Social Insurance Numbers

I’ll start with some historical facts.  The SIN was created in 1964 to serve as a client account number in the administration of the Canada Pension Plan and Canada’s varied employment insurance programs. In 1967, what is now Canada Revenue Agency (CRA) started using the SIN for tax reporting purposes.  Basically, you need a SIN to work in Canada or to have access to government programs and benefits.

SINs are a nine-digit number.  The top of the card has changed over the years as the departments that are responsible for the card have changed:

  • Manpower and ImmigrationSIN (Iowa Lott)
  • Employment and Immigration Canada
  • Human Resources Development Canada
  • Government of Canada

As of 31 March 2014, Service Canada no longer issues plastic SIN cards.  Instead, an individual will receive a paper “Confirmation of SIN letter.”

For a list of list of legislated uses of the SIN, go here – http://www.esdc.gc.ca/en/reports/sin/code_of_practice/annex_2.page

Geography

If you thought your SIN was arbitrary, think again.  The first digit of a SIN indicates the province of registration.

0 = Not used
1 = NB, NF, NS, PE
2 = QC
3 = QC
4 = ON
5 = ON
6 = AB, MB, SK, NT, NU
7 = BC, YU
8 = Not used
9 = Temporary

Temporary SINs

SINs that begin with a “9” are issued to temporary workers who are neither Canadian citizens nor permanent residents.  The use of these SINs is temporary and are valid only until the expiry date indicated on the immigration document authorizing them to work in Canada.  If your SIN begins with a “9”, you must update your SIN record to ensure that the expiry date always corresponds with the expiry date on your document from Immigration, Refugees and Citizenship Canada authorizing you to work in Canada.  Once your SIN record has been updated, you will receive a SIN with the new expiry date.  Your previous SIN is no longer valid and should be destroyed in a secure manner.

Validating your SIN:

First of all, no two people can have the same SIN.  Your SIN is unique to you, only!  That’s one reason why you should use your SIN, when having someone trustworthy, like me, check your credit report.  But that’s another subject for another day.

How can an online store tell when you have incorrectly entered your Visa number?  How does your income tax program know if you entered the wrong SIN?  Is it magic?  No, it’s a relatively simple checksum formula, known as Luhn algorithm.  It is used to validate a variety of identification numbers such as credit cards, and Canadian social insurance numbers.  It was created by IBM scientist Hans Peter Luhn.  Here’s how it works:

The 9 numbers above (Iowa Lott) are fictitious, but valid 324 217 694
Multiply each top number by the number below it 121 212 121

In the case of a two-digit number, add the digits together and insert the result. Thus, in the second-to-last column, 9 multiplied by 2 is equal to 18.  Add the digits (1 and 8) together (1 + 8 = 9) and insert the result (9).

So the result of the multiplication is:

344 415 694

Then, add all of the digits together:

3+4+4+4+1+5+6+9+4=40

If the SIN is valid, this number will be divisible by 10.

For more information about the Canadian SIN, visit the following FAQ:

https://www.priv.gc.ca/resource/fs-fi/02_05_d_02_e.ASP

 

If I can help, let me know.

What’s in a name?

Businessmann zeigt seine Visitenkarte

For years, the mortgage broker industry was given considerable latitude when choosing titles.  The only restriction was your imagination.  Titles like, Mortgage Advisor, Mortgage Consultant, Mortgage Specialist, Mortgage Architect, Mortgage Planner, Mortgage God, etc.  You get the idea.  Oddly enough, what you saw less of was, Mortgage Broker?  I suppose there was a good reason for that.  In the early nineties, when mortgage brokers were becoming mainstream originators, servicing the prime lending space, at the same time, some were trying hard to distance themselves from the prevailing perception as, “lender of last resort,” associated with the subprime lending space.  Especially those who were serving the prime lending space, exclusively, anything but “Mortgage Broker” sounded better.  But without any formal accreditation or credentials associated with the profession, other than your license, mortgage brokers didn’t sound any different than their competition, the mortgage originators employed by the banks.  Often times the very same titles.  Hence, according to the Ontario regulator of mortgage brokers, there was too much confusion in the marketplace for the consumer as to who was a licensed mortgage broker/agent, and who was not.

In Ontario, that changed when the industry regulator for mortgage brokers, the Financial Services Commission of Ontario (FSCO) rewrote the Mortgage Brokers Act, to become the Mortgage Brokerages, Lenders and Administrators Act, 2006 (MBLAA).  Among the many changes to the older Act, was a restriction on the use of titles.  With protecting the consumer a top priority of FSCO, they wanted to eliminate any confusion about who holds a mortgage broker/agent license.  Remember, FSCO does not regulate bank employees.  That is the jurisdiction of the federal government, under the Bank Act.  In Ontario, as per the MBLAA, mortgage brokers/agent have the following options for titles:  Mortgage Broker, Broker, Mortgage Agent, or Agent.  French equivalents, and short-forms aside, that’s it!  Not much latitude, but hopefully far less confusion about who you are dealing with.  Anyone not in compliance with this regulation can face severe consequences.

Getting and keeping your license as a mortgage broker/agent in Ontario is the subject for another day.  As a consumer, your first clue to confirming someone is a licensed mortgage broker/agent is no further away than the title you see on their business card.  You can also confirm their license by looking them up on the FSCO public registry – http://www5.fsco.gov.on.ca/mbsweblist/agents.aspx.

If I can help, let me know.

Disclosing Material Risks

One part of the Ontario legislation which governs the mortgage broker industry (The Mortgage riskBrokerages, Lenders and Administrator Act) has to do with disclosing material risks. The MBLAA is very explicit about requirements related to disclosure. For example, potential conflicts of interest, fees and payments, cost of borrowing, to name a few. But when it comes to material risks, it behooves any mortgage broker/agent to go the extra mile and over-disclose!

In fact, there is a specific section in the Disclosure to Borrower document, oddly enough, called “Disclosure of Material Risks.” As per the MBLAA, for every mortgage transaction, the mortgage broker/agent must provide borrowers with a Disclosure to Borrower document. The document is pretty much identical from one mortgage brokerage company to the next, given the fact ninety percent of us all use the same software. The Disclosure to Borrower document does a good job of making sure the mortgage broker/agent has met all the disclosure requirements in the MBLAA. But, in this special section, the mortgage broker/agent has the opportunity to highlight any material risks, not already covered, or perhaps risks, that warrant repeating. Things like, the mortgage is fully closed, higher penalties to break, variable-rate vs. fixed-rate, longer amortization, ILA (independent legal advise), etc.

If your mortgage is fully closed, you represent a higher risk of default to any lender. This is not a mortgage term or condition you want. Nor is it associated with the favorable terms offered by a prime lender (i.e. major bank). However, it may be one of the terms if you had to go with a subprime lender.  Under these circumstances, the subprime lender willing to fund the deal has mitigated the risk by locking you in and guaranteeing themselves a ROI commensurate with the risk. The only way you can break a fully closed mortgage is if you sell the property.  Sound like something you would want?  Make sure you are aware of all the risks associated with your mortgage. Especially the material risks.

If I can help, let me know.

The power of prepayment

keep-calm-and-save-your-moneyDo you know how powerful mortgage prepayments can be? They do two things: save substantial interest costs and shorten the life of your mortgage (the amortization). You typically have two prepayment alternatives, monthly or annually. The annual option allows you to make lump sum prepayments, typically from 10-20 per cent, of the “original” loan amount. Calling this prepayment option annual is somewhat misleading since you can now typically plunk down your lump sum prepayments on any regularly scheduled mortgage payment date. However, the maximum allowed prepayment is still tracked annually.  If you pay your mortgage biweekly, that’s 26 times a year you can prepay. The monthly option allows you to increase your regularly scheduled mortgage payment, from 10-to-100 per cent. Again, if you pay your mortgage more frequently (e.g. biweekly), the increased payment can be more than twelve times a year.

UNDERSTANING AMORTIZATION

For an amortized loan, every payment consists of an interest component and a principal component. Most borrowers prefer a fixed-rate of interest, and a constant payment. Over time, the interest component will shrink and the principal component will increase, but the payment remains constant. At the beginning of the amortization period, when the amount of the loan is biggest, most of the constant payment will be interest. Later in the amortization period when the interest component is lower, a greater portion of the constant payment is applied to the balance owing. The chart below illustrates the impact on a monthly basis. In year two, the interest component is much higher than in year 20.

Date  

Principal

portion

Interest

portion

Total

payment

         
Year 2 Jan

$100

$800

$900

Feb

$101

$799

$900

Mar

$102

$798

$900

Year 20 Jan

$585

$337

$900

Feb

$588

$332

$900

Mar

$573

$327

$900

Assumes fixed interest rate, an original $100,000 loan, and no prepayments

 

THE EARLIER YOU START PERPAYMENT THE BETTER

The impact of making prepayments on your mortgage is much more significant in the early years. While this is usually the heavy borrowing period in the lives of most people and finding extra cash is difficult, virtually any amount of prepayment makes a considerable difference. That’s because the early scheduled payments are mostly interest. Your prepayments will effectively leapfrog the early high-interest payments. To illustrate this in the chart below, see what happens to a $100,000 mortgage amortized over 25 years when you make a single, one-time prepayment of $1,000. Without listing every year, I have arbitrarily picked years 1, 9, 15, and 23 to show the dramatic difference on when you decide to make the $1,000 prepayment.

Amortization

Year

Savings

1

$9,780

9

$4,110

15

$1,875

23

$325

Clearly, the chart shows the sooner you make the one-time $1,000 prepayment the more interest you will save. (Source of above two charts: CIBC)

Finally, consider the impact of increasing your monthly payment. On a $300,000 mortgage at 3%, amortized over 25 years, the monthly payment is, $1,419.74. If you could round the payment up to an even $1,500, you would shorten your amortization almost two years, and save over $10,000!

The bottom line is there are dramatic savings to be found if you can make prepayments against your mortgage. The key is to put yourself in a position to take advantage. Sadly, there are too many people who use very little, or none, of this opportunity to save money. Make sure your mortgage advisor gives you the guidance you need when taking on this kind of debt.

If I can help, let me know.

More Consumer Protection

subburbsAcross Canada, regulators are ramping up their commitment to greater consumer protection. Last January I wrote about FICOM, the mortgage broker regulator, among others, in BC, and their intentions to update the legislation with respect to compensation disclosure.

See: Compensation Transparency

Yesterday, FICOM announced they would be going ahead with their plans to have mortgage brokers disclose the dollar amount of their compensation, even in cases where the mortgage broker is paid by the lending institution. Needless to say, the mortgage broker community had a lot to say about this change, and the subsequent uneven playing field among other mortgage origination channels (i.e. bank representatives, both in branch and mobile). Part of the problem is jurisdictional. FICOM does not regulate banks. That is the responsibility of the Federal Office of the Superintendent of Financial Institutions (OSFI). In an ideal world, all mortgage originators, across all channels, would be regulated by one regulatory body.

But perhaps that ideal, is not so elusive. Also making news yesterday, was the signing of a memorandum of understanding (MOU) between the Investment Industry Regulatory Organization of Canada (IIROC) and the Financial Services Commission of Ontario (FSCO) to share information about their respective licensees. IIROC regulates the securities industry, and FSCO regulates mortgage brokers, pension plans, insurance agents, loan and trust companies, among others.

Many “financial advisors”, including mortgage brokers, hold multiple licenses. The MOU follows a similar agreement between the IIROC and the Chambre de la sécurité financière that was signed back in November 2015. IIROC also has information-sharing arrangements with more than a dozen other Canadian and international regulators.

In fact, Ontario’s regulatory framework, in the financial services industry, was the subject of a government review last year which produced a number of proposals, including merging FSCO and the Deposit Insurance Corporation of Ontario (DICO) into a single regulatory agency. The new, larger regulatory body would be called the Financial Services Regulatory Authority (FSRA).

“The lines that once clearly delineated the various financial services industries are being blurred as the sector evolves and more individuals become active in multiple areas,” said Brian Mills, interim CEO and superintendent of FSCO. “Greater cooperation and coordination between regulators is becoming an increasingly important part of our work to protect consumers.”

Canada’s financial services industry has undergone rapid change in structure, technology, and indeed, consumer expectations. With that comes the necessary change in government oversight to protect the industry’s integrity. That’s good for everyone.

Stay tuned, there will be more to come.

Selling your house; for what it’s worth.

arms-lengthThe Appraisal Institute of Canada released a document encouraging Canadian homeowners to do their own due diligence and have their house appraised before putting it on the market.

You can read the entire document here: Homeowners encouraged to do their own due diligence when selling their home

If you have sold your home before, you understand the importance of getting the listed price right! A qualified, independent, accredited appraiser can help you do that. Both seller and prospective buyers will be more confident in the listed price, and it sets the table for an honest negotiation. It should also lead to a timely sale.

Another good reason to hire an appraiser has to do with the bank’s policy on “market value”. Whoever buys your home, assuming they will need a mortgage, has to satisfy the bank’s criteria for market value. Understand, banks lend money against a property’s market value. What is the bank’s criteria for establishing market value? Simply put, it’s the lessor of purchase price or appraised value.

In an arms-length purchase transaction, where the property was listed on the open market, determining market value can be an easier exercise. Typically, the appraised value will match the purchase price. However, as we have seen many times in markets like Toronto and Vancouver, buyers can pay well over the listed price. When that happens, there is a risk the appraised value will be less than the purchase price. This can potentially increase the buyer’s down payment necessary to obtain financing. For example, listed property for $450,000 sells for $480,000. Maximum financing from the bank will be 95% of appraised value, NOT, purchase price. The buyer will need to come up with the difference. The aforementioned risk is directly related to the amount paid over the listed price, assuming the property wasn’t listed below market value. It’s not exact science, but you get the idea.

Therefore, any effort to establishing the property’s market value in advance can be beneficial to both sellers, who want a timely sale with no surprises, and prospective buyers who can more readily determine their financing requirements.

Canada’s new federal mortgage rules

FCPPI recently read the document released by the Frontier Centre for Public Policy titled, “Canada’s New Federal Mortgage Rules: Right Diagnosis, Wrong Medicine?” 

You can read the entire document here:  Canada’s New Mortgage Rules

I decided to write the author, Wendell Cox, and share my opinions with him.  I am now sharing them with you 🙂

Hi Wendell, I enjoyed reading your editorial above, and thought I would share my opinions with you.  First of all, with respect to the disconnect between the Feds intervention and the real problem vis-à-vis land use regulations in Vancouver and Toronto, your closing comment summed it up best: “The solution is in Vancouver and Toronto, not Ottawa”.  It raises the question, again, should CMHC be privatized?  If CMHC was privately owned and operated, like the other two default insurance providers, would the Feds be able to impose this type of policy?  I think not, which would leave policy control at the municipal and provincial levels, where it belongs.

Having said that, I don’t agree with the assertion that the new rules are affecting the wrong people.  There is no disputing the new rules will not impact homes purchased at $1M and above since they do not qualify for the default insurance.  But I don’t think the people buying homes above $1M fall into the same high risk category vis-à-vis total debt to income ratios.  Perhaps the Feds got this part right, and the people buying homes under $1M are the target group.  Your concerns about Alberta’s economy and the new rules are fair.  Yet another reason why this type of policy should be handled at the provincial and municipal levels.  But that doesn’t dismiss the need to rein in the high debt to income levels affecting most of the country, and targeting the consumer groups most guilty.

My own personal opinion, as someone who has worked in the mortgage industry since 1992, addressing total debt to income ratios should be done more directly.  Forget about tinkering with down payment restrictions.  The debt service ratios (GDSR and TDSR) would be a better alternative to focus on.  Also, blanket policy changes that paint everyone with the same brush are unfair.  First time home buyers are a different animal than move up buyers.  Refinancing represent a different risk than purchases.  I would like to see greater government consultation with our industry associations (i.e. Canadian Mortgage Brokers Association) on policy reform.  Now there’s a novel idea 🙂

Thanks for listening.

Compensation Transparency

Financial-transparencyFICOM, the mortgage broker regulator in BC, wrote an open letter to mortgage brokers regarding their intentions to update the legislation with respect to compensation disclosure.  This should be mandatory reading for every mortgage broker/agent in Canada. Better still, get involved and email FICOM your opinions and concerns as they have requested. You might also contact your industry associations to see what position they are taking. New legislation is coming, with or without your participation. Don’t miss a chance to have your say.

For what it’s worth, I will give you my opinion. First of all, anyone who thinks the regulators’ efforts to protect the consumer are easy, or misguided, should spend a few days in their shoes. Look no further than the number of complaints they receive each year. I think FICOM’s open letter does an adequate job of describing the risks, or conflicts of interest, associated with our industry. There’s a long list of potential influences on the mortgage intermediary: Tiered pricing, volume bonuses, proprietary points, non-monetary rewards, business partners/relationships, to name a few. Do you really think the consumer is adequately protected?

This level of protection is not unique to the mortgage industry. How many more commercials do I need to see about how my financial planner gets paid. The financial services sector continues to get more sophisticated, and as FICOM pointed out in their letter, “there is increased international and national regulatory focus on compensation transparency in the financial services sector”.

Consider the following purchase transaction on your next deal, and the parties involved vis-à-vis their compensation disclosure in dollars:

  • Realtor (full disclosure)
  • Lawyer (full disclosure)
  • Default Insurance (full disclosure)
  • Appraisal, if applicable (full disclosure)
  • Home Inspection, if applicable (full disclosure)
  • Mortgage Broker (?)

Yes, the above list represents a typical “prime” application. If this was a sub-prime application (i.e. private lender), there would be full disclosure on mortgage broker fees and lender fees. I don’t think it is mortgage brokers working in this market that are making the most noise. This is a greater concern in the prime mortgage market.

I realize borrowers pay the other parties listed above, directly. But how are mortgage brokers different? On the one hand, we are providing a service, and paid for it, just like everyone else. The consumer is the beneficiary of our service, just like everyone else. On the other hand, unlike everyone else, mortgage brokers are the only party whose compensation is unknown to the consumer, sub-prime applications notwithstanding. Is this lack of transparency good for the consumer? Then add all the conflicts of interest to the equation. This is the dilemma FICOM is looking to solve.

It is a similar situation for most of the financial sector. The nature of our service is different. Yes, we ALSO work for the FI, and we have a number of them to choose from on every application. But as I said earlier, in addition to our base commission, there are a number of additional perks which we can receive. They can also potentially influence our advice. Hence, the need for greater transparency.

I don’t pretend to have the solution, nor am I suggesting FICOM’s current recommendations are the answer. But if the goal is for greater transparency so that consumers are better informed, as a consumer advocate, I’m on board. At this stage, we all need to get involved so that the solution is something we can all live with.  Changes are coming, and it is up to us, in the industry, to provide the necessary feedback so FICOM and other regulators can achieve the balance they are looking for.

Get involved!

To read FICOM’s’ letter, click here.

Who’s representing the little guy?

It wasn’t that long ago; the mortgage broker industry was predominately represented by the traditional small shop brokerage. In 1992, when I entered the industry, 791 mortgage brokers were registered in the province of Ontario. At that time, brokerages did not require a separate license. In a November 6, 1992 Mortgage Broker Survey, commissioned by the Mortgage Brokers Section of the Ontario Ministry of Financial Institutions, an estimated nine in ten (90%) brokerages had five or fewer people. In fact, half (48%) of the brokerages had only one person. This my friends, was the lay of the land for many years!

Fast forward to today where 1,436 mortgage brokerages are registered in the province of Ontario and the demographics paint a different picture. Yes, the traditional small shop brokerage is still around, in good numbers, including yours truly, but the larger “nationals” and “networks” have taken centre stage. At least, that’s how it seems when it comes to influencing lender policy. Let me come back to that. Unfortunately, I don’t have the hard numbers to officially characterize the industry landscape today. FSCO, the current regulator for the province of Ontario, has neither commissioned any new survey that I am aware of, nor were they able to share this information, when I requested it.

Back to my point earlier, and the reason for this commentary. For the past few years now, there has been a trend with some lenders, not all, who want to cut off business ties with the small shop brokerage. The lender’s position is based solely on brokerages maintaining minimum volume requirements. For example, if the brokerage cannot originate $5M, in new loans, each year, the lender will cut the brokerage off, period! It doesn’t matter how good the loans perform. It doesn’t matter if the brokerage maintains an application-to-funding ratio at or above the lenders’ standard. It is simply a matter of volume. This draconian measure is wrong on so many levels, and as the proprietor of a small shop brokerage myself, I can no longer stay quiet.

For a large national brokerage, this is not a problem. The large number of mortgage agents together will satisfy any number of lenders, and their minimum volume requirements. But for the small shop brokerage, there is not enough business to go around to satisfy multiple lenders. So what should be done? Should lenders be able to get away with this?

Every mortgage broker and mortgage agent working in Ontario, or any other part of the country for that matter, should be just as outraged as myself about this unfair practice. It doesn’t matter what size brokerage you work for now, or may work for in the future. As licensed mortgage professionals, we have all fulfilled the same requirements in order to do business. That doesn’t change because you prefer to work in a smaller office. Where you decide to do business, should have no influence on the number of lenders you have access to. For years, that was the fair practice. What has changed? And what about John Q public? Is the consumer better served by having smaller shop brokerages marginalized? Definitely not! Ask any small shop brokerage about their level of service, supervision, and training. I’m sure they would match it up against any office. But that is not the point. There should be room for everyone to operate in this industry. As a mortgage professional, you should have the opportunity to work wherever you want, and under the same conditions with respect to access to lenders who service the broker channel.

No one would argue against lenders’ controlling their costs. If your benefit to a lender is net negative because your application-to-funding ratio is consistently below the industry standard, and no amount of training has changed that, you deserve to go. If your business is adversely affecting the lender’s delinquency ratio, and they have good reason to suspect fraud, you deserve to go. On the other hand, if any business you originate, performs well, your application-to-funding ratio is good, and no BDM is spending extra time or money on you, then your benefit to that lender is net positive. I would challenge any lender to convince me otherwise. By enforcing minimum volume requirements, mortgage brokers are loosing their ability and willingness to shop around in order to maintain their active status with lenders. This is simply wrong, and undermines the integrity of our professional service.

So what can be done about reversing this ugly trend, and restoring the fair practice that characterized this industry for decades? This is my call to action for every provincial association, including CMBA, to right this ship. Collectively, you represent every mortgage originator who works exclusively in the broker channel across Canada. You have the ear of the lending community, and fundamentally, I can’t think of anything more important you can do for your membership. Finally, at the grass roots level, I encourage every mortgage originator who works in the broker channel, to get busy and make some noise. Let’s unite, and reinforce the ground we all are standing on. Let your respective industry associations know how you feel.

Thanks for your support!

Deadline for higher mortgage default insurance premiums is knocking

Mortgage Default InsuranceCome June 1st, the cost of mandatory mortgage default insurance is going up by approximately 15 percent. If you are planning to purchase a home with financing above 90 percent loan-to-value (LTV), at today’s mortgage default insurance rates, you better act fast. To avoid getting hit with the higher insurance premiums, your request for mortgage default insurance must be submitted prior to June 1st. That’s nine more days, including today.

For the average Canadian homebuyer with less than 10 percent down, the higher insurance premiums represent an increase of approximately $5 to the monthly mortgage payment. The higher insurance premiums do not affect financing below 90% LTV.

To learn more, go here – http://www.cmhc.ca/en/corp/nero/nere/2015/2015-04-02-1605.cfm 

If I can help, let me know.