When it comes to your mortgage contract, watch your language.
Most consumers only look at their mortgage contract -- one of the most important documents they will ever sign -- just before they are about to close on a house, says Toronto real-estate lawyer Steve Brett.
"It's very rare they come to me [first]. In residential transactions, they usually strike the deal first," he says. "The mortgage commitment comes shortly prior to closing. I'll talk to people over the phone and they'll say, 'These are the terms of the deal -- is that the way it should be?' "
For about $200, Mr. Brett says a consumer could run a pre-approved mortgage by him before buying a house. "But in 35 years, I've never had that happen. I sometimes might get asked [to look at a mortgage contract] on refinancing."
Even the most basic mortgage contract terms, such as what constitutes the "prime rate" on a variable-rate mortgage, can create confusion.
"There can be different meanings to things like the prime rate or the base rate," Mr. Brett says. "They could have prime rate of 2%, but the base rate for residential mortgages might be prime plus one [percentage point], so their prime rate becomes 3%. Clients could get into difficulty thinking they are getting a heavily advertised prime rate but they are not."
He had a customer come in recently with an offer of financing from a mortgage broker that said he was getting the "prime rate" from a specific company. "I pointed out that [their version] of prime rate might not be the same as the banks'. He might have to pay a higher rate. His prime could be bank prime plus half a percentage point."
A bigger issue for consumers might be what their contract says about locking a variable-rate mortgage into a fixed rate during the term of the contract, usually five years. If they take advantage of the ability to lock in the rate, who gets to decide what that rate will be?
"It can be pretty open-ended. The banks' posted rates, for example, are not the real rate," Mr. Brett says. "You've got the right to lock in, but
The banks' posted rates ... are not the real rate
you are going to want to negotiate that rate and all the bank is obliged to do is give you the posted rate."
Mr. Brett says a preferable position would be to have a contract that says you have the right to negotiate at certain discounts to the posted rate if you lock in. "You always have the right to go elsewhere," he says, adding that can mean financial penalties.
Gary Siegle, a Calgary-based regional manager with Invis Inc., a mortgage broker, advises consumers to forget what is said to them verbally and try to understand what the terms in their contract actually mean.
"If it says you get the prime rate, you need to know how they will be establishing [that rate]. Is it on the company web-site? Is it based on the Bank of Canada rate?" Mr. Siegle says. "Consumers hear these words all over the place and they need to establish what they mean. You need to make sure your contract has a measurable rate."
He says most variable-rate mortgages are pretty standard: The consumer gets the prime rate plus or minus a certain number of basis points. There is little room for argument.
The debate begins, he says, when consumers want to lock in their mortgage and start stumbling over the terms in the contract. Defining the rate, however, is usually the biggest issue. "Often, that part is not clear," Mr. Siegle says.
So, make sure it is before you sign.
(prepared by Garry Marr/Financial Post/Vancouver Sun)
