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Canadians are Sick of Banks’ Mortgage Lending Practices
When consumers in Canada aim their vitriol at a financial product they're unhappy with, credit cards used to top the "least liked" list. Things have changed in just a few short years. Nowadays, Canadian banks are in the bullseye of the consumer complaint game due to their strict, and some say very unfair, mortgage lending policies.
Consumer watchdog agencies have summarized the most common complaints against the banking giants with the term "the 3 P's." What are the three P's? In short, the term refers to typical areas of mortgage lending: portability, penalties and pre-approval.
A recent survey suggests Canadians have a tenuous relationship with national mortgage lenders. The national Banking Ombudsman report from the Canadian government pointed specifically to the three P's as the crux of the reason that so many citizens are resorting to non-traditional lenders. Some potential borrowers are opting out of the home-buying quest altogether, choosing instead to live in rental units until the situation changes. Those who stick to their goal of owning a home often pay higher-than-market interest rates when they work with alternative lenders.
Here's a detailed breakdown of the three P's and how each one has impacted the mortgage lending landscape:
When a homeowner sells a house, the mortgage they had is not necessarily "portable" to the new home they want to purchase. The banking industry's view is that the original property was collateral, so once it's sold there has to be a brand-new mortgage. That can mean you have to re-qualify based on the price and location of the new home. In addition, perhaps you've lost your job or have a lower credit score than you did when you purchased your first home.
The solution, if there is one, is for homeowners to read the fine print in any mortgage contract and find out what the rules for portability are. Key points to scrutinize include whether there are any financial penalties for porting, whether the lender accepts self-employment earnings as "income," and whether there are location restrictions on where the second home can be.
Perhaps the most common complaint against Canadian mortgage lenders is related to pre-payment penalties. Whenever a homeowner pays a mortgage off early, banks stand to lose whatever amount of interest they would have earned on the loan. There's a complicated mathematical calculation to determine the IRD (interest-rate differential), which is at the crux of the penalty for early payoff.
In most consumer complaints, homeowners say that they were unaware of the penalties, how the penalties were calculated and the circumstances that led to the surcharges. In nearly every case, legal authorities rule in favor of the lenders. The reason is simple law: mortgage documents clearly delineate penalties and how they're figured. Consumers often ignore this disclosure as "unnecessary fine print," at their own peril.
This complaint category has been around for decades. Lenders who are pre-approved for a loan often find, when they go to finalize the contract, that they are no longer qualified for the mortgage based on "new information" or "changed circumstances." Many people get stuck, facing a bank's denial of financing or a significant, and costly, change in terms of the loan.
This article does not necessarily reflect the opinions of the editors or management of EconoTimes.