a prominent indication
that collect calls are accepted, that the borrower may use to get information about the
account during the lender’s regular business hours
11.Any charge for a brokerage, if the brokerage’s charges are included in the amount borrowed
and are paid directly by the lender to the brokerage. O. Reg. 191/08, s. 10 (1)
(2) If the initial credit limit is not known when the initial disclosure statement is made, and if the
brokerage is a lender under the mortgage, the brokerage must disclose it,
(a) in the first statement of account provided to the borrower; or
(b) in a separate statement that the borrower receives on or before the date on which the
borrower receives that first statement of account. O. Reg. 191/08, s. 10 (2)
412
Chapter 18: Borrower Disclosure
(3) Subject to subsection (4), if the brokerage is a lender under the mortgage, the brokerage
must give the borrower an additional disclosure statement at least once a month that contains
the following information:
1. The period covered by the disclosure statement and the opening and closing balances in the
period
2. An itemized statement of account that discloses each amount credited or charged, including
interest, and the dates when those amounts were posted to the account
3. The sum for payments and the sum for credit advances and interest and other charges
4. The annual interest rate that applied on each day in the period and the total of interest
charged at those rates in the period
5. The credit limit and the amount of credit available at the end of the period
6. The minimum payment and its due date
7. The borrower’s rights and obligations regarding any billing error that may appear in the
statement of account
8. A local or toll‐free telephone number, or a telephone number with a prominent indication
that collect calls are accepted, that the borrower may use to get information about the
account during the brokerage’s regular business hours. O. Reg. 191/08, s. 10 (3)
(4) The additional disclosure statements described in subsection (3) are not required for a
period during which there are no advances or payments and,
(a) there is no outstanding balance at the end of the period; or
(b) the borrower has notice that the mortgage has been suspended or cancelled due to
default and the lender has demanded payment of the outstanding balance. O. Reg.
191/08, s. 10 (4)
4. Disclosure ‐ Credit card applications
Regulation 191/08, Section 11, subsection 1 states that a mortgage brokerage that issues a
credit card secured by a mortgage or arranges a mortgage securing a credit card and distributes
an application form for credit cards must specify the following information in the application
form or in a document accompanying it, including the date on which each of the matters
mentioned takes effect:
1. The annual interest rate for a credit card with a fixed rate of interest
2. If the credit card does not have a fixed rate of interest, the fact that the variable interest rate
is determined by adding or subtracting a fixed percentage rate of interest to or from a public
index, the public index and the fixed percentage rate to be added or subtracted from it
3. The day on and after which interest accrues and information concerning any grace period
that applies
4. The amount of any charges other than interest charges. O. Reg. 191/08, s. 11 (1)
(2) Subsection (1) does not apply if, on the application form or in a document accompanying it,
the mortgage brokerage prominently discloses,
(a) a local or toll‐free telephone number, or a telephone number with a prominent indication
that collect calls are accepted, that the borrower may use to get information required by
subsection (1) during the mortgage brokerage’s regular business hours, and
(b) the fact that the applicant may obtain the information otherwise required by subsection
(1) at that telephone number. O. Reg. 191/08, s. 11 (2)
Chapter 18: Borrower Disclosure
413
(3) If an individual applies for a credit card by telephone or any electronic means, the mortgage
brokerage must give the applicant the information required by paragraphs 1 and 4 of subsection
(1) when the application is made. O. Reg. 191/08, s. 11 (3)
(4) If a mortgage brokerage solicits applications for credit cards secured by a mortgage in
person, by mail, by telephone or by any electronic means, the information required by
paragraphs 1 and 4 of subsection (1) must be disclosed at the time of the solicitation. O. Reg.
191/08, s. 11 (4)
5. Disclosure ‐ Credit cards
Regulation 191/08, Section 12, subsection 1 states that a mortgage brokerage that enters into
or arranges a mortgage secured by a credit card must give the borrower an initial disclosure
statement that includes the following information:
1. The information described in paragraphs 1 and 3 to 11 of subsection 10 (1)
2. The manner in which interest is calculated and the information required by paragraph 1 or 2,
as the case may be, of subsection 11 (1)
3. If the credit agreement requires the borrower to pay the outstanding balance in full on
receiving a statement of account,
i. mention of that requirement,
ii. the grace period by the end of which the borrower must have paid that balance, and
iii. the annual interest rate charged on any outstanding balance not paid when due
4. If a lost or stolen credit card is used in an unauthorized manner, the fact that the maximum
liability of the borrower is the lesser of $50 and the maximum set by the credit agreement
5. If a transaction is entered into at an automated teller machine by using the borrower's
personal identification number, the fact that the liability incurred by the transaction is the
borrower’s maximum liability, despite paragraph 4
6. If the mortgage brokerage has received a report from the borrower, whether written or
verbal, of a lost or stolen credit card, the fact that the borrower is not liable for any
transaction entered into through the use of the card after the mortgage brokerage receives
the report. O. Reg. 191/08, s. 12 (1)
(2) If the initial credit limit is not known when the initial disclosure statement is made, the
mortgage brokerage must disclose it,
(a) in the first statement of account provided to the borrower, or
(b) in a separate statement that the borrower receives on or before the date on which the
borrower receives that first statement of account. O. Reg. 191/08, s. 12 (2)
(3) Despite section 13, if a credit agreement for a credit card is amended, the mortgage
brokerage must give the borrower a written statement at least 30 days before the
amendment takes effect, and the statement must set out the changes to the information that
was required to be given to the borrower in the initial disclosure statement, excluding
information about the following changes:
1. Any change in the credit limit
2. Any extension to the grace period
3. Any decrease in charges other than interest charges and default charges referred to in
paragraphs 3 and 7 of subsection 10 (l)
4. Any change concerning information about any optional service in relation to the credit
agreement that is referred to in paragraph 9 of subsection 10 (1)
414
Chapter 18: Borrower D
Disclosure
5. Any change in a variable interest rate referred to iin paragraph 2 of subsecttion 11 (1) as a
result of a change
c
in th
he public index referred tto in that paaragraph. O
O. Reg. 191/08
8,
s. 12 (3)
How
w Disclosu re Must be
b Made
Broke
erages must provide
p
writte
en disclosure to borrowerss (as per sectiions 6 of Regulation
191/0
08) that meetts the followin
ng four key re
equirements:
1. it may
m be a sepaarate docume
ent or part off another doccument
2. in cases where amounts required to be disclosed cannnot reasonablly be known, disclosure
maay be based on
o an assump
ption or estimate, as long aas the assump
ption or estim
mate is
reaasonable and the borrowe
er is told that it is an assum
mption or estiimate
3. it must
m be writtten in clear, plain
p
language
e that brings tthe required information tto the
atttention of the
e borrower
4. it may
m be provid
ded electronically, provide
ed that the boorrower conssents in writin
ng
Whe
en Disclos ure Must be Made
Disclo
osure must be
e provided to the borrowe
er at least twoo business days before thee borrower is
requirred to make any
a payment or enter into
o the mortgagge agreementt; however, th
he two
business days mayy be waived iff the borrowe
er consents inn writing and tthe disclosure is still madee
before the borrow
wer is required
d to make anyy payment orr enter into th
he mortgage aagreement.
Pa
ause for cla
arification
n – What disclosure
d
d
documentss must be given to
th
he borroweer?
Th
he MBLAA req
quires that wh
hen the borro
ower signs thee borrower d
disclosure doccument the
mo
ortgage agent must give th
he borrower:
1. A signe
ed copy of the
e borrower disclosure, andd
2. An amo
ortization schedule for the
e full term of tthe proposed
d mortgage
While most mo
ortgage agents will also leaave a copy of the lender’s ccommitment, they are
on
nly legally required to leave
e these two documents.
d
18.3
3 Sample
e Borrow
wer Disclo
osure
Discla
aimer: The fo
ollowing samp
ple borrower disclosure doocuments aree intended for illustration
purpo
oses only and are not warrranted to be compliant.
c
It is the respon
nsibility of thee mortgage
agentt to use only those
t
forms approved
a
by his
h or her brookerage.
Case Study
S
– Fixed
d rate mortgaage
The fo
ollowing is a case
c
study that is used to provide
p
an exxample of thee potential dissclosure
docum
ment for use by a brokeragge arranging a fixed rate m
mortgage for a borrower.
m Coren is a liccensed mortggage agent wiith REMIC Moortgages Inc. Adam has reecently
Adam
arranged a fixed raate mortgage with constan
nt payments ffor his clientss, Noreen and
d Christopherr
Borro
ower to purch
hase a new ho
ome in Torontto. Adam is nnot charging a brokerage ffee since he iss
being paid directlyy by the lende
er. Given thiss scenario Adaam has comp
pleted a borro
ower
disclo
osure docume
ent as provide
ed by REMIC Mortgages Innc. The first d
document bellow is the
415
Chapter 18: Borrower Disclosure
lender’s commitment letter. The following document is the borrower disclosure based on this
commitment letter.
Figure 97 – Sample mortgage commitment Letter for use in disclosure
Mortgage Commitment
Response: December 15, 2012
Page 1 of 4
Broker Information
Name:
Address:
Attention:
REMIC Mortgages Inc.
2175 Sheppard Avenue East, Suite 213, Toronto, ON, M2J 1W8
Adam Coren
Application Reference Number: 1213456‐789
Lender Information
Name:
SuperBank
Address:
2750 Yonge Street, Suite 6500, Toronto, ON, M1M 1M1
Lender Reference #: 1213456‐789
Mortgage Insurance Reference #: TBD
TBD means
To Be
Determined
Applicant Information
Applicant(s): Noreen Borrower, Christopher Borrower
Property Information
Address:
1234 Queen Lane, Toronto, ON, M1S 1M1
With reference to the above noted property SuperBank is pleased to provide the following mortgage loan
offer, subject to the following terms and conditions:
Loan
Terms
Purchase Value:
$237,500.00
Down payment:
$11,875.00
Amount:
$225,525.00
Insurance Premium
Total Loan:
$6,201.94
$231,726.94
Other Mortgages:
N/A
Product:
Mortgage Type:
Term Type:
Interest Rate
(compounded semi‐
annually):
Term (months):
Amortization
(months):
Frequency:
Payment
First
Principal and Interest:
Closed
Taxes (Estimated)
5.390%
Taxes Paid By:
60
Total Installment:
$1,399.64
$149.58
lender
1,549.22
300
Monthly
Commitment Expires
12/22/2012
Supersizer
Cashback:
N/A
Closing Date:
03/01/2013
LENDER AUTHORIZATION
All of our normal requirements and, if applicable, those of the mortgage insurer must be met. All costs including
legal, survey, mortgage insurance, etc. are for the account of the applicant(s). The mortgage insurance premium (if
applicable) will be added to the mortgage. This mortgage is subject to the details and terms outlines as well as the
conditions described in the attached Schedule A.
Approved by:
John Underwriter, SuperBank Signature: _________________ Date: ________________
CLIENT ACCEPTANCE
I/We the undersigned applicant(s) accept the terms of this mortgage as stated above and agree to fulfill the
conditions of approval as outlined in the attached Schedule A to the lender’s satisfaction. I/We further certify that
the information given on the mortgage application is true and correct.
Applicant: Noreen Borrower
Signature: _________________
Date: _________________
Applicant: Christopher Borrower
Signature: _________________
Date: _________________
416
Chapter 18: Borrower Disclosure
Mortgage Commitment – SCHEDULE A
ASSUMPTION POLICIES
Page 2 of 4
Assumption Option: The transferee or purchaser may, upon completion of a mortgage application which
meets our mortgage approval criteria then in effect, personally assume (with the consent of his or her spouse where
required by law) all of your obligations under your mortgage by executing an assumption agreement in the form
required by us.
CONDITIONS
Mortgage: The mortgage loan to be made to you shall be subject to all extended terms set forth in SuperBank’s
standard form of mortgage contract, and loans insured by a mortgage insurer will be subject to the requirements of
the Certificate of Insurance issued by the mortgage insurer.
Property Taxes: If stipulated by us, you will pay us monthly, an amount which in our opinion is sufficient to
enable us to pay the annual property taxes on your behalf by the due date for the first installment of the tax bill in
each year, based on the estimated annual taxes. We shall withhold a tax holdback from our mortgage advance
sufficient to accumulate the required credit in your tax account. Any tax bills issued and unpaid at the interest
adjustment date shall be paid from the proceeds of the mortgage loan.
Fire Insurance: We shall require evidence of replacement cost all‐risk insurance coverage acceptable to us,
taken with an insurer not disapproved by us. Such policy must contain the standard Insurance Bureau of Canada
mortgage clause and must indicate our interest as mortgagee.
 Title Insurance: A title insurance policy acceptable to us and obtained by our solicitor at your cost.
Processing Fee and Costs: Whether or not this loan is funded, you agree to pay the processing fee specified
herein, if any, and all legal, appraisal and survey costs incurred by you or us in this transaction.
CMHC/GEMICO/Canada Guaranty Insurance Fee: Insurance Fee: You agree to pay any mortgage insurance fee,
as indicated, and all applicable federal or provincial taxes thereon.
Interest Adjustment: Interest shall accrue from the date the first advance is made. Interest due to the interest
adjustment date will be simple interest calculated daily and will be deducted from the first advance
Pre‐authorized Cheque Plan: You agree to make repayment under the mortgage by a 'pre‐authorized cheque
plan' or by such other means as may be requested by us.
Commitment: This commitment is not transferable by you and the benefit may not be assigned by you. It may
be assigned by us.
Representation and Warranty: You warrant to us, and it is a condition of this loan, that all information
submitted by you or your broker to us in connection with your loan application is true and accurate, and you agree to
supply promptly, on request, any further information concerning yourself, your financial standing or the property to
be mortgaged, which may be required by us.
Title: You represent and warrant to us, and it is a condition of this loan, that you have a good and marketable
title to the property to be mortgaged, satisfactory in all aspects.
Zoning and Work orders: It is a condition of this loan that the mortgaged property and the use thereof comply
with all applicable government laws and regulations and that there are no outstanding work orders, notices or
directives against the property.
Construction Loan: In the case of a construction loan, advances will be made at our discretion and we will
always retain sufficient funds to complete construction.
New Homes: If this mortgage loan is for the purchase of a newly constructed home, our solicitor will be
required to obtain a certified copy of the New Home Enrolment endorsed by HUDAC (or the equivalent enrolment in
any governmental new home warranty programme in provinces other than Ontario) before making any mortgage
advances.
Date:______________________________
Initials:__________
Initials: __________
417
Chapter 18: Borrower Disclosure
Mortgage Commitment – SCHEDULE A Continued
ASSUMPTION POLICIES
Page 3 of 4
No agency: You acknowledge that we may assign this commitment or the mortgage to a third party and may
receive a fee in connection with such assignment. We may also receive a fee in connection with the servicing of this
loan. We are not acting as your agent or otherwise in any fiduciary capacity in relation to you in connection with the
loan described herein.
Solicitor and Documentation: The solicitor specified by us will act on our behalf in this transaction. You agree to
deliver to our solicitor your title documents, insurance policy and survey as soon as possible.
Entire Agreement: This commitment, when accepted by you, will constitute the entire agreement and
understanding between you and us with respect to this loan and will supercede all other agreements or
understandings, whether oral or written.
Survival: You agree that the terms, conditions & covenants contained in this commitment shall survive and will
not merge upon registration of the mortgage and the advance of funds thereunder but will remain valid and
subsisting obligations.
Information: You agree that we may conduct credit checks with consumer reporting agencies and make such
other investigations and collect such other information concerning you as we may deem advisable, all such
information to be used for the purpose of underwriting, assessing the risk associated with, and administering this
mortgage loan.
Privacy: You agree that we may share information concerning you with (a) any proposed assignee of this
commitment or the mortgage loan, (b) our duly authorized agents and representatives who are engaged in the
processing or servicing of your mortgage, (c) any parties necessary or desirable in connection with any sale or
securitization of this mortgage loan and (d) organizations with which the lender has strategic alliances who may use
such information to provide you from time to time with information on financial products which may be of interest to
you. If you prefer that your personal information not be shared with any party referred to in this document or future
documents, you may so advise us in writing at any time and we will not share the information with them.
PAYMENT FLEXIBILITY OPTIONS
Circle Payment Option:
Weekly
Bi‐weekly
Semi‐monthly
Monthly
INSTRUCTIONS
The terms and conditions of this mortgage commitment will form part of the solicitor’s instructions.
OTHER
Borrower disclosure required prior to funding
Title to be taken in the name of Borrower, Noreen and Borrower, Christopher
Subject to satisfactory confirmation of down payment.
Subject to satisfactory confirmation of income.
Subject to CMHC approval
Subject to signed and dated mortgage application
Receipt of satisfactory purchase agreement including all addendums and MLS listing.
PORTABILITY OPTIONS
If the mortgagor is not in default and has entered into an agreement to sell or transfer title to the mortgaged
property, the mortgagor may exercise the Portability Option.
Date:______________________________
Initials:__________
Initials: __________
418
Chapter 18: Borrower Disclosure
Mortgage Commitment – SCHEDULE A Continued
PREPAYMENT POLICIES
Page 4 of 4
Privileges: 15% per year & Double Up
The Mortgagor, when not in default of any terms or conditions contained in the Mortgage, may prepay the
whole of the principal sum then outstanding without notice upon payment to the Mortgagee of the greater of
i) three months' interest at the interest rate on the principal sum outstanding; or
ii) the amount, if any by which interest at the Interest rate exceeds interest at the Mortgagee's current interest rate
for reinvestment calculated on the principal sum outstanding. Such amount to be calculated from the date of
prepayment to the maturity date of the mortgage.
RATE ADJUSTMENT POLICIES
 If five days prior to closing our interest rate is lower than the guaranteed interest rate, upon request, the lower
rate will prevail.
ADMINISTRATION AND SERVICE FEES
NSFs, Stopped Payment, Returned Items: $150.00
Date:______________________________
Initials:__________
Initials: __________
Chapter 18: Borrower Disclosure
419
Figure 98 – Sample Borrower Disclosure document
Borrower Disclosure
Page 1 of 4
REMIC Mortgages Inc.
To:
Noreen Borrower, Christopher Borrower
1234 Borrower Lane, Toronto, ON, M1M 1M1
We are pleased to inform you that we have arranged the following mortgage on your
behalf:
Details of the mortgage we have arranged on your behalf
Address of property to be mortgaged: 1234 Queen Lane, Toronto, ON, M1S 1M1
Purpose: Purchase
Closing Date: 03/01/2013
Commitment Expires: 12/22/2012
Loan
Terms
Payment
Purchase Value:
$237,500.00 Mortgage Type:
First Principal and
$1,399.64
Interest:
Down payment:
$11,875.00 Term Type:
Open on Penalty Taxes (Estimated)
$149.58
Amount:
$225,625.00 Interest Rate:
Fixed at 5.390% Taxes Paid By:
Lender
Insurance
$6,201.94 Compounding:
Semi‐Annual Total Installment:
1,549.22
Premium
Term (months):
60
Total Loan:
$231,726.94 Amortization
300 Due Date:
1st of each month
(months):
Other Mortgages:
N/A Frequency:
Monthly
Product:
Supersizer All mortgage payments are
applied to interest first, followed
by principal
Other Terms and Conditions
Prepayment Privileges:
 When not in default of any terms or conditions contained in the mortgage, you may prepay the whole
of the principal sum then outstanding without notice upon payment to the mortgagee of the greater of
three months' interest at the interest rate on the principal sum outstanding; or the amount, if any by
which interest at the Interest rate exceeds interest at the mortgagee's current interest rate for
reinvestment calculated on the principal sum outstanding. Such amount to be calculated from the date of
prepayment to the maturity date of the mortgage.
 15% per year & Double Up
Rate Guarantee
 If five days prior to closing our interest rate is lower than the guaranteed interest rate, upon request,
the lower rate will prevail.
Portability Option
 If the mortgagor is not in default and has entered into an agreement to sell or transfer title to the
mortgaged property, the mortgagor may exercise the Portability Option.
420
Chapter 18: Borrower Disclosure
Borrower Disclosure Continued
Page 2 of 4
Assumability Option
 The transferee or purchaser may, upon completion of a mortgage application which meets our
mortgage approval criteria then in effect, personally assume (with the consent of his or her spouse where
required by law) all of your obligations under your mortgage by executing an assumption agreement in
the form required by us.
Administration and Service Fees
 NSFs, Stopped Payment, Returned Items: $150.00
Other Obligations
 You must maintain your property, pay your property taxes and maintain acceptable property
insurance at all times. Failure to do so can be considered default by the lender.
 You must abide by all of the terms and conditions as expressed in this mortgage’s Standard Charge
Terms. Failure to do so can be considered default by the lender.
 You understand that time is of the essence and that you must meet all of the terms and conditions of
the attached mortgage approval. Failure to do so may result in cancellation of the mortgage commitment
without recourse by you resulting in potential financial loss.
Other information about your mortgage
As with all mortgages borrowing involves a certain degree of risk. The potential risks associated with this
mortgage include:
 Standard Charge Terms
Every mortgage has terms and conditions which a borrower must abide by. You understand that this
mortgage contains a set of Standard Charge Terms that governs your rights and obligations under this
mortgage contract. There is a risk to you if you fail to meet these obligations which may include penalties
assessed by the lender or an action to remedy the contravention by the lender’s use of the power of sale
process.
About REMIC Mortgages Inc.
 REMIC Mortgages Inc. will receive a fee and/or other remuneration by the lender on
completion of this transaction based on a percentage of the loan proceeds to which the
broker/agent is entitled a percentage.
 REMIC Mortgages Inc. is acting on behalf of both the lender and the borrower in arranging
The cost of
this mortgage transaction.
borrowing
is
 REMIC Mortgages Inc. acted as a mortgage lender and represented 23 lenders in 2011.
expressed as a
percentage…
Cost of Borrowing and APR
The total APR of this transaction is 5.646% and includes the following costs of borrowing:
Cost
Details
Appraisal fee:
$250.00 You have already paid this amount … and in
Legal fees plus disbursements (this is an $1,500.00 To be deducted on closing
dollars and
estimate):
cents
Total Costs: $1,750.00
Over the term of this mortgage if all of your payments are made on time and you do not make
any prepayments you will have paid $26,482.83 in principal and $61,089.57 in interest and your
outstanding balance at the end of 60 payments will be $215,161.49
Chapter 18: Borrower Disclosure
Borrower Disclosure Continued
421
Page 3 of 4
Brokerage Acknowledgement
I, Adam Coren, a licensed mortgage agent on behalf of REMIC Mortgages Inc., have completed this
disclosure document in accordance with the Mortgage Brokerages, Lenders and Administrators Act, 2006.
________________________________
Signature of Adam Coren, Broker
________________________________
Date
Borrower Acknowledgement
By signing below we, Noreen Borrower and Christopher Borrower acknowledge that we have read and
understand this document, including the terms and conditions of this mortgage and have received an
amortization schedule. We understand that this disclosure must be made at least two business days
before we are asked to make a payment, enter into the mortgage agreement or incur any other obligation
in relation to this proposed mortgage unless we consent in writing to waive these two business days. By
waive this waiting period, or
do not waive this waiting period.
signing below we
By signing below we further acknowledge that we understand that time is of the essence and we must
meet the terms and conditions of the attached mortgage commitment letter, and will undertake to do so
immediately. We understand that failure to do so may result in this mortgage approval being cancelled
without recourse. We further understand that if this mortgage approval is cancelled based on my/our
failure to meet the terms and conditions of this transaction that we may suffer financial harm, in which
case we agree to hold harmless and indemnify REMIC Mortgages Inc. from all liability.
We further acknowledge that we may obtain independent legal advice, at our own cost regarding this
transaction and that REMIC Mortgages Inc. has not advised us against this.
__________________________________
Signature of Noreen Borrower
__________________________________
Signature of Christopher Borrower
__________________________________
Date
__________________________________
Date
422
Chapter 18: Borrower Disclosure
Borrower Disclosure Continued
Page 4 of 4
Amortization Schedule
(this must be included with every Borrower Disclosure document)
Loan Amount:
Interest Rate:
Term:
Amortization:
Payment
Number
1
2
3
4
5
6
7
8
9
10
11
12
$500,000
5%
1 year
25 years
Payment
Date
Payment
Amount
03/01/2013
04/01/2013
05/01/2013
06/01/2013
07/01/2013
08/01/2013
09/01/2013
10/01/2013
11/01/2013
12/01/2013
01/01/2014
02/01/2014
$2,908.03
$2,908.03
$2,908.03
$2,908.03
$2,908.03
$2,908.03
$2,908.03
$2,908.03
$2,908.03
$2,908.03
$2,908.03
$2,908.03
Compounding Frequency:
Payment Frequency:
Monthly Payment:
Interest Adjustment Date:
Amount
to
Principal
$846.07
$849.56
$853.06
$856.58
$860.12
$863.66
$867.22
$870.80
$874.39
$878.00
$881.62
$885.25
Cumulative
Principal
$846.07
$1,695.63
$2,548.69
$3,405.27
$4,265.39
$5,129.05
$5,996.27
$6,867.07
$7,741.46
$8,619.46
$9,501.08
$10,386.33
Amount
to
Interest
$2,061.95
$2,058.47
$2,054.97
$2,051.45
$2,047.91
$2,044.37
$2,040.81
$2,037.23
$2,033.64
$2,030.03
$2,026.41
$2,022.78
Semi‐Annual
Monthly
$2,908.03
February 26, 2013
Cumulative
Interest
Balance
$2,061.95
$4,120.42
$6,175.39
$8,226.84
$10,274.75
$12,319.12
$14,359.93
$16,397.16
$18,430.80
$20,460.83
$22,487.24
$24,510.02
$499,153.93
$498,304.37
$497,451.31
$496,594.73
$495,734.61
$494,870.95
$494,003.73
$493,132.93
$492,258.54
$491,380.54
$490,498.91
$489,613.66
Chapter 18: Borrower Disclosure
18.4 Borrower Disclosure Checklist
The following checklist can be used to assist in developing borrower disclosure form(s).
Figure 99 – Borrower Disclosure Checklist
Does our disclosure form(s) include:
All fees and payments associated with the mortgage, including brokerage fees?
The nature of the relationship between the brokerage and lender?
The role of the brokerage?
The number of lenders the brokerage represented during the previous year?
Any potential conflicts of interest?
The risks associated with the mortgage?
The terms and conditions of the proposed mortgage, including prepayment penalties and
NSF fees?
The cost of borrowing expressed as an APR?
The cost of borrowing expressed in dollars and cents?
Good faith estimates for costs unknown at the time of disclosure?
The amount of the mortgage?
The interest rate of the mortgage and how it is compounded?
The amount of each mortgage payment and when it is due?
An amortization schedule?
Information on any optional services, such as a home warranty or other insurance?
Costs associated with discharging the mortgage?
Any other items covered by the MBLAA and its Regulations and/or any items we want
disclosed to our borrowers? List below:
______________________________________________________________
______________________________________________________________
______________________________________________________________
423
424
Chapter 18: Borrower Disclosure
18.5 Summary
Proper disclosure to borrowers, investors and lenders is vital to ensuring that they are aware of
all of the risks, potential conflicts of interest, costs, rights and obligations and other important
information associated with a proposed mortgage so that they can make an informed decision
about the transaction. The brokerage is responsible for providing this disclosure in all
transactions and will be held accountable even in cases where a broker or agent was at fault for
improper or non‐compliant disclosure.
To make certain that compliant disclosure is made in every transaction requires the brokerage
to have the policies and procedures in place to adequately supervise all of its brokers/agents
and oversee all transactions in which anyone acting on its behalf is involved in.
Full disclosure to borrowers, lenders and investors will assist in limiting misunderstandings that
can potentially lead to complaints being lodged against the brokerage with FSCO. It can also
ensure that the borrowers fully understand the risks associated with the proposed mortgage
and that it is suitable for them based on their needs and circumstances.
Full disclosure to investors/lenders will assist in preventing them from investing in mortgages
that have a higher level of risk than they are prepared to accept and ensure that they fully
understand the risks and rewards associated with the proposed investment, allowing them to
make an informed decision.
Full disclosure is not only necessary for the purposes of compliance, but necessary to ensure
that a brokerage’s borrowers, lenders and investors are satisfied customers, thereby providing
an ongoing source of borrowers and investment funds that can assist the brokerage in its
success and in maintaining its good reputation. As Warren Buffet once said, “It takes 20 years to
build a reputation and five minutes to ruin it. If you think about that, you'll do things
differently.”
Chapter 18: Borrower Disclosure
425
18.6 Key Terms and Definitions
Conflict of Interest
A brokerage, broker or agent with a direct or indirect interest in the mortgage being arranged
resulting in a situation where the broker/agent must choose between his or her best interests
and the interests of his or her borrower, investor or lender, as the case may be
Cost of borrowing
The MBLAA defines the cost of borrowing as “the interest or discount applicable to the
mortgage; any amount charged in connection with the mortgage that is payable by the
borrower to the brokerage or lender; any amount charged in connection with the mortgage that
is payable by the borrower to a person other than the brokerage or lender, where the amount is
chargeable, directly or indirectly, by the person to the brokerage or lender, and; any charge
prescribed as included in the cost of borrowing, but does not include any charge prescribed as
excluded from the cost of borrowing. It must be disclosed as either a percentage or in dollars
and cents depending on the disclosure requirements of the Regulations.”
Disclosure
The act of making something evident. There are several disclosure requirements mandated by
the MBLAA and its Regulations with relation to a mortgage being recommended to a borrower,
investor or lender by a brokerage.
Disclosure Form
A form, prescribed or otherwise, used to provide disclosure to a borrower, lender or investor, as
the case may be, in accordance with the MBLAA and its Regulations
Fees and Payments
This phrase is used to describe all payments involved in arranging a mortgage transaction,
excluding repayment of the mortgage
Relationship between brokerage and lender
This phrase is used to describe the nature of the relationship between the brokerage and lender,
specifically if there is any relationship other than an arm’s length relationship between the two.
This information must be disclosed to every potential borrower.
Risk
A concept that identifies the borrower’s or investor’s acceptable level of risk. There are two
fundamental requirements when considering risk: understanding the borrower’s or investor’s
general level of acceptable risk and disclosing the specific risks associated with the mortgage
being recommended by the broker/agent
Role of the brokerage
This phrase is used to describe the nature of a brokerage’s relationship with borrowers and
lenders, specifically on whose behalf the brokerage is acting, and must be disclosed in every
mortgage transaction
426
Chapter 18: Borrower D
Disclosure
18.7
7 SAMPL
LE BORR
ROWER DISCLOSU
D
URE - FIL
LOGIX
Chapter 18: Borrower D isclosure
42
27
428
Chapter 18: Borrower D
Disclosure
18.8
8 Review
w Questio
ons
Answers to the Revview Questio
ons are found at www.REM
MIC.ca
True
e or Fals e Questi ons
1. On
ne of the things that must be disclosed to the borrow
wer is the role of the brokerage.
he relationship between the brokeragee and the borrower must b
be included in
n
2. The nature of th
the
e disclosure document
d
to the
t borrowerr.
3. A brokerage
b
fee
e must be disclosed to the borrower annd included in
n the cost of b
borrowing.
a its Regula
ations a borroower disclosu
ure documentt should statee
4. To comply with the MBLAA and
“re
efer to the len
nder’s commitment’ to dissclose the lennder’s terms aand condition
ns.
5. If a prospective mortgage waas default inssured by CMH
HC, the insuraance fee would have to be
inccluded in the cost of borro
owing.
6. Law
wyer’s fees, excluding
e
disb
bursements, must
m be incluuded in the co
ost of borrow
wing.
Sho
ort Answe
er Questio
ons
1. Lisst the types off informationn (e.g., risks) that
t
must be included in a borrower dissclosure form
m.
2. Explain the timiing requiremeents of providding disclosurre to a borrow
wer.
3. Lisst the specific costs that must be included when calcculating the cost of borrow
wing.
4. Hoow must the cost
c of borrow
wing be expre
essed in a borrrower disclo
osure form?
5. Whhen or under what circumstances woulld a broker noot have to suppply his or heer borrower
witth a borrower disclosure form?
f
Chapter 19:: Closing the TTransaction
42
29
Ch
hapter 19:
1 Clo
osing thhe Trannsactionn
Lea
arning Outccomes
Succcessful undersstanding of th
he concepts presented
p
in tthis chapter w
will enable the learner to:
 Liist common closing
c
costs
 Estimate comm
mon closing costs
c
 Explain how documents related to the transaction arre electronicaally registeredd
 Suummarize thee lawyer’s tassks in a purchase transacti on with a moortgage, a salee transaction
an
nd a standalo
one mortgage
e transaction
 Explain the steeps involved in closing a mortgage
m
tran saction
 Explain the intterest adjustm
ment date (IA
AD)
 Calculate
C
an in
nterest adjusttment payme
ent
Intro
oduction
erly preparingg the borrowe
er for the clossing process iis a step that can be overlo
ooked by the
Prope
new mortgage
m
age
ent, resulting in confusion on the part oof the borrow
wer and/or thee borrower’s
failure
e to have ade
equate funds to pay the clo
osing costs.
In thiss chapter, the
e closing proccess will be discussed, com
mmon closing costs will be described an
nd
the lawyer’s role in
n the closing process will be
b explained. By understaanding this process, the
mortggage agent caan advise his or
o her client on
o what to exxpect, thereb
by reducing orr removing th
he
confu
usion and stre
ess experience
ed by the borrrower.
19.1
1 Estimating Clos
sing Costts
Before a transactio
on can close, it is vital thatt the borroweer understand
d and be prep
pared for the
closin
ng costs assocciated with th
he transaction
n. Failure to pprepare for th
hese costs haas caused
manyy transactionss to be cancelled at the law
wyer’s office bbecause the b
borrower did not have thee
fundss to close. The exact amou
unt required by
b the borrow
wer on closingg differs baseed on the typee
of transaction, butt a mortgage agent should ensure that tthe borrowerr has between 1.5% and
3% off the purchase
e price set aside for closing costs. To e stimate the ccosts involved
d in closing,
the mortgage
m
agen
nt should advvise the borro
ower of comm
mon closing co
osts.
Com
mmon Clo
osing Cos
sts
Mortggage Default Insurance
Depending on the amount of th
he mortgage and
a the downn payment, th
his number w
will vary. While
the de
efault insuran
nce premium is typically in
ncluded in thee mortgage, tthe PST chargged on this
be payable on
premium is not. When
W
calculatting the premium, note thee amount of PPST that will b
closin
ng.
430
Chapter 19:: Closing the TTransaction
hase
Land Transfer Tax (LTT) ‐ purch
If the transaction is a purchase,, the buyer must have fundds for the lan
nd transfer taxx. This tax is
calcullated based on
o the following formula (tthe percentagges are calcullated on the aamount of the
purch
hase price thaat falls within each categorry):
Land Transsfer Tax
Pu
urchase Price
e of the Prope
erty
On th
he first $55,00
00
0.5%
%
On th
he excess between $55,000 ‐
$250,000
1% oof the excess amount
On th
he excess between $250,000 ‐
$400,000
1.5%
% of the excesss amount
On th
he excess ove
er $400,000
2% oof the excess amount
Example
If the purchase price were $300
0,000, the Lan
nd Transfer Taax would be ccalculated as follows:
$250,000 ‐
$55,000
$
=
$195,000
$
The
T first
$55,000
$
($55,00
00 x .005)
+
Value of $30
00,000 ‐
$250,000 = $
$50,000
($19
95,000 x .01)
+
015)
($50,000 x .0
= $275 + $1,950 + $7750
= $2,975
City of
o Toronto Mu
unicipal Land
d Transfer Taxx (MLTT)
In add
dition to the provincial
p
LTTT, the City of Toronto
T
introoduced the fo
ollowing tax that must be
added
d to the LTT as
a of Februaryy, 2008. First time purchassers can receeive a rebate o
on this tax up
p
to $3,,725.00. In th
he above note
ed example this is not a firrst time purch
hase so the M
MLTT would
add an additional $2,725
$
to the
e LTT for a tottal payable off $5,700.
Pu
urchase Price of the Prope
erty
Land Transsfer Tax
On th
he first $55,00
00
0.5%
%
On th
he excess between $55,000 ‐
$400,000
1% oof the excess amount
On th
he excess ove
er $400,000
2% oof the excess amount
Chapter 19: Closing the Transaction
431
Home Inspection ‐ Purchase
While prices vary, this cost can be estimated at between $250 and $300
Appraisal Fee
While some lenders will waive the appraisal fee or reimburse the fee on closing, it is important
to advise the borrower of the typical charge which ranges from $250 to $300. Though the
borrower may have to pay this fee before the transaction closes, it should be considered by the
borrower since it may reduce the amount that he or she has for closing costs.
Legal Fees
Legal fees associated with closing will vary depending on whether the transaction is a purchase
or a refinance or equity take‐out. In April, 2007 the Working Group on Lawyers and Real Estate,
comprised of the Ontario Bar Association, the County and District Law Presidents Association
and the Ontario Real Estate Lawyers Association published a “Suggested Fee Schedule for
Residential Real Estate Transactions” that suggests fees for transactions of average complexity.
The following is an interpretation of those suggestions and may or may not accurately reflect
the Working Group’s current or future opinions.
The suggested fees are based on the following formulas:
Purchase of a Residential Property with One Mortgage
Purchase Price of the Property
Fees
On the first $100,000
$850
On the excess between $100,000 ‐
$300,000
0.5% of the excess amount
On the excess over $300,000
0.25% of the excess amount
These fees are based on completing the following tasks:
 Purchaser’s Solicitor for reviewing executed agreement of purchase and sale (but not
including negotiating or drafting agreement) and advising
 Investigating title and checking the description
 Making requisitions on title and on other matters recited in the agreement
 Searching the arrears of realty and all other taxes and rates constituting statutory liens
 Advising on the applicability of GST legislation
 Searching for executions
 Searching for work orders
 Discussing with the purchaser all matters relating to title, zoning and statement of
adjustments
 Reviewing and executing mortgage instructions
 Advising the client concerning insurance requirements
 Advising the client with respect to Rule 2.02(10)‐(13) of the Law Society of Upper Canada and
options for assuring title, including Solicitor’s Opinion Letter and title insurance where
appropriate for rural properties
432
Chapter 19: Closing the Transaction
 Advising client with respect to road access, shore allowance, septic issues, water potability
and well issues
 Where appropriate advising the purchaser regarding Tarion warranties and claim periods
 Attending on execution of documents
 Attending to the closing
 Giving opinion on title or securing Title Insurance policy
 Reporting within 30 days of closing and all other required services.
Purchase/Sale of a Residential Property with no mortgage
Sale Price of the Property
Fees (based on 66% of a
Purchase transaction)
On the first $100,000
$560
On the excess between $100,000 ‐
$300,000
0.33% of the excess amount
On the excess over $300,000
0.165% of the excess amount
These fees are based on the completion of the following tasks:
 Vendor’s Solicitor for reviewing executed agreement of purchase and sale (but not including
negotiating or drafting agreement) and advising
 Preparing transfer, answering requisitions on title
 Preparing Statement of Adjustments and advising
 Advising on the applicability of GST legislation
 Advising on the applicability of any non‐resident taxes
 Reviewing charge taken back (if any)
 Attending on execution of documentation
 Attending to the closing and completing the sale
 Reporting to client and all other required services.
In the case of a condominium unit, if required, supplying or arranging for copies of
condominium status certificate and related documents, including the declaration, by‐laws,
management contract, insurance trust agreement, and up‐to‐date insurance certificate.
Registration of a Mortgage Only
The amount to register a mortgage is recommended to be $650.00, subject to adjustment for
the time spent, the complexity of the transaction, the amount involved, the result obtained and
the requirements of the lender and any title insurer involved. There are also several tasks that a
lawyer may be requested to perform in addition to the average transactions as listed above.
Additional tasks will likely result in additional fees.
Title Insurance
Title Insurance typically costs between $200 and $300, depending on the type of policy, the
property type and the value of the property.
Chapter 19: Closing the Transaction
433
Property Insurance
Depending on the type of coverage, this amount ranges. An average of $50 per month is
appropriate under most circumstances.
Interest Adjustment Amount
The interest adjustment amount is an amount payable to a lender for the period of time that
mortgage proceeds are held by the borrower before the period covered by the first mortgage
payment. This amount will vary based on the mortgage’s interest rate and the number of days
between the mortgage advance and the interest adjustment date.
New Home Warranty
Tarion, the new name for the Ontario New Home Warranty Program, regulates the home
building industry in Ontario. Tarion steps in to protect consumers when builders fail to
complete purchase agreements and construction contracts or fail to fulfill their mandatory
warranty obligations in the Ontario New Home Warranties Plan Act. Tarion pays claims to
consumers. The builder and/or vendor pays the warranty enrolment fee to Tarion before
construction and will either include it in the purchase price of the home or show it as a separate
item on the Statement of Adjustments. The fee ranges from $325 to $750 based on the sale
price. (More information can be found by visiting www.tarion.com)
New Hydro Account
If the purchaser has not had hydro in his or her name before a deposit of $200 will likely be
required.
Status Certificate Fee – Condominiums only (previously referred to as an Estoppel certificate)
The common fee is $100.
Closing Adjustment
An estimate should be made for closing adjustments for bills that the seller has prepaid such as
property taxes, utility bills, and other charges. The borrower’s lawyer will inform him or her of
the exact amounts once the appropriate searches have been completed.
HST (formerly the GST)
On a new home, HST is charged; however, the builder may include it in the purchase price. If it
is not included, it must be paid on closing. In addition, there is an HST rebate applicable to new
homes, substantially renovated homes, and modular and mobile homes for which an application
must be completed. More information on the HGST rebate can be found at Canada Revenue
Agency at www.cra.gc.ca.
PST on Default Insurance
In Ontario there is still 8% PST (not HST) payable on the premium. For example, a CMHC fee of
$10,000 would result in a tax of $800.1
The following is an example of the potential closing costs associated with a sample transaction.
1
CMHC, How much does CMHC loan insurance cost? http://www.cmhc‐
schl.gc.ca/en/co/moloin/moloin_005.cfm
434
Chapter 19:: Closing the TTransaction
Example
Bob and
a Mary are purchasing a resale, single
e family detacched home fo
or $420,000 in Barrie,
Ontarrio and are pu
utting $37,800 (9%) down.. The CMHC ppremium at 991% LTV is 3.6
6% of the
$382,200 mortgage, or $13,759
9.20. They are moving in 110 days beforre the end of the month.
This means
m
that th
here will be 10
0 days of inte
erest, which iss the interestt adjustment, required on
closin
ng. The closin
ng costs for th
his transaction
n may be appproximately:
Item
Appraaisal Fee – not required on
n this CMHC in
nsured mortggage
Closin
ng Adjustmen
nts (as per the
e lawyer)
HST – not applicab
ble as this is not a new hom
me
Statuss Certificate Fee
F – not a co
ondominium
Home
e Inspection
Intere
est Adjustmen
nt (based on 10 days at J2=6%)
Land Transfer
T
Tax – LTT only as not in the GTTA
Legal Fees
New Home
H
Warran
nty – this is a resale home
New Hydro
H
Accoun
nt
Prope
erty Insurance
e – first montth’s premium payment
PST on CMHC Prem
mium @ 8%
Title Insurance
Total
ounded)
Cost (all ro
$0
0
$35
50
$0
0
$0
0
$30
00
$64
41
$4,875
$2,150
$0
0
$20
00
$50
0
$1,101
$25
50
$9,917 or 2.3
36% of the
purchasee price
Su
uccess Tip – Closing Cost Workksheet
Prrovide your client with a Cllosing Cost Worksheet
W
(Apppendix 3) an
nd prepare him or her at
the initial consultation for th
he costs involved. It is besst to know up
p front if yourr client is
go
oing to have troubles
t
getting cash to paay the closingg costs. This ccan assist you
u in
de
etermining the mortgage product
p
that best
b suits youur client’s neeeds as well ass helping the
cliient make an informed decision on the house that hhe or she is ab
bout to purch
hase. The
od
dds of losing a client at closing due to a lack of fundss will be greattly reduced, w
which will
he
elp you close more businesss!
19.2
2 Electro
onic Land
d Registra
ation
Electrronic Land Registration (e‐‐reg) is a syste
em that has rrevolutionized
d the way doccuments are
produ
uced and registered in Onttario. The 200
0‐year‐old paaper‐based syystem was rep
placed by e‐
reg, a completely electronic,
e
paaperless syste
em where doccuments are ccreated, regisstered and
wareh
housed in an electronic format. The system containns records for over 5.7 milllion parcels of
land in Ontario.
Produ
uced and mod
dified online, these docum
ments do not hhave to be prrinted on pap
per to be legal.
Registtration is com
mpleted electrronically, elim
minating the nneed for regisstering docum
ments at a
Land Registry Officce.
Chapter 19: Closing the Transaction
435
The province of Ontario, through the Province of Ontario Land Registration Information System
(POLARIS), in partnership with Teranet Land Information Services Inc., a private sector
corporation created in 1991, has developed e‐reg. 1994 saw the provincial legislature pass
legislation creating the statutory framework for e‐reg, and Teranet has developed the software,
called Teraview, used to access and use the e‐reg system. The first electronic land registration
occurred on January 25, 1999 in London in the county of Middlesex.
Transfers, charges, discharges, and other conveyancing documents are prepared by the lawyer
or a person authorized on his or her behalf, using a computer. These documents are completed
and electronically signed by the lawyers involved in the transaction, not by the client. However,
client authorization is required to allow this process to occur. This authorization is generated by
the client signing an Acknowledgement and Direction document that the lawyer must keep on
file.
In a purchase transaction, a Document Registration Agreement (DRA) is completed by both the
vendor’s lawyer and the purchaser’s lawyer. This document allows the lawyers to handle the
client’s documents and funds and by signing this document, both lawyers agree to undertake
their professional obligations as to the handling of these documents and funds.
Before the documents are registered, the lawyers involved in the transaction must show their
approval of these documents by signing for completeness. In so doing, all lawyers agree that
the documents meet their clients’ requirements, are accurate and ready to be registered.
Through Teraview, the lawyer can complete the following pre‐closing and closing procedures:
 Automated title searching
 Writ searching
 Subsearching
 Creation of drafts and documents ready to be registered
 Calculation and payment of land transfer taxes
 Electronic registration of documents, as well as other procedures.
As of 2012 there are approximately 2 million annual transactions done electronically,
representing over 99% of registrations in Ontario. The result has been and continues to be a
streamlined process that saves time and simplifies the process of land registration in Ontario.
19.3 The Closing Process
The following is a brief description of the process involved in closing a mortgage transaction and
includes the steps involved in the purchase of a property with a mortgage. This process begins
where an agent’s involvement typically ends, although it is in the agent’s best interests to be
aware of how the process is progressing to ensure that the mortgage does in fact close. Once
the agent has met all of the lender’s conditions, the process is in the hands of the lender, the
lawyer and the borrower.
1. The purchaser’s lender is satisfied that all conditions have been met
2. Client or lender decides on which lawyer to use
436
Chapter 19:: Closing the TTransaction
h
been don
ne earlier in the
t process. It is always b est to have th
he lawyer
This step may have
chosen early in the process so
s that as soo
on as the lendder is satisfied
d that all conditions have
been met it can
n proceed to the
t next step.
Certain lenders will have a specific lawyer they wish too use to closee the transacttion, while
oth
hers will allow
w the client to
o use his or her own lawyeer. If the client uses his orr her own
law
wyer it is impo
ortant to note that this law
wyer is worki ng for the len
nder, and while the lawyerr
has a responsib
bility to provid
de disclosure to the client,, his or her main responsib
bility is to thee
nder.
len
3. The lender send
ds the closingg lawyer an “Instructions too Solicitor” p ackage
This package co
ommonly contains:
 A copyy of the lende
er’s mortgage
e approval
 The lender’s disclossure statement
or’s Final Rep
port and Certiificate of Titlee document ffor the lawyerr to fill in
 Solicito
 Solicito
or’s Interim Report
R
and Re
equisition for Funds docum
ment for the llawyer to fill
in
uthorized Deb
bit Form
 Pre‐au
 Acknowledgement and Direction
n
 Instrucctions on the requirementts for title‐ins ured mortgagges and non ttitle‐insured
mortgages
nits, proof of
 Requirrements regarding propertty insurance, surveys, condominium un
identitty, etc.
In addition, if th
he lender is prohibiting seccondary finanncing such as a vendor takke‐back or a
2ndd mortgage, the lawyer is required
r
to in
nform the len der if he or s he becomes aaware of any
seccondary finan
ncing. This may cause the transaction tto be cancelleed.
wyer meets with
w the client
4. Law
The lawyer perfforms due diligence such as
a obtaining pproof of identtity in the forrm of photo ID
D,
and has the clie
ent sign the Acknowledgem
A
ment and Direection (see th
he Appendix ffor a sample
Acknowledgment and Directtion). This do
ocument allow
ws the lawyerr to act on thee client’s
behalf, register documents electronically
e
and includess authorizatio
on to use the Document
Re
egistration Agreement (DRA
A) (see the Appendix for a sample DRA
A). The DRA aallows
Solicitors to excchange docum
ments, cheques, and keys before closing.
5. The purchaser’ss lawyer prep
pares and sends documentts
The purchaser’ss lawyer prep
pares a draft e‐reg
e
deed, p erforms the rrequired
seaarches/subse
earches in POLARIS, and se
ends a Requis ition letter to
o the vendor’s lawyer.
Pa
ause for cllarification
n ‐ Subsearrch
A subsearch is an update off a previously completed fuull search, co mmonly perfformed on
be
ehalf of a purchaser by his or her lawye
er immediatelly prior to reggistration of a transfer, and
d
on
n behalf of mo
ortgagees immediately prior to the reggistration of a mortgage.
A subsearch typically consists of perform
ming searches on the title o
of the main property and
ad
djoining prope
erties for easements, restrrictive covenaants, etc., as well as execu
ution searches,
ch
hattel searche
es and other land‐related searches.
s
Chapter 19: Closing the Transaction
437
6. The vendor’s lawyer receives documents
The vendor’s lawyer receives the Requisition letter, reviews the e‐reg deed, and confirms use
of the DRA by responding to the purchaser’s lawyer.
7. The purchaser’s lawyer receives documents
The purchaser’s lawyer receives a response to the Requisition letter, updates the e‐reg deed
if necessary, and finalizes the registration documents.
8. The vendor’s lawyer sends the purchaser’s lawyer the closing documents
9. The purchaser’s lawyer requests funds from the purchaser’s lender
10. The lender sends funds to or deposits funds into the purchasing lawyer’s trust account
11. The purchaser’s lawyer sends documents and closing funds to the vendor’s lawyer
12. The vendor’s lawyer receives all documents and monies
13. The purchaser’s lawyer registers the discharge/cessation of mortgage, transfer/deed,
charge/mortgage and advises the vendor’s lawyer of registration
14. The vendor’s lawyer releases funds and documents and sends money to the original lender
to discharge the current mortgage (if applicable)
15. The purchaser obtains keys, garage door opener, security codes, etc.
16. The purchaser’s lawyer advises the Tax and Assessment departments and condominium
corporation (if applicable) of the change of ownership
17. The purchaser’s lawyer reports to the title insurer and remits the premium (if applicable)
18. The purchaser’s lawyer sends closing reports to the vendor’s lawyer, the lender and the new
homeowner
19. The lender remits insurance premium to the mortgage default insurer (if applicable)
20. The lender sends the mortgage brokerage its finder’s fee (if applicable)
21. The mortgage brokerage pays the mortgage agent the contracted percentage of the finder’s
fee
19.4 The Interest Adjustment Date (IAD)
Mortgage payments are made in arrears, meaning that a monthly payment made on October 1st,
for example, actually covers the payment due for the month of September. If a mortgage is
funded exactly one month before the first payment, the first payment will cover the principal
and interest due for that month exactly. However, if the mortgage is advanced on August 15th,
for example, and the repayments are monthly on the first of every month, the first regularly
scheduled monthly payment must begin on October 1st. Therefore, the first monthly payment
438
Chapter 19: Closing the Transaction
will only pay the principal and interest due from September 1st until October 1st. This leaves
interest due from the date of advance to the period exactly one month before the first payment.
In this example, the borrower would have the mortgage proceeds from August 15th until
September 1st without paying interest on those funds. The due date for the payment of this
interest is referred to as the Interest Adjustment Date. The borrower is advised by the lender of
this amount, normally by letter or by the lawyer closing the transaction, and a cheque is due on
that date. Some lenders will deduct the amount of this interest on the date of closing, saving
the borrower the aggravation of having to make an additional payment. However, if all of the
mortgage proceeds are required on closing, the borrower can pay the interest adjustment on
the interest adjustment date.
With flexible mortgage repayment dates, a payment may be set up to be made exactly one
month after closing. However, a borrower may prefer the payment to be set at the beginning,
middle, or end of the month based on his or her specific budget. If the mortgage is advanced at
any time greater than a month before the first payment, an interest adjustment payment is
required. The same is true for any other payment frequency. For example, if the payment is
weekly and the mortgage is advanced ten days before the first payment, there is an interest
adjustment amount payable.
When an interest adjustment payment is calculated, the term and amortization of the mortgage
are not involved. The following calculation demonstrates calculating an interest adjustment
payment using the HP10BII financial calculator. Please note that the following calculation is an
advanced calculation and will not be included in the course’s final exam.
Example 1
Mr. Borrower is receiving a mortgage for $250,000 on August 15th. The mortgage bears interest
at a rate of 6% per year, compounded semi‐annually, not in advance. The mortgage has
monthly payments that begin on October 1st. What is the amount of the interest adjustment
payment due on September 1st?
Solution
Although this mortgage has a 5‐year term amortized over 25 years, these facts are not used in
calculating the interest adjustment payment.
N
The first step is to determine the number of days between the mortgage advance date and the
interest adjustment date. The day of the advance is always included in this calculation.
Therefore, the interest adjustment date is August 31 (since there are thirty‐one days in August)
and the mortgage was advanced on August 15th, the calculation is:
31 (Interest adjustment date) – 15 (date of advance) = 16 + 1 (the day of the advance) = 17
You can also look at this as the number of days before the first payment. That is 16 as the first
payment is on the 17th. One is added to sixteen in this example to include the actual date of the
advance, September 17th. This number will be used as N.
P/YR
Chapter 19: Closing the Transaction
439
This calculation will be used to accrue interest on the mortgage proceeds from August 15th for a
period of seventeen days. Since the frequency of the compounding is daily and the contracted
interest rate is semi‐annually, the interest must be converted to its daily equivalent. Therefore,
the interest rate must be converted to its J365 equivalent.
PV
The mortgage amount advanced on August 15th will be inputted as the present value (PV) and
will accrue interest for seventeen days.
PMT
Since there are no payments made during the seventeen days in which interest is accruing, the
payment must be entered as zero.
FV
The unknown in this transaction is the future value (FV). Once this amount is calculated, the
mortgage advance is deducted from it and the remaining amount is the interest adjustment
payment.
Therefore, the calculation is as follows:
6 SHIFT NOM%
2 SHIFT P/YR
SHIFT EFF% 6.09
365 SHIFT P/YR
SHIFT NOM% 5.91223922637
250,000 +/‐ PV
17 N
0 PMT
FV 250,689.304206
Therefore, there will be $250,689.30 outstanding as of September 1st. To determine the amount
of interest payable, the original mortgage advance must be subtracted from the current balance
and the difference paid to the lender as the interest adjustment amount.
$250,689.30 ‐ $250,000 = $689.30
Therefore, on September 1st the borrower must pay $689.30 to the lender.
440
Chapter 19: Closing the Transaction
Example 2
The lender is advancing a mortgage for $250,000 on August 15th, at a rate of J2=6% with weekly
payments and a 20 year amortization. If the first weekly payment begins on August 27th, what is
the interest adjustment date and how much interest is payable on that date?
Solution
The interest adjustment date is August 20th, since the first payment is on August 27th and will
cover the period between August 21st up to August 27th.
20 (Interest adjustment date) – 15 (date of advance) + 1 (day of advance) = 6
6 SHIFT NOM%
2 SHIFT P/YR
SHIFT EFF% 6.09
365 SHIFT P/YR
SHIFT NOM% 5.91223922637
250,000 +/‐ PV
6N
0 PMT
FV 250,243.067146
$250,243.07 ‐ $250,000 = $243.07
Therefore, the interest adjustment payment due on the interest adjustment date is $243.07.
If the interest adjustment date is set at the same time of advance, then the interest adjustment
payment is deducted from the mortgage proceeds. The calculation for determining this amount
is slightly different. In both cases, the outstanding balance, exactly one payment before the first
payment is due, must be the face value of the mortgage (the amount the borrower is contracted
to repay).
When the interest adjustment payment is due one payment before the start of the first regular
payment, the mortgage amount advanced accrues interest until that date, at which time the
accrued interest is paid, leaving an outstanding balance the same as the face value of the
mortgage. When the interest is deducted from the advance, the amount received by the
borrower is less than the face value of the mortgage. This amount will now accrue interest so
that on the date of payment before the start of the first regular payment, the outstanding
balance will be exactly equal to the face value of the mortgage contract.
Chapter 19: Closing the Transaction
441
While this may appear complicated, the net result is simply switching the face value of the
mortgage from the PV to the FV and solving for the PV.
Using the same scenario from Example 2, consider that, instead of advancing $250,000 on
August 15th, the interest adjustment payment is deducted from the advance. The method of
calculating the amount of that advance is as follows:
6 SHIFT NOM%
2 SHIFT P/YR
SHIFT EFF% 6.09
365 SHIFT P/YR
SHIFT NOM% 5.91223922637
250,000 FV
6N
O PMT
PV –249,757.168951
Therefore, the amount of the advance with the interest adjustment payment deducted is
$249,757.17
One final observation can be made when comparing paying the interest adjustment payment
after the mortgage advance or from the mortgage advance. The actual amount of the interest
adjustment payment in this scenario, when deducted from the mortgage advance on the 15th is:
$250,000 ‐ $249,757.17 = $242.83
The amount of the interest adjustment payment when made on the 20th is $243.07 or a
difference of $0.24. The reason there is a difference is that under the first scenario interest is
accruing for six days on $250,000, while in the second scenario interest is accruing for six days
on $249,757.17. Although this is hardly enough to make a borrower change when he or she
wishes to make the interest adjustment payment, he or she might be curious as to why there is
a difference between the two options.
442
Chapter 19: Closing the Transaction
19.5 Key Terms and Definitions
Acknowledgment and Direction (A&D)
The Acknowledgment and Direction, signed by the client, provides the lawyer with the
authorization to electronically register documents
Closing Costs
The costs associated with closing a real estate and mortgage transaction
Document Registration Agreement (DRA)
The document, signed by the vendor’s and purchaser’s lawyers that allows for closing an
electronic transaction
e‐reg
The gateway used to access POLARIS and create and register land titles documents electronically
in Ontario
Interest Adjustment Amount
The interest payable to a lender for the period of time that mortgage proceeds are held by the
borrower before the period covered by the first mortgage payment
Interest Adjustment Date (IAD)
The date that the interest adjustment payment is due
Land Transfer Tax
A tax payable to the Provincial Government by the purchaser of a property upon the transfer of
title from a seller
POLARIS
Province of Ontario Land Registration Information System
Solicitor’s Final Report and Certificate of Title
The document sent to the lender detailing the successful mortgage transaction
Teranet
The province of Ontario’s private sector partner in the creation of the electronic land
registration system
Teraview
Teranet’s software that provides access to e‐reg and POLARIS
Chapter 19:: Closing the TTransaction
44
43
19.6
6 Review
w Questio
ons
ons are found at www.REM
MIC.ca
Answers to the Revview Questio
Sho
ort Answe
er Questio
ons
1. Lisst the commo
on closing costs associated with a purchhase of a resale home wheen a mortgagee
is used
u
to comp
plete this purcchase.
2. Wh
hat might be the legal feess on a purchaase of a $750,,000 residential property?
perty?
nder what circcumstances iss HST charged
d in the purchhase of a prop
3. Un
4. Wh
hat tax is charged on the mortgage
m
deffault insurancce premium?
5. Lisst the pre‐clossing and closing procedure
es that a lawyyer can complete using Teraview.
6. Explain the sign
nificance of th
he Acknowled
dgement and Direction in tthe closing prrocess.
7. Wh
hat purpose does
d
the DRA
A serve?
n, who remits the insurancce premium to
o the title insurer?
8. In a title‐insured transaction
9. De
efine the IAD.
10. Ms.
M Homeown
ner is receiving a mortgage
e for $350,0000 on Februaryy 11th. The m
mortgage bearrs
intterest at a ratte of 5.4% perr year, compo
ounded semi‐‐annually, no t in advance. The
mo
ortgage has monthly
m
paym
ments that beggin on April 1 st. What is th
he amount off the interest
adjustment payyment due on
n March 1st?
444
Chapter 19: Closing the Transaction
Appendix 1: Acknowledgment and Direction
Chapter 19: Closing the Transaction
445
446
Chapter 19:: Closing the TTransaction
App
pendix 2: Docume
ent Registtration Ag
greemen
nt (DRA)
Chapter 19:: Closing the T ransaction
44
47
448
Chapter 19: Closing the Transaction
Appendix 3: Closing Costs Worksheet
Closing Costs Worksheet
Client Name(s):
Item
Cost
Appraisal Fee
Broker’s Fee and/or lender’s Fee
Closing Adjustments
Condominium Status Certificate Fee
HST (formerly GST – on new homes only)
Home Inspection
Interest Adjustment (based on anticipated closing date and 1st payment
date)
Land Transfer Tax @ ___% of Purchase Price: $____________
New Home Warranty
Legal Fees
New Hydro Account
Property Insurance
PST on CMHC Premium @ 8% x $____________ (if applicable)
Title Insurance
Total
$
Chapter 20: Contract Law
449
Chapter 20: Contract Law
Learning Outcomes
Successful understanding of the concepts presented in this chapter will enable the learner to:
 Explain what constitutes a valid contract
 Explain the types of defects that may be present in a contract
 Discuss the rights provided by a contract
 Explain the ways in which a contract may be discharged
 Define a breach of contract
 Explain the remedies available under a breach of contract
Introduction
Contracts form the basis of all transactions in the mortgage industry and it is therefore
necessary to have a basic understanding of contract law. However, this chapter is not designed
to be a replacement or substitution for a qualified legal opinion, nor should any legal decisions
be based on this information. The information contained in this chapter is a general overview of
contract law and therefore does not provide an exhaustive discourse on the topic. There are
exceptions to every generally accepted rule or concept discussed in this chapter, as is evidenced
by the number of court cases involving contract law at any given time.
In any situation where the mortgage agent is requested by a client to provide his or her opinion
on a legal matter, it is necessary for the mortgage agent to suggest that the client contact a
lawyer.
If a mortgage agent does offer advice on legal matters, the client may assume that he or she is
speaking as a professional and not simply offering a personal opinion, and rely on that advice in
matters of contract law. That could result in the client suffering a loss. If that occurs, the client
will most likely sue the mortgage agent for the faulty advice. Since the advice was provided in a
professional capacity, the client may be able to win that suit. For this reason, it is necessary for
the mortgage agent to understand that a basic comprehension of contract law is helpful in his or
her mortgage practice but he or she is not qualified to provide any form of legal advice, whether
or not that advice is ultimately determined to be correct.
20.1 What is a Contract?
Simply stated, a contract is a legally enforceable agreement made between two or more parties.
Contracts are made and fulfilled every day. Going to a restaurant and having lunch is a contract.
Buying a newspaper is a contract. Even when virtually instantaneously fulfilled or performed,
contracts form the basis of our interactions as consumers.
Contracts can be either in writing or verbal, although verbal contracts are not necessarily
prudent. If two parties enter into a verbal contract it is possible that although both parties have
the best of intentions, a misunderstanding or faulty remembering of the terms of the contract
might result in the contract not being completed in the manner that one or both had agreed to.
450
Chapte
er 20: Contra ct Law
ontracts shou
uld be in writiing, if for no oother reason than to ensure that both
In thaat sense, all co
partie
es clearly understand the terms
t
and con
nditions of thhe contract. TTake, for exam
mple, a
contraact of employyment. There
e are several conditions in most employyment contraacts, from
non‐ccompete clausses to income
e consideratio
ons. If this coontract was m
made verballyy, it is entirelyy
possib
ble that one or
o both partie
es would simp
ply forget ter ms and conditions that haad originally
been agreed to.
Pa
ause for cla
arification
n – Real esttate contra
racts must be in writiing
Altthough verbaal contracts arre legal, contrracts for the ppurchase and
d sale of real eestate must
auds, Chapteer
be
e in writing. This
T requirem
ment is found in the Ontarioo legislation, Statute of Fra
S.1
19, subsection 1.
20.2
2 The Ele
ements of
o a Valid Contractt
e contract, sevveral elements must be prresent.
To be considered a valid, legallyy enforceable
The Offer
An offfer is a promiise to do som
mething. For example,
e
Sam
mir enters a co
offee shop an
nd goes to thee
countter where he meets Bob, who
w is workin
ng behind the counter selliing coffee. Saamir asks Bob
b
how much
m
a cup of coffee is. Bob tells Samir that he will sell him a cup
p of coffee if Samir gives
him tw
wo dollars. At
A this stage Bob
B has made
e an offer to SSamir but theere is no contrract in place
becau
use Samir hass not indicated his acceptance of this offfer.
An offfer can be terrminated in several ways, including by tthe offeror (tthe person making the
offer)) who can rescind or take back
b
the offer before it ha s been accep
pted. It can allso be
terminated by the offeree (the person accep
pting the offeer) through th
he process of making a
countter‐offer. A counter offer occurs when the offeree rrejects the offfer and propo
oses a changee
to thaat original offer.
Acc eptance of the Offfer
Accep
ptance is a pro
omise to acce
ept the offer. Continuing w
with the prevvious examplee, if Samir tells
Bob that he will pu
urchase the cu
up of coffee, then Samir iss telling Bob tthat he promises to acceptt
the co
offee and payy him the purcchase price. This exchangge of promisess completes tthe process o
of
an offfer and accep
ptance as longg as the prom
mises are for aacts that are o
occurring now
w or will occu
ur
in the
e future, whetther that is tw
wo minutes frrom now or tw
wo years from
m now.
If, how
wever, Bob had taken a cu
up of coffee with
w him ontoo the sidewalkk and had seeen Samir
walkin
ng and simplyy gave Samir the
t cup of co
offee for whattever reason (perhaps Sam
mir looked likee
he ne
eeded a cup of
o coffee) with
hout Samir firrst asking for the cup of co
offee, Bob cou
uld not then
demaand payment for that cup of
o coffee. Wh
hile this exam
mple is simplisstic, it illustrates the fact
that a contract is binding
b
on futture acts, nott acts that havve been comm
mitted wheree no contract
had existed.
Chapte
er 20: Contra ct Law
45
51
Inte ntion to Create a Legal Re
elationsh
hip
The parties enterin
ng into an agrreement musst intend to foorm a legally binding agreeement. If onee
party does not perrform his or her
h promise, the
t other partty may seek a remedy from
m the courts..
Although the exam
mple of Bob and Samir migght not appeaar to meet this test, upon ccloser
inspection it will. Bob
B fully expects that he will
w be paid foor the coffee once it has been provided
d
to Sam
mir. If Samir does not do so,
s Bob has le
egal recourse . Although th
he odds of seeing a Bob
and Samir in court contesting th
he purchase of
o a cup of cooffee are slim, the fact rem
mains that Bob
b
expeccts to be paid. If Bob did not
n expect to be paid or if he had a reassonable doub
bt as to
wheth
her he would be paid, he would
w
not be creating a leggal relationsh
hip between h
himself and
Samirr. He would also
a not likelyy be in business for much loonger.
n the approacch that moral or social agreeements lackk the intention