Sometimes times get tough, and when they do, bank borrowers miss payments on lines of credit, credit cards or mortgages.
If you find yourself in this boat, it’s important to be aware that any cash or assets you have with that same institution, or its affiliated companies, are fair game for the bank.
It’s called the right to offset, and here’s how it works.
“When a financial institution uses its right of offset, it can take money the consumer has on deposit with it or with one of its affiliates, to pay any outstanding debt owed,” says spokesperson Léonie Laflamme-Savoie from the Financial Consumer Agency of Canada (FCAC). “A right of offset may also apply to accounts a consumer holds jointly with others.”
Lowest fixed and variable mortgage rates in Canada for October 19 2023
Suppose you have a line of credit or mortgage with XYZ bank, plus chequing and unregistered savings accounts with that same bank – or a bank it owns.
If you don’t pay your debt as agreed, XYZ bank has a right to clean out those accounts to make itself whole. And it doesn’t even have to ask.
What’s more, if your pay is auto-deposited like clockwork, and you still owe it money, the bank can help itself to each paycheque that goes into your account.
One side note: banks cannot enforce their right of offset against your registered retirement savings accounts (excluding TFSAs), pursuant to the Income Tax Act.
Offset clauses are routine in bank lending contracts. But even if your lender’s paperwork doesn’t have one, banks have a common law right of offset, whether or not an offset clause is in its agreement.
Mortgage and credit line defaults are bound to increase as our economy cracks under the weight of multidecade highs in interest rates. For anyone who decides to stiff their bank (not recommended), they best make sure that all their other money is at some other institution.
“My advice to everyone concerned about this is, it’s a good idea to keep your assets separate from your liabilities,” says insolvency trustee Douglas Hoyes of Hoyes, Michalos & Associates in Toronto. It’s easy to say, pay your debts and avoid this problem altogether, but people can’t always foresee job loss, debilitating illness, divorce and other default triggers.
Mind you, if you get to a point where you’re missing payments and a bank is looking to exercise its right to offset, it’s probably a sign you need to make some serious financial changes. That may well include selling your home, liquidating assets or consulting an insolvency professional.
Sneaky mortgage fee hikes
People routinely discharge mortgages. It happens whenever someone pays off their mortgage, refinances or sells their property.
In most provinces, lenders charge a fee for the privilege of terminating your mortgage with them and deregistering the mortgage off title. Typically, they range from $75 to $450 or more.
Borrowers seldom pay attention to these charges until they actually go to discharge their mortgage and see the lender’s payout statement. As a result, such expenses don’t factor into most people’s choice of lender. Lenders know that – and take advantage of it.
Discharge fees have been subject to fee creep lately. As just one example, Alterna Bank recently hiked its discharge fee 87 per cent, from $230 to $430 effective Nov. 1, leading some to complain on public forums.
“Federally regulated lenders, such as banks, must disclose the mortgage discharge fee in the mortgage contract provided initially,” said the FCAC’S Ms. Laflamme-Savoie.
“Banks may make a business decision to change fees, such as discharge fees,” FCAC adds. But they must disclose the fee and any change to the fees within 30 days.
To determine what your bank can or can’t do, you need to read that boring old mortgage contract. “Typically, agreements for banking products and services include the possibility for some changes, such as a change in fees,” the FCAC says.
A Ramp Up in U.S. Yields Keeps Pressure on Canadian Rates
U.S. Treasury yields are hitting multiyear highs and that’s keeping a floor under Canadian interest rates.
So far, Canada’s lowest nationally advertised mortgage rates haven’t been affected this week. If U.S. yields keep making new long-term highs, however, their magnetic pull on Canadian rates could drive our mortgage costs higher.
Data from CanDeal DNA show the bond market now expecting a better than even chance of one more Bank of Canada rate hike.
More interesting, however, is the fact these implied future rates suggest our prime rate won’t fall below today’s 7.2 per cent until 2025.
That would make for some very unhappy floating-rate mortgagors. Albeit, if the economy slows as expected through year-end, those rate-cut expectations could be pulled forward.
Robert McLister is an interest rate analyst, mortgage strategist and editor of MortgageLogic.news. You can follow him on Twitter at @RobMcLister.
Robert McLister