Have a Home Capital mortgage? Here's what you need to know

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Imagine you've got a Home Trust mortgage and you're watching its parent's stock price drop 70-per-cent in three weeks and depositors pull their savings from the company.

Your head is filled with thoughts, namely:

"Will they call in my mortgage?"

"What will I do at renewal?"

"Will I have to pay a higher rate when my mortgage matures?"

Uncertainty breeds fear, so let's address each of those concerns right now:

1) "Will Home Trust call in my mortgage?"

Calling in a mortgage means will they demand immediate repayment. The answer is no. That's highly unlikely if you're making all your payments on time. The company has no incentive to call in the mortgages of borrowers who are paying as agreed.

2) "What will I do at renewal?"

One of two things will probably happen. Either:

a) The company partners with or is bought out by investors with fat wallets – and it continues to operate, albeit under a different brand name most likely.

b) The company is wound down and its mortgages are sold off, with our banking regulator – the Office of the Superintendent of Financial Institutions (OSFI) – overseeing an orderly sale.

Read more: The rise and fall of Home Capital

Outcome A is the best-case scenario. Home Capital's mortgage performance is rock-solid, its borrowers have gobs of equity and its deposits are government guaranteed. The company will draw plenty of interest from asset buyers. OSFI could even make temporary policy exceptions to allow a big financial institution buyer to more easily engage in Home Capital's business. The biggest question is, how many buyers will be scared off by potential litigation from angry shareholders.

In either event, Home Trust borrowers who pay their mortgage on time will have renewal options. Whoever buys the company, or its mortgages, has every incentive to renew its borrowers because renewal revenue is plump and juicy.

If, for some reason, you're in the tiny minority of borrowers that a new buyer didn't want, or can't service due to its lending policies, you'd have at least a month or so to find alternative financing. Mortgage brokers can readily find options for most borrowers, so long as you have at least 20-per-cent equity and a quality property or good credit and provable income.

3) "Will I have to pay a higher rate when my mortgage matures?"

If you're a prime borrower, meaning you can get approved at any big bank, then no, you won't have to pay abnormal rates when your Home Trust mortgage matures.

If you're a non-prime borrower, meaning you have credit issues or can't prove your income sufficiently, then yes, you may have to eat higher rates at renewal. It's hard to say how high. It depends on how skittish non-prime investors remain. But bank on at least 1/4 to 1/2 per cent (potentially) if you are renegotiating this year.

Here's the problem, though. Home Trust was Canada's biggest non-prime lender. More than $5-billion-plus worth of its mortgages could come up for renewal or be refinanced in the next 12 months.

If Home Trust disappears, a lot of those borrowers will flee to its regulated competitors (e.g., Equitable Bank, Canadian Western Bank, etc.), credit unions and less regulated lenders (e.g., mortgage investment companies). These companies would likely charge rate premiums for the foreseeable future because their supply of funding is only so big.

That said, if you've got a Home Capital mortgage and you're paying your mortgage as agreed, you have little to worry about. If you're not making your payments, Home Capital will be quick to pursue you and get its money back – as all lenders would.

Here's something else to keep in mind. OSFI and investment bankers are quarterbacking a resolution to this fiasco as we speak. Home Capital will likely be bought, partnered with or its mortgages will be sold, and 12 months from now most people will forget this ever happened. It's that simple.

OSFI is not going to sit by and watch Home Capital flat-out fail. Forget about that as even a remote possibility. Its job is to maintain confidence in Canada's banking system, and that it will do. Several big players are running models at this very moment to see if they can make a play for Home Capital and/or its mortgage assets. You may see some positive news on that front soon.

Robert McLister is a mortgage planner at intelliMortgage and founder of RateSpy.com. You can follow him on Twitter at @RateSpy

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