Cheap & cheaper

Late last week Dave got an email from his friendly, neighbourhood, slippery mortgage broker. (Not all brokers are like that, but read on…). So our guy has a home loan of almost $550,000 and Mr. Broker was kindly offering to reduce his current 2.99% rate down to just 2.04%, for the low, low, one-time-only fee of $25,604.

“He had a bunch of calculations on a spreadsheet about interest paid, interest owing etc.,” says Dave. But he wasn’t buying it.

“Apparently mortgage dudes have their own versions of Frankenumbers.   He offered to make this change for me and said I would be saving about $7,000 for the next 4 years (and I presume he would be getting about $6,000 for another mortgage commission).”

So being part of the GreaterFool enlightened class (and because our faithful blog dog is also a financial math teacher), Dave gave his guy a wee lesson in finances and morality.

Amount left on mortgage:  $545,891
Payments:  $2,647
Interest rate: 2.99%
Remaining principle after another 49 months:  $478,162
Amount paid by me:  $129,703

To get the new rate:
Amount:  $571,585   ($545,891 + the $25,604 penalty)
Payment amount:  $2,386
Interest rate:  2.04%
Remaining principle after another 49 months:  498,977
Amount paid by me:  $116,914

“So,” he concludes, “the broker wants me to save $12,800 in payments but add $20,800 to my mortgage!!?? Is there a regulatory body or College of Mortgage Brokers that I can complain to?”

Yes there is. Mortgage brokers are provincially regulated – and those regulators have teeth. For example, if Dave’s in Ontario he should squawk to the Financial Services Commission of Ontario. If in BC, the mortgage cops are at the BC Financial Services Authority.

This raises a couple of points. First, how do you become a licensed mortgage flogger? How detailed is the financial training that agents must absorb? How much experience do these folks need before they can start advising clients on acquiring and correctly financing the biggest debt of their lives? How long does it take to qualify to do this line of work, taking into account that each transaction involves hundreds of thousands of dollars?

Well, in Ontario, this is the process:

There are 3 steps to get mortgage agent licensed in Ontario:
1. Pass The Course – the mortgage agent course can be done in as little as 5 days for as little as $338.
2. Get Hired – you must join a mortgage brokerage first before you can get licensed.
3. Complete the FSRA Application – the FSRA (formerly FSCO) licensed mortgage brokerage applies to FSRA for your mortgage agent license.
And, you can do it all online while you’re locked down in quarantine. How cool and convenient is that? Not busy this week? Hey, you can be a mortgage agent by the weekend!

(You can compare this to a lowly financial advisor, required to write at least four examinations and take courses over 36 months plus go through a corporate registration period, who is then policed by a federal regulator with judicial powers, as well as being licensed provincially – all to invest some guy’s $12,000 TFSA.)

But wait. What’s this 2.04% ‘special rate’ being offered to our online warrior-teacher-colleague?

It’s excessive, is what.

There are currently brokers offering five-year fixed terms for 1.3%, if you can believe it. Even a bunch of banks are sub-2% these days. For example, TD’s giving its customers a half-decade loan at just 1.84%. Both CIBC and BMO are doling dollars at 1.93%. And if you look fetchingly at [email protected] you might even squeeze a few more basis points out of her.

Of course, events of last week started changing things. The Republicans lost control of the Senate and Trump lost his mind. There was an attempted insurrection as rightist ‘patriot’ nutbars stormed Congress to overturn a perfectly fine democratic election (so the courts say) and it’s now evident the sitting president will be impeached and later convicted so he can never again hold office. Big news.

The Republican Party has split after losing the House, the Senate and the White House which opens the way for four years Biden/Democratic big-spending. That will increase deficits, debt, engorge government, likely raise corporate taxes, hasten defeat of the virus, re-open the economy more rapidly and therefore fuel inflation and raise rates.

Yup. Coming. It was likely before January 6th. Now, in the aftermath, it’s a slam dunk. The bond market is already on the move. And that’s where mortgages are priced.

So, yeah lock in. Even break your loan if it makes sense. Just don’t be a rube.