Decoding mortgages

General Tim Hill, MBA 5 Sep

When shopping for a mortgage, it’s easy to get lost in the fine print. And not all mortgages are created equal. There’s a major distinction that you should be aware of: collateral mortgages vs. conventional mortgages.

With a conventional mortgage, the amount registered is the amount you need to borrow, so, for example, the value of your house minus the amount of your down payment. However, with collateral mortgages, the amount that’s registered is the full value of the house, and can, in some cases be up to 125% of the value of your property.

Collateral mortgages are becoming more popular. In 2010, TD made a major shift: the bank was no longer offering conventional mortgages; all its mortgages would be collateral. ING made a similar move in 2011.

According to TD, collateral mortgages allow homeowners to more easily access credit, allowing them to borrow more without additional charges. In an e-mail, TD wrote:

“A collateral charge registration will allow a customer to borrow in the future without requiring a new registration. In contrast, a conventional mortgage would require a new registration if there are changes or increases in the amount of the mortgage.”

However, many experts are concerned that collateral mortgages mean less choice and flexibility for consumers.

One concern is that while it can be relatively easy to transfer your conventional mortgage at the end of your term to another lender, a collateral mortgage can be more complicated, and expensive, to move, says mortgage broker Steve Garganis.

Shopping your mortgage around at the end of your term, experts advise, can save you a lot of money. While most homeowners renew their mortgages with their current lender, shopping around can save you 0.5% to 1% on your interest rate – which can mean a huge difference in how much you have to pay.


Class-action lawsuit targets CIBC mortgage penalties

General Tim Hill, MBA 1 Sep

Tue Aug 5, 2014 12:01am PST

At least 52,200 British Columbians will be entitled to refund cheques from the Canadian Imperial Bank of Commerce (CIBC) if a recently certified class-action lawsuit succeeds, according to one of the lawyers involved in the case.

The representative plaintiff in the case is Victoria resident Erin Sherry, who wanted out of a CIBC (TSX:CM) mortgage when her marriage dissolved.

The bank hit her with $47,869 in fees because she was only two years into a 10-year mortgage and interest rates had fallen between the time Sherry had committed to the mortgage and when she wanted to break it.

Her argument to get out of paying those fees is twofold, her lawyer, Kieran Bridge, told Business in Vancouver.

Her first argument is that the language in the mortgage document from CIBC’s CIBC Mortgage Inc. subsidiary was so vague that it rendered the contract legally unenforceable.

Bridge, principal at Kieran A.G. Bridge Law Corp., pointed out that CIBC has since changed wording in its mortgages, possibly indicating that even the bank realized that the wording was too vague.

If Justice Jeanne Watchuk, who certified Sherry’s class action on June 30, disagrees and rules that CIBC’s mortgage contracts are valid, Sherry has another argument.

“The mathematical formula that the bank used is improper,” Bridge said. “If an appropriate formula was used then the penalty would have been less.”

CIBC’s lawyer, McCarthy Tétrault LLP partner Herman Van Ommen, declined to comment, and calls to CIBC were not returned.

Other lawyers with whom BIV spoke, however, agree that the mathematical formula that banks use to calculate penalties when customers prepay mortgages is extremely complicated.

The calculation uses the difference between the posted interest rate when someone takes out a mortgage and the interest rate when the customer prepays the mortgage. That percentage is applied to the outstanding balance of the mortgage. The amount of time remaining on the mortgage also affects the final tally as fees are much higher when longer time frames remain on the mortgage, explained Jeremy Bohbot Law Corp. principal Jeremy Bohbot, who specializes in real estate mortgage law.

Bohbot said that the calculation could be viewed as unfair given that the initial rate used in the calculation is the posted interest rate at the time of the mortgage and not the actual rate that the mortgage holder obtained.

“Nobody ever gets the posted rate,” he said. “It’s a bit like the posted price of a car at a used car lot.”

Still, “complicated” is a better word than “vague” to describe language in mortgage contracts, he said.

Fasken Martineau LLP partner Andrew Borrell, who specializes in class-action lawsuits, agreed.

Borrell, who has seen plenty of mortgage-related litigation, said mortgage contracts vary between banks significantly, so just because the class-action lawsuit against CIBC was certified, it should not be presumed that other similar litigation will target other banks.

All those who obtained mortgages with CIBC Mortgage Inc., through its FirstLine Mortgages and President’s Choice brands, after mid-2005 are automatically part of the class action unless they choose to opt out.

CIBC estimates that between 18% and 36% of mortgage holders prepay their mortgages in any given year. But even a far lower percentage would still amount to tens of thousands of people.

Watchuk relied on data from Bridge in her judgment, which noted that there are between 58,000 and 116,000 CIBC mortgages in B.C. each year. Watchuk noted that if there were a 10% prepayment rate, “there would be between 5,800 and 11,600 prepayments made in B.C. each year.” Over the past nine years, that would translate into between 52,200 and 104,400 mortgage prepayments in B.C.