Consumer Protection Act 2002
The Ontario Ministry of Consumer and Business Services has revised the Consumer Protection Act 2002 and the revisions come into force on July 30th 2005. Let us hope the current Total Cost of Borrowing (also called APR in the USA) regulations concerning Mortgage Brokers will be used as the model for all providers of loans, leases and mortgages. Canadian Consumers need consistent terminology when discussing loans, mortgages and leases.
When money is lent to a borrower there can be factors other than just the method of compounding used by the lender that influences the effective interest rate (EIR). The EIR is always greater than the nominal rate if the method of compounding is more frequent than annual. A nominal annual interest rate of 6% with monthly compounding gives the lender an EIR of 6.1678% because of the compounding method and the assumption that the lender is going to reinvest the payment each month at the same interest rate that he is charging you. This is called deemed reinvestment in legal jargon.
When you borrow money whether it be a loan, lease or mortgage and agree to pay back blended monthly payments of principal(P) and interest(I), other costs in addition to the blended monthly payments of P and I increase your overall interest costs. For example the three areas of concern as outlined below all increase the TCOB. The nominal annual interest rate by itself is almost a meaningless number when rate shopping for a loan, mortgage or lease!
UP FRONT COSTS
These costs can be spread over the full amortization period or just a portion (term) of the amortization period. Examples of these costs are fees paid to mortgage brokers, or banks mortgage renewal fees.
These costs can be constant each month or change with time. Monthly mortgage insurance premiums are an example of a constant monthly cost that is not part of the normal amortization schedule.
REAR END COSTS
These are fees paid at the end of the term (as in an automobile lease) or at the end of amortization period. For example some banks charge you a discharge fee and an electronic registration of discharge fee to close out your mortgage once you finally pay it off.
For mortgage brokers in Ontario the factors affecting the annual interest rate must be addressed and reported as the Total Cost of Borrowing to a borrower. It is about time that the Ontario law dictate that all people arranging loans, leases and mortgages be subjected to the same rules. The consumer stands to benefit if the Ontario government makes this a reality!