Mortgage penalty can be a shocker
March 13 2009 by Ellen Roseman
If you have a closed mortgage at a fixed rate, and you want to get out early, be prepared to pay a high penalty. The cost may be many thousands of dollars.
Most mortgages have a clause that says premature cancellation requires paying three months’ interest or an interest rate differential (IRD), whichever is greater.
The IRD is greater, now that mortgage rates are falling. I talked about it in my column and got lots of interest from readers (and two requests for radio interviews, as well).
It used to be the case that if you had a mortgage insured by CMHC that was past the three-year mark, you could pay three months’ interest to get out. But in 1999, CMHC pulled the plug on the long-standing prepayment privilege and made it a “non-mandatory requirement.”
Lenders are now free to either honour the old CMHC position or impose their normal prepayment penalty policy on CMHC-insured mortgages.
Real estate lawyer and consumer advocate Alan Silverstein was shocked to hear about the new rules in March 2000. Here’s what he said in the Toronto Star.
Who are the big winners? Banks, trust companies and other CMHC-approved lenders, empowered to siphon larger prepayment penalties from Canadians.
I’m not aware of any public consultation on these new rules, or any dialogue with consumers or consumer advocates. Why not?
I’m not sure what irritates me more: CMHC’s regressive new policy, or the clandestine way it was introduced.
The banks are not consistent in the way they calculate the IRD penalty. So, how do borrowers know what is fair?
Robert McLister, a mortgage broker, has put a calculator at his website so you can see what the IRD penalty may be in your case.
I heard from mortgage brokers about how banks use these penalties to penalize borrowers. The $20,000 example I used is not uncommon.
The Financial Consumer Agency of Canada has information on mortgage penalties here.
I’d like to see a bit more advocacy on behalf of consumers who can’t get a straight story on how the penalty is calculated.
Here’s what McLister says about these penalties:
Some lenders use posted rates for their IRD calculation and some use discounted rates.
Some lenders round up to the next longest term when determining comparable IRD interest rates. Some round down.
A small number of lenders prohibit breaking a mortgage early — regardless of the penalty —unless in the case of an approved bona fide sale.
The moral: Always contact your lender directly for an exact penalty quote.
John, mortgage broker
Mar 13 2009
Hello Ellen. I’m glad to see your article has brought up the pain and shock we have been seeing in the last few months for persons refinancing.
Just recently, one of my clients had to refinance to consolidate debt with another lender because he did not qualify anymore with the existing lender — a $28,000 penalty on a $500k mortgage .
When I contacted the lender they could not give me a exact calculation on how they arrived at the figure.
The lender is required to reduce the penalty by the prepayment amount, but some don’t.
I had another client who had taken a cash back mortgage. The penalty calculation was double what it would be if he had taken a discounted rate without the cash back. He had to pay back the cash back prorated: total $32,000. I advised him not to proceed.
Please note, where customers have lost their job or there has been a serious life change, and if their mortgage was insured by Genworth, they could possibly qualify for a possible workaround to reduce the costs and penalties. It’s called Homeowners Advantage. So ask your lender if you qualify for this program.
Chris
Mar 13 2009
I find the IRD confusing, so I was asking my credit union about it recently.
Since I have about 3 years remaining on my 5-year mortgage, I would owe a penalty based on IRD rather than 3 months’ interest.
I assumed, based on my initial inquiries, the IRD would be high, like $17,000, based on a spread of 2 points (my 5.5% minus a 3.5% variable rate) over 34 months. That sounds similar to the woman in your column.
But the mortgage specialist later said the spread would be based on the rate they could get on a similar product. So with less than 3 years remaining on mine, that would be the rate on a 2-year fixed mortgage, which is currently 5.0%, for a spread of 0.5% and an IRD-based penalty of $4,400 — just slightly more than the 3-months’ interest.
He got that figure from a form on his computer. I’m still nervous that he was right the first time….
Of course, if renegotiating your mortgage — even with a high penalty — drops your monthly payment significantly, you can choose to put some of that savings back into your mortgage. This helps to pay it off earlier and eventually nullifies the penalty you paid by effectively shortening your amortization period and decreasing the interest paid, while improving your cash flow.
Things get more complicated if your mortgage is CMHC-approved (and most people I know are CMHC-insured). As it was explained to me, breaking the mortgage to renegotiate a better rate if you are still below the 25% threshold means you must pay the CMHC premium again — which can be thousands of dollars. (Could that be why Marilyn’s penalty ended up being so high?)
The blended mortgage approach one reader mentioned in the comments is not a bad half-way option. The fee is usually only about $250 (which you could save in the first couple of months from the lower payments) with no breakage penalty and no need to re-apply to CMHC. You get the average of the two rates over a new 5-year period, for example.
Mike
Mar 13 2009
My partner and I both own a condo. We split up and decided to sell in November. At the time, our RBC banker told me that our penalty would be 3 months’ interest.
I had read our mortgage and questioned him about the interest rate differential. He said it would not apply. He was wrong.
Our penalty is now over $15,000!
I went to our bank and asked for a break on all or part of the penalty. My banker spoke to his boss and they said no.
This is despite the fact we are giving up a $280k mortgage and they are getting 2 new ones, one for each of us on our new places, over $225,000 each, so the combined new mortgage is much more than the current one.
I threatened to move my business and I was told I was unreasonable. Only when I got a cash back offer from BMO did RBC offer me cash back.
They offered me $5,000 cash back at 4.76 per cent, while the current variable rate is 3.2 per cent.
I spoke to many levels of people at RBC and was repeatedly told they never waive penalties. Other banks I spoke to told me they would’ve waived it in our situation.
So they are almost doubling the value of the mortgage and will not budge, but the low rates now make the new mortgage worth taking.
Anthony, mortgage broker
Mar 13 2009
If your readers intend to purchase another property, it is cheaper to “port” the mortgage to the new property.
Admittedly, the borrower may have to pay down the principal to qualify.
Before the current debacle, it would not be necessary to pay down the principal to qualify. But banks will, in all likelihood, lend less on an equivalent property as they recognize that average home values have decreased markedly in recent months.
If a buyer is upgrading, I agree, the paydown would not be necessary.
Best advice to borrower is to read all terms carefully and negotiate everything. If credit rating is clean, and job secure, obtaining mortgage is NOT difficult.
Cindy, mortgage broker
Mar 13 2009
While it’s true that mortgage penalties can be a shocker when clients are in the early stages of their mortgage terms, I think it’s also important to note that refinancing a mortgage in the later stage of, say a five-year term, can actually save people a lot of money, given the current low rate environment.
Typically, lenders will require borrowers to pay three months’ interest or the IRD, depending on which is greater. Below are estimated formulas for helping calculate penalties to determine if a refinance is worthwhile for a consumer:
To estimate three months’ interest cost:
(A) Principal amount you want to prepay: $200,000
(B) Mortgage interest rate at the time of prepayment expressed as a decimal. For example, 5% = 0.05
(C) A x B: $200,000 x 0.05 = $10,000
(D) C ÷ 4 is estimated three months’ interest cost: $10,000 ÷ 4 = $2,500
To estimate IRD –
A) Mortgage interest rate on the mortgage at the time of prepayment: 5% or 0.05
B) Current interest rate for a new mortgage with a term that is closest to the remaining term in your existing mortgage (less any discount being offered on such new mortgages): 3.5% or 0.035
C) A - B is the difference between your existing interest rate and the current rate. Write C as a decimal: 0.05 – 0.035 = 0.015
D) Amount you want to prepay: $200,000
E) Number of months left until the mortgage maturity date: 12
A) C x D ÷ 12 x E is the estimated IRD amount: 0.015 x $200,000 ÷ 12 x 12 = $3,000
Jenni
Mar 13 2009
I am thinking of relocating to a new community where property values are half of what they are here in Toronto.
If I transfer my mortgage to a new property and it’s of a lesser value, what sort of penalties (if any) should I expect?
I know Anthony mentioned paying down the principal, but is there anything else? (not that that isn’t scary enough).
Ram
Mar 14 2009
I think we are greedy in expecting the bank to relax the terms of our contract. Think about it the other way, the interest rates are low now and a lot of people will be getting into fixed rates. In a couple of years, if the interest rates should rise will we accept banks to reset the rates in the middle of the term. If that is not fair, how this is? - Yes, banks make a lot of money and they can be accommodative - but what rule to apply who to accommodate and who not to - If banks accommodate them all, they’ll be out of business!!
Lior
Mar 15 2009
Some lenders can also use another penalty option called interest-to-term. If the the mortgage is large enough and the borrower is trying to re-finance rather early into the term, it would make a $10,000 IRD or 3-month interest look mediocre. Generally, though, most times the penalty would be the IRD or 3-months interest, whichever is greater. These are easy to calculate. However, it should be taken into account only when you do actually decide to re-finance. That’s because the penalty is dependent on the remaining time in the term. It won’t be possible to get a direct quote from the start of the mortgage.
CanadianFinance
Mar 16 2009
I’m looking at doing this right now. I thought the $4,000 or so I will likely pay for 3 remaining years was a bit much. But ultimately it’s at least a breakeven.
I may come ahead, since I’ll be locking in a lower rate for another 5 years as opposed to having to renew that amount in 3 years when rates might be higher.
Reg
Mar 19 2009
My fiancé and I bought a house a year and half ago in Chatham, Ontario. We got a mortgage through CIBC for $130,000.
Everything was great. My fiancé received a promotion that brought us out to Halifax, Nova Scotia. So we put the house up for sale and started renting.
Well, the house sold for $142,000 and we owed $124,000 on it. Wow, unreal in these times, we made money, or so we thought.
So we talked to the bank to find out what the penalties are. Ha, ha, the joke’s on us, we have to pay $7,900 in penalties because we were in a 5 year term (with 3.5 years left). We also have to pay $6,100 back because we were first time home buyers and did the cash back for our deposit.
So, $14,000 in penalties to the bank. When we add on the $600 lawyer’s fees and $3,550 commission for the realtor, we now owe $250 on a house for which we paid $130,000.
Yes, we signed a contract with the bank and we cannot get out of it, but I want to warn other people about this. There is no hope for us, but maybe we can help others.
At the end of the day, we are paying $142,500 to sell a house for which we paid $130,000. All because the back counts on our money for the five years and our getting out hurts them.
We knew we were in trouble with the house. That is why we sold it instead of forfeiting it, losing it or just walking away, which would cost the bank even more. We thought we did the right thing, but instead we get burned.
The topper to this story is that we have our wedding planned for June 20th and were counting on the money we made on the house to pay for it. Now we are looking into postponing the wedding for a year, which will also cost money because of penalties……… When does it all end?
Brian Poncelet,CFP
Mar 21 2009
One idea to lower a penalty fee charged by the bank (a case by case situation) is to use a line of credit (about 3.5%) and pay down what you can. As an example, TD will let you pay down 15% of the orginal amount you borrowed. By doing this, you have reduced the penalty by 15% or more.
If you have at least 12 months to go on a mortgage and the interest is high, this may make sense.
If other higher interest debt (like credit cards etc.) is added to the new mortgage after the penalty is reduced, all the better! Just don’t make the same mistakes again if you can help it!
Stuart Turnbull
Apr 6 2009
Reg: You may want to check out Revenue Canada to see if you qualify for some significant Tax deductions: Realtor fees, legal fees, mortgage penalties, to name but a few.
Here is a link to their site, http://www.cra.gc.ca and type in Moving Expenses in the search dialogue box. Good luck.
Paul
Apr 8 2009
Just want all of you to know this:
We just paid out one mortgage - sold another property -
The paid out mortgage balance was 98,000.
bank: ICBC - Interest 5.79, reinvestment rate: 5.15
They came out with penalty in the amount of $7691
I did my calculations (differential amount) following all their instructions in the contract. My results: penalty of $2940
I called them, they explained that my calculations were correct “EXCEPT”: i didn’t notice something between parenthesis in the contract: your interest is what they gave you PLUS any discount they gave you.
So my interest is 5.79, but they offered me that rate at a discount from the normal rate of 7.19, so the differential interest came out as 2.04% instead of 0.64%; more than threefold
Legal? May be not: the idea is that they recover what they are loosing by going into the market now: the difference between what I am paying and what they will get now, NOT from what I COULD HAVE PAID
Ethical? you can choose the word:
They have gone a long way in engineering a whole procedure (offerings, discount at branches, contract wording) with the only purpose of making money from off-guard customers: in one word: to screw-up YOU and me
Beware of CIBC, no wonder is regarded as the worst bank
Beware also of PCF, i have another story for other day
Beware of ALL BANKS!
Grant
Apr 15 2009
I to am in a situation that I just found out I have to pay $23,000.00 in penalty. Has anyone thought of hiring a lawyer to look over everything or is there such a lawyer that does this kind of thing? Thoughts?
Combo
Apr 15 2009
I am with TD. I gave them the option to break my mortgage to put me at a variable rate. My penalty at the time was $8,700 (Feb 27th).
It took them 6 weeks to tell me that they did not want to offer me anything else.
I called Scotiabank that same night and 4 days later I am approved. I check for my penalty and it’s $15,600!!!! TD’s delay cost me 7,000$!!!
Now I’m asking for a rundown on this calculation, as I suspect that they are adding in a percentage to the IRD from an alleged discounted rate that I received. My mortgage contract does not mention this.
I plan to go to court if this is the case. I’m sure that this issue will become a class action suit.
JayCe
Apr 24 2009
We are hoping to sell our home and will be leaving the country to go out on the mission field. Our bank (CIBC) has quoted us a $10,000 penalty for paying out the mortgage.
We CANNOT get that out of our home in this market. We thinking that maybe we would be fortunate enough to get what we owe, the fees etc and up to maybe $2,000 penalty.
We also do not wish to go out with debt as we will have no real income! The bank insists they will NOT budge on the penalty fee.
Anyone know what is involved with abandonment? Can’t see that it would be in the bank’s best interest but any other options?
Serge
Apr 28 2009
I have mortgage (just over $ 230k) with CIBC with a remaining term of 3 years 4 months. Interest rate is 5 %. So I called CIBC today to find how much penalty would be. They told me over $ 15k. When I asked how do they calculate the IRD (if today rate of the closest rate to mine is 4.85%) they told me that thay use not today rate but rate at the time when my mortage was advanced (more then 1,5 year ago). Is it legal? I thought that they have to use today rate but not rate of June 2007.
Russ Skinner
May 1 2009
I am a mortgage agent, and previously was a real estate law clerk and paralegal. One of the tips in your original column was to make a lump-sum payment before renegotiating.
The rules here also differ greatly between lenders. But in one situation a number of years ago, with a lender that allowed up to 15% to be prepaid in each mortgage year (in that case, May 1st to April 30th), a couple were facing a horrendous penalty to get out of a house they couldn’t afford. We got creative, and with the assistance of the other lawyer, presented a cheque on April 30th for the first 15%, a cheque on May 1st for the second 15%, and a cheque on May 2nd for the new payout amount, minus the two prepayments and recalculated at (approx) 70% of the penalty. The bank wasn’t happy, but what could they do?
One other point that I haven’t seen addressed: some lenders (especially some of those catering to the credit-challenged segment) do not allow prepayment. Always check your Standard Charge Terms and whatever provisions were added to the first page of the Charge/Mortgage.
Oh, and check with professionals (mortgage agents, your lawyer).
Jordan
May 2 2009
It is an OUTRAGE AND I CANNOT BELIEVE RBC CAN GET AWAY WITH THEIR IRD CALCULATION.
They take the posted rate when you signed like 2 years ago. Back then, posted rates were hugely increased compared to what they actualy gave you. They take that so-called discount they gave you and deduct it from today’s posted rates, which are much much closer to actual rates.
So they are charging out my mortgage at 2.95?????? for a 3 yr fixed. I said ok, then i will take a 3 year fixed mortgage for 2.95. They said no, the actual rate is 3.95???? So how come you are charging me the rate of 2.95??
Well, that is because we gave you 1.5 off your rate back in 2007. Unreal. A $280,000 mortgage and they are charging me $15,465 to sell my condo. They will have made $48,000 in profit in under 2 years from a $280,000 mortgage. They all sleep just fine too
NICK
May 2 2009
Is it true that for a fixed mortgage greater than 5 years, the penalty is the 3 months interest?
I am in year 2 of a 7 year term, and the IRD is in the $28,000 range…but i thought I read somewhere that if it’s greater than 5 years, it’s the 3 month interest calc?
Thanks!
Ellen Roseman
May 4 2009
Yes, check this information:
The Interest Act prohibits IRD penalties on terms over five years, after five years has elapsed. In such cases, a maximum 3-month interest penalty may apply.
For example, someone who has been in a 6-year mortgage for 60 months or more would pay a 3-month interest penalty (maximum) to break it before maturity.
http://www.canadianmortgagetrends.com/canadian_mortgage_trends/interest-rate-differential-ird.html
RM, recently unemployed
May 7 2009
I am a TD Bank Mortgage Customer, and my wife and I have been struck with a string of unfortunate circumstances as first time buyers, TD staff members that didn’t want to escalate our concern, who finally lead us astray, and simply have passed the buck on our situation.
We purchased our first house in October 2007, and we obtained a TD closed Mortgage at 5.55% for 5 years. We took a closed mortgage because we were confident that we were going to remain in the same home.
Needless to say, we were taken by surprise upon moving in. Victims of false real estate marketing, we discovered that our parking pad was illegal, an immediate $15,000 loss in home value. Moreover, the vendor didn’t provide us with a survey as promised, the house was left in a mess with junk we had to remove at our expense. Finally, we had to retrofit the home at a cost of $25,000 from our own savings (which we never intended to use for anything else except to fund starting a family) as a result of a basement leak and further application fees, appeals and bring the home up to standard.
After taking the issue to the City of Toronto Community Council, we managed to get some headway, but the recourse was to be rectified at our own expense. Moreover, I was laid off in October 2008. We decided to cut our losses immediately and put the house on the market, given that we were being proactive, eliminating a possible foreclosure and saving TD Bank the risk, since there is job uncertainty in my wife’s industry as well.
Long story short … We engaged with TD Bank at the branch level immediately when my employment status changed. We were advised that a discharge amount would be applied at a fee of $8,000, the higher of 3 months interest, should we sell. We were further advised to buy another property to save the discharge fee. That just wasn’t feasible, so we decided to move forward with selling the home and recouping whatever remaining equity we had left.
Unsatisfied with the lack of support from the branch holding our mortgage, we took our concern to a TD Mortgage representative in our local area. In February 2009, she told us she would look into our discharge penalty options, transfer the mortgage to her branch, and advised us to promptly be in touch as soon as we sold. By the time we met with her upon selling the house at a loss, she asked us to fill out a pre-qualification document, quoted us a discharge penalty of $18,000, and attempted to persuade us to take a higher mortgage amount on my wife’s income, amortized over 35 years, and roll our outstanding debts into the mortgage, pressuring us to buy another property with CMHC insurance! Again, not sound advice for a couple like us struggling to make ends meet, given that we illustrated our issues with the home and with full transparency. Moreover, the entire time we believed we could discuss the matter further, our discharge penalty essentially doubled.
Frustrated with the lack of results, I contacted our TD branch manager and in April escalated our concern to the Regional VP who we were informed could assist us in reducing the discharge amount. For two weeks, we waited, hoping for a reply and some favourable news given our extenuating circumstances. During that time, our discharge penalty rose to approximately $25,000 since the interest rates were again lowered. After two weeks, we received a response from a TD Bank GTA Customer Service Manager (by phone) advising us that it is not TD’s responsibility to assist in the matter given that we had a string of bad luck, and that we were bound to the fees payable, regardless of the circumstances, wishing us the best of luck. The Regional VP passed the buck and didn’t even take the time to respond back to us or hear our concern in person.
If TD Bank takes the full discharge amount, they will eat 1/2 of our lifelong RRSP savings that we contributed to and used as our down payment for the property using the First Home Buyer’s Plan. We simply can’t buy another house under duress to save the penalty amount in this market because we can’t afford to do so.
Be warned that the TD Bank policy of “interest rate differential formula” is not illustrated in their mortgage documentation, at least not ours. Further, know that there is an escalation process if you are not given a straight answer, but nobody at the frontline of TD Branches will tell you about it up front. Also, despite going through the escalation process and now to the Ombudsman, we’re still waiting for an answer.
Having been stung by a false marketing scheme, hit with unexpected expenses in our home, being laid off and having to sell our home at a loss … now TD Bank wants a piece of whatever little we have left.
So much for counting on sound advice and assurance from one of Canada’s largest financial institutions who prides itself on providing financial solutions for its customers.
Daya
May 15 2009
I see that lot of people are in same boat as I am with banks’ locked-in mortgage terms and high penalties to take your business away.
I have an RBC mortgage and the penalty is about $20k. Surprisingly, I have another mortgage with PC Financial and the penalty is $3k. What is the difference?
Are there any lawyers who would like to take these banks to court for ripping off their clients with fine print in the mortgage contracts. (Who reads the fine print anyway?)
I am shocked by the fact that RBC, as a big blue-chip bank, has this fine print. I need a new mortgage too, but definitely will not give my business to RBC.
RM again
May 20 2009
We met with a TD Mortgage Specialist, who was brought into the loop by another VP (not the same VP we wrote to, who denied our request for a reduction in the penalty).
His solution was to make a lump sum payment of 15 per cent on the mortgage using a line of credit, which would be reimbursed to TD upon closing. We are allowed to do so each calendar year.
However, since we were not advised of this in October 2008 when discussing our financial situation with TD prior to selling, we asked about making a total 30 per cent lump sum payment to reduce the discharge amount. He agreed.
He’s also waiving the charges for administering any back end legal fees, which are in his control.
Our estimated discharge amount right now is $23,000. We won’t know how much lower the penalty will be until TD makes the $89,500 payment to our $265,000 mortgage, but he estimates the discharge amount at $16,000 or so after the payment is made.
We also requested an increase in the portability time frame and he has given us an additional 2 months, for a total of 6 months portability upon closing June 15th.
Should I obtain a job by then and we decide to buy, we will have until Dec. 15th to close another property, but it has to be for the same yet lowered mortgage amount of $185,500.
Manny Azevedo
May 27 2009
Being self-employed (my business is now 15 years old), Scotiabank will only allow a maximum mortgage based on 65% of the value of the property rather than 75%, after which CMHC insurance is required. The bank has the property assessed and will not allow the borrower to see the assessment. I understand they also do a calculation on the assessment value.
I have more job security in my own business than an average person would have working for someone else.
How is it that banks are allowed to do this?
Money Plant
Jun 16 2009
I hope link below will help your readers as well
http://canadianmoneyplant.blogspot.com/2009/06/how-to-calculate-mortgage-penalty-when.html
Bob
Jun 19 2009
One other option is, if you’re selling, the buyer can assume the mortgage. On the downside, it is unlikely that someone would choose to pay a higher interest rate. But we’re thinking of offering a $5K or so discount off of our asking price to buyers who assume our mortgage (CIBC/5 yr closed) to avoid a $15K penalty. They would also save on some closing costs…
Wonder if there is a consumer group and/or government regulatory agency that might step in and make some noise and put some public pressure on the bank to be more lenient, given the extreme circumstances some have found themselves in.
Any thoughts Ellen?
Chris
Jun 24 2009
In response to the comment earlier about making sure you get a direct quote from your provider;
We were quoted $3,700 on March 27th, closed on May 15th and effectively charged $9,585.
I asked for the quote in writing back on March 27th and how they arrived at this charge. There was absolutely no mention of the IRD potential. I was denied a wriiten quote because “it changes daily”.
There was absolutely no customer service of any kind from MCAP from quote to closing. Other than our annual statements and our original mortage package, I received nothing from them, other than marketing documents advertising other products.
The orginal package has nothing in it indicating the usage of the IRD over the traditional three months interest penalty and indicates nothing about arriving at their prepayment penalty.
It’s highway robbery and a complete lack of customer service. In fact, it’s disgraceful. I’m embarrassed that this Canadian company is treating people this way. I actually feel like it was more of a hassle to borrow money from them than being cherished or valued as a customer.
I initiated multiple requests to be refunded the difference from our provided quote based on zero prior disclosure. The customer service rep pursued it for us, reviewed internal tapes etc and after repeated emails asking for a response, I was merely sent a form email saying we were out of luck and they “don’t refund penalties” this morning, June 24th.
Very sad state of affairs that this is where we are in this world. The outcome is totally unacceptable and can only warn others, get everything in writing or don’t buy it.
I am almost certain, if I had stuck with my local bank, I would have at least been given the common courtesy of some sort of disclosure of what I could be facing. It turns out, I wouldn’t have sold my home for that $6,000 difference.
Once again, it appears to be all about greed. A 120 percent increase from the initial quote, and a cash grab $300 “processing fee”. I am steadfastly losing faith in our human race. It’s despicable.
Al Burton
Jun 25 2009
I’m facing a similar situation in Alberta with “ATB Financial”. I was an employee there and had a staff mortgage. Once I left employment the mortgage automatically rolled over into a 5-year closed. I’m now facing payout penalties over $20K, or >8% of the mortgage principal!!! What a kick in the pants on the way out.
While I was working for the bank I used to design retail products and was deeply involved in profitability analysis so I can tell you and all of your readers that this is purely a “non-interest income” cash grab. Any other argument that the bank puts forward can be easily refuted.
I absolutely believe that there needs to be consumer advocacy here. The argument that all the banks are doing it doesn’t hold water in a post-sub-prime world. I’d also be interested in participating in an organized class-action suit if there was a legal firm interested in taking this on.
Chris
Aug 6 2009
My partner and I had to put our house up for sale in Smithers BC after owning it for just one year. He had been laid off from his job and other prospects were non-existant. We ended up selling the house in July for $194,400 and paid $202,000 for it in April, 2008.
The Credit Union, Bulkley Valley Credit Union gave us a payoff of 179,249 and a penalty of $9,883 to total $189,185, as I have read in so many cases, this was a shock to us not only because it erased our equity and we already lost money on the sale (not including the $20K of renovations we did) but we ended up owing $4992 to close.
Upon looking into this situation and pouring over our mortgage and associated paperwork I found that on our original “Fixed Rate Loan Agreement” and “Commitment Letter” I noticed that the “Prepayment Rights” give you four choices- CLOSED, FULL PENALTY, XX MONTHS INTEREST PENALTY or OPEN. Each has a tick box and ours had “CLOSED” ticked. According to this agreement in the definitions section, the “FULL PENALTY” option is the one that charges you either 3 months interest or the IRD. While “CLOSED” is defined ONLY as meaning that “You may not make any payment to the Credit Union before it is due”. There is nothing in the definition of “CLOSED” that says there is a prepayment penalty or that links it to the “FULL PENALTY” option…..so? In this case with the definition appearing to mean that you cant make a payment early- how does this impact the pre-payment penalty you would pay? I see nothing that says anything about the “CLOSED” option meaning anything or being defined any differently.
Since our Fixed Rate Loan Agreement does not say that we will face the “FULL PENALTY” option, is the Credit Union in error by charging us then penalty when it was not selected in the Prepayment Rights box?
Incidently, this Credit Union also did not know exactly how the IRD was calculated other than getting it off of a chart. They also applied our rate discount from Feb 2008 (not April 2008) to the new rate even though that particular discount is no longer available on the new lower rates. Without the discount our IRD would be half of what it was calculated to be using the discount.
Any thoughts?
Virginia
Jan 20 2010
I’m so overwhelmed over reading this I’d like to curl up in a ball.
I have a 5.94% wish scotia and 3 years left on a 5 year term. I thought I’d be smart and refinance.
They said 3 month interest penalties simply don’t exist anymore. It would cost $17,000 to refinance , but they’ll be generous” and lower my rate to 5.15% if I add 2 years to the term.
Yay, I’d save in the long run IF we stay in the house… but now I’m deathly afraid to move. This is my first house and I thought we were smart locking in. I wish someone told me…
Yogesh
Jan 25 2010
I have a five year fixed mortage at 5.1% I have 29 months left. My mortgage balance is about $124,000 and I pay $735 per month.
I have to sell the property as I move out of town due to my job. The bank said I have to pay a penalty of $8,200. I am not sure how they arrived at this number.
Can you help, please? What are my chances to sue the bank for charging so much of a penalty?
john
Jan 29 2010
I work at a very small bank.
2 years ago banks borrowed at 4% and lent at 5%
add in wage/operating costs the borrowing cost increases to 4.5% leaving income of 0.5% for a 5 year mortgage
If you payout your mortgage the bank will re-lend the money out. But today 3 year rates are 3.75%.
Now the bank will be losing 0.75% a year for the next three years.
Tough lessons
1. You signed a contract. If you break the contract you deserve to pay a penalty.
2. Banks cannot afford to wave a penalty because they make so little on each mortgage.
3. IRD penalties are designed so that as rates decrease penalties increase. They are designed so that you could never refinance at a rate low enough for you to save money
Now the good stuff
1. Banks provide absolutely terrible disclosure on their penalty calculations. I have a very good understanding of how IRD penalties are calculated but cannot calculate penalties based on the legal disclosures from CIBC, RBC, BMO etc.
2. The people you talk to at the bank also have no idea how the penalties work
3. Your lawyer should have fully explained the penalty clause. The average life of a 5 year mortgage is around 38 months so most borrowers will pay a penalty to break their mortgage. It is your best interest to understand how the penalties work.
4. generally IRD penalties are calculated as
(your mortgage rate - some low rate)/12 * number of months left on your mortgage * your current balance.
i.e for Yogesh his penalty is
(5.1% - 2.36%)/12 * 29 * 124,000 = $8,200
Banks are required to give you all the inputs and most importantly where they got the “some low rate” from
3. If they don’t provide this info to your satisfaction. File a complaint.
The steps are as follows:
Be polite (bankers are people too)
ask them to tell you the complaints resolution process (They are required by law to tell you)
ask to speak to their manager.
(be polite but firm)
After you speak to the manager tell them you want to escalate the issue to their corporate complaints manager.
After speaking to the corporate complaints manager tell them you want to escalate the issue to an ombudsman
What does all this accomplish??
You may get a discount on your penalty but most importantly the bank will have to pay $2,000-5,000 for the ombudsman. (that’s the real win!)
Also file a complaint to the FCAC (www.fcac-acfc.gc.ca) they’re a government watchdog and a pain in the butt for banks as they contact us for every complaint.
4. Be proactive. Phone your bank up and get a payout statement as soon as you think you may want to payout. !!
5. Always demand that they include your contractual privilege payment when calculating the penalty. Banks are required by law to do this. They’ve been in a large class action lawsuit over it but they still forget to apply the privilege payment.
6. Most banks allow you to port your mortgage (sell your old house and buy a new house). This doesn’t break the contract so you don’t pay a penalty. If you move up to a bigger house they can increase your mortgage. If you move down to smaller house you will have to prepay a part of your mortgage. Either way this will save you most of your penalty. Caveat – you need to plan ahead a few months in order to do this.
7. Always take your payout statement and mortgage contract to your lawyer. They can tell you if they are overcharging you. Well they should anyways; not all lawyers were A students
8. Never get a cash back its cost is the same as a 15% loan and if you payout early its cost is the same as a 30-50% loan (due to increased IRD penalties).
Matthew
Feb 3 2010
I agree with Al above. The banks can rationalize all they want about the money they lose on mortgages that pay out earlier than the term, but the IRD or three-month penalty is merely a cash grab for the bank.
TD was unreasonable to deal with when we had to break our mortgage due to a life change (we were moving out of the area where they did not lend, thus we were not able to carry the mortgage with us). Everyone quoted policy and was really never willing to listen to what we had to say.
Yes, banks are in the business of making money, but exceptions can be made in certain circumstances. Canadian banks, however, are so rigid in their practices that the last thing on most bankers’ minds is truly forming relationships with their customers and doing the right thing.
don
Feb 15 2010
Get over it…locked in is locked in. You cannot have the best of both worlds. If you float, you take the risk that rates will increase or enjoy the benefits when they go down.
If you don’t want to take the interest rate risk, then lock in. You cannot do both without paying.
Lawyers will not do a class action suit. If anything, sue your own lawyer for not detailing this enough for you.
The banks provide safety of capitial and leverage and have products for every scenario. If you choose wrong, sorry.
As a depositor, I do not want my GIC rate to decrease because you made a bad lending call.
Leo
Feb 22 2010
I think I figured out a way to lower the penalty. First accept the blended rate for extending the term (usually for free). Then call back the next day and break the term. My goal was to go from a fixed to a variable mortgage to take advantage of the really low rates right now. For me the penalty went from 3500 to 1725. About half. ING has no other fees as long as you stay with them. The consultant was surprised by this, said that it’s totally legal and within contract, and even jokingly offered me a job.
Tina
Feb 26 2010
I’m with RBC too. I wanted to sell my house and port my mortgage to my new place and it took awhile for all the paperwork to be approved and processed.
Because my credit rating had worsened over the previous few years and I had been late on some payments (all caught up now!), they decided not to renew a mortgage with me….after my house was already sold!
Now I’m being charged over $8,700 on a $170K mortgage that I’m NOT voluntarily walking away from. Now I have no mortgage and hardly any money. I’m screwed.
Steve
Mar 4 2010
When does personal accountability come in? No one listens to their mortgage broker/specialist. We just quote the “best rate” we found on the internet and expect it to be matched or beaten without listening to the facts or reading the fine print.
I am having difficulty understanding how a person’s lack of planning or forward thinking is the lender’s problem. If one of my clients wanted to break their contract, I would expect serious compensation as I have already spent money based on those contracts - oh wait, that must be different because the banks make lots of money.
I don’t know how to break this to you, but the banks are corporations, not non-profit organizations. Maybe you will pay better attention next time.
J
Mar 4 2010
Steve, go back to the sty, you greedy pig.
Maybe if the terms of the agreements/contracts weren’t so convoluted, then we would have a better understanding of how the banks, and people like yourself, are bending us over.
It takes real skill to borrow money at a reduced rate, only to lend that same money at an increased rate and rip the customer off at any expense.
You should be proud of the service you provide. How many years of schooling did that take you to accomplish?
Glorified car salesman.
Josie Leeman
Mar 8 2010
MCAP MORTGAGE SERVICE ARE THE BIGGEST THEIVES IN THE MORTGAGE BUSINESS IN CANADA.
THEY HAVE VERY POOR CUSTOMER SERVICE, AND PLACE FEES IN YOUR MORTGAGE WITHOUT ANY KIND OF NOTICE
IF YOU ARE SEEKING A MORTGAGE THEN STAY FAR AWAY FROM MCAP MORTGAGE SERVICES
Pragnesh
Mar 17 2010
Just wondering if there is a document out there that states what the penalty would be for an open variable mortgage.
I am currently with Scotia and with National giving close to 5.5% cash back, I am really considering moving, but I am a bit scared because I am only 17 months into my 5 year term.
Any one have an answer on this?
Clive F.
Mar 18 2010
I am currently trying to break a mortgage that I have with Scotiabank to take advantage of the current low rates. I have 10 months left on this 5-year mortgage.
I have been waiting for two weeks now for Scotia to let me know the penalty amount I would have to pay to get out of the mortgage. My sense is either they are stalling and/or are working on figuring out a way to charge me as much as possible.
For me, the issue is not the penalty itself or even the banks’ intransigence when it comes to cutting people some slack in exceptional circumstances. (I have signed a contract and I expect to live with the consequences.)
Rather, it is the lack of transparency, real or apparent, in how the banks calculate the penalty. There appears to be all kinds of esoteric formulas, which vary from bank to bank, that are used in calculating that penalty.
In addition, the banks seem to have granted themselves the right to be “creative” when doing the calculation in order to come up with the highest amount that they feel they can charge you.
It’s no surprise that no one, even bank employees and mortgage professionals, can figure out for sure how much it will cost you to get out of a mortgage.
All this to say that I am greatly encouraged by the recent federal government announcement concerning standardizing the way the penalty is calculated. This is way overdue in my view.
Other than reducing the frustration and bad surprises, I see this step greatly facilitating decision making about whether you should break a mortgage.
At the end of the day, it’s all about having terms that are fair, consistent and clear when you sign that mortgage contract.
Leo
Mar 21 2010
to Pragnesh,
With a variable mortgage, the penalty is usually 3 months interest, but it should be plainly spelled out in your mortgage contract.
I have to warn about the cash back. First, it’s often only for first timers. And second, see above for problems with breaking mortgage again (usually the cash back is added to the penalty).
With the low rates these days, why would you want to get out of a variable open mortgage now? It’s going to take a while for your prime-x% rate to get above the current 5 yr fixed rate (3.75-4%).
The government is planning to raise the rate later this year, but it daren’t do it too quickly.
Pragnesh
Mar 25 2010
Thanks Leo only reason i am considering the cash back is paying off LOC that i have the cash back will pay off that. Does any one know if i have open variable mortgage do i still have to pay penalty. I thought there is none and i asked my bank rep couple of times and he confirmed on mine there is none. Also he was mentioning that usually cash backs are charged back to customers or added to their mortgage amount is that true.
Dino
Mar 26 2010
My outstanding mortgage balance is $105k and I have 3 years left. RBC want me to pay $7,800 if i sell my house.
Well, I do not mind paying those penalties but they never ever mentioned anything about penalties when I got the mortgage from them.
I sat with them at least 3 times and no one ever mentioned that. If they had, I would never done a closed mortgage.
PB
Apr 19 2010
I called MCAP for a payout figure last Friday. My mortgage comes due August 1st of this year.
Not only are they quoting me a payout of 3 months interest penalty, but they did NOT deduct the 20% prepayment privilege from this calculation AND they are trying to add an EXTRA $500.00 re-investment fee! I checked my documents, and nowhere is there mention of a re-investment fee.
Seriously…this is highway robbery! I work in the financial industry and I would NEVER recommend this company to my clients…never!
Dan Beresford
May 5 2010
I’m probably going to be very unpopular because of what I’m going to say. Don’t get me wrong, I feel very bad for all the people who have paid and will pay penalties on their early mortgage payouts.
I am an ex-banker who specialized in mortgages and I’m an ex-mortgage agent. I will be writing an article about payout penalties to be published in a July in a Canadian mortgage newsletter.
I understand how you feel but… it’s not the mortgage lender’s fault.
1) Did you read your commitment letter and did you read your mortgage disclosure form? Payout penalties are mentioned on those documents BEFORE you even get a mortgage. If you didn’t understand what you were reading, did you ask your mortgage rep what the paperwork meant?
2) Did you choose low rates instead of prepayment options and fair payout penalties?
One of the banks I worked for did not have the best mortgage rate, but they had low payout penalties and great prepayment options. Every day, people chose lower rates and gave up prepayment options and lower penalties. It didn’t matter if it was a consumer or a mortgage broker/agent, all anybody wanted was a low rate.
3) All fees and charges are discussed in your mortgage documents. It is mandated by law. Did you review your mortgage documents when you sat down with your lawyer or did you just flip through them and sign for the mortgage?
I’ve seen people walk into their lawyer’s office sign for their mortgage and never read a thing. If you don’t have time to read the paperwork on the day you sign for the mortgage, get a copy a week before you meet the lawyer and read it. If you don’t understand something, ask your mortgage rep or the lawyer.
4) In a contract, the terms are binding. You borrow money and agree to repay a set amount in a set period of time and you agree to a set interest rate. Why would you expect the mortgage lender not to collect their money on a contract? When you buy or sell a house, you agree to the price. If you try to break the contract or change the terms, you get sued. When you lose, you pay a penalty. What’s the difference?
5) Portability and assumability. Did you look at those options when changing properties? Most mortgages are portable and assumable, unless of course you gave those options away to get a very low rate.
6) Blend and extend. You may not get the low rates on the market today but you will save on penalties and get a lower interest rate if your interest rate was higher than rates today. The rate will not be as low as rates today, but it usually works out lower than what you were paying.
7) Mortgage lenders sell mortgage pools to investors. They guarantee the investor a certain rate of return over time. When a mortgage gets paid out early, the investor still gets paid the guaranteed rate.
Who buys those types of investments? The Canadian government, mutual fund companies, pension plans, investment house, portfolio managers, to name a few. If they don’t earn interest on those investments, why would they buy them? If they don’t buy them, where will the money come from that you borrow to buy a house? Where will your pension money come from? Where will your RRSP money come from?
Like you, I’m not a fan of payout penalties but I made a contract with my bank and breaking that contract affects many people. I made a promise to my bank to pay them a certain amount of money over time if they would loan me the money up front. They honoured their part of the bargain. I need to honour mine.
bdiegow
May 6 2010
I had a stressful dispute with MCAP over the interest rate that they wanted to change after the commitment letter was accepted.
Generally, the customer service was good, as I always have a live person to talk to each time I called.
Prior to seeing a lawyer, I decided to call their ombudsman, who looked into my case, called me back in less than 24 hours to apologize and saying they will live with their commitment despite their error. How about that?
jim
May 8 2010
Could you expand on how you got the rate reduced by accepting, then rejecting a blended mortgage, please, Leo.
Leo
May 9 2010
To Jim: First of all, it’s all in the math. 3 months ago when I was doing this, the math was in my favour. It may or may not be now. Do the math.
First you need the formula that the bank uses to calculate your penalty. It’s usually the GREATER of (a) 3 months interest OR (b)the interest rate differential calculation (IRD).
I called my bank (ING) and got their formula for the IRD. It is (A-B)/C * D * E where:
A= the current yearly interest rate you are paying as a decimal. (Some banks will use the posted rate at the time the mortgage was given instead of the discounted rate. This increases the IRD.)
B= the current yearly interest rate the bank is offering for a term as close to or lower than the remaining number of months left on your term, as a decimal. (Some banks will use the discounted rate instead of the posted rate. This will increase the IRD.)
C= number of payments per year you make.
D= your current principal outstanding.
E= the number of payments left in your term.
On top of this, some banks may also demand repayment of any cash back that they gave you on top of the penalty. You need to read your mortgage documents.
I’ll use my numbers as an example: I had a 5 year fixed rate that I pay monthly of 5.1%, with 16 months left on my term. They were offering a 1 year fixed at 2.65% and a 5 year at 3.89%.
I had a remaining principal of $107,774.31. If we do the calculation, we get
(.051-.0265)/12 * 107774.31 * 16 = $3,520.62.
They offered to blend and extend the mortgage (for free) to a rate of 4.21% if I extended for 5 more years. Remember their current rate was 3.89%, so 4.21% is a blend of what I had (5.1%) and the current rate.
Before I accepted I did the calculation again:
(0.0421 - 0.0389)/12 * 107774.31 *60 = $1,724.38
This is less than half. What they couldn’t quite get was that because I was now multiplying the amount by 60 months, they thought the amount would have to be more than when I only had 16 months left.
It has more to do with the differential: (.0421-.0389)*60 is less than (.051-.0265)*16.
I, of course, accepted the blended rate.
I called back a couple of days later to break the mortgage and go variable. (This was why I was breaking the fixed rate as the variable was 1.95%).
I was then told that I could do this right away, BUT that it wouldn’t take effect until the next payment date (about a month). I was guaranteed a rate until then, so I went for it.
As it turns out, during that month 2 things happened:
1) the rate for a 5 year fixed went up to 4.39% and
2) the variable rate went to 1.75%.
This was a win-win for me as the IRD just went down again. As a month had passed, my new principal was $107,427.56.
Let’s figure out the IRD again using the new numbers:
(0.0421-.0439)/12 * 107427.56 * 60 = $966.84.
Wow, quite a difference from $3,520.62.
I should note that these penalty amounts are without taking contractual prepayments into account, so the actual amounts were actually a bit LESS. I actually ended up paying $766.74.
I should also mention that ING had no other fees as long as I renewed with them. If I wanted to take my mortgage elsewhere, there may have been closing costs and lawyer’s fees on top of this, but I only wanted to change to a variable rate.
Through this whole thing, the ING bank was nothing but helpful. They do not use posted rates, as all of their rates are discounted and shown online. There is no haggling and no cashback offers.
They are straightforward and fair (something sadly missing in most banks today). All of their mortgages are portable and assumable. They also have some of the highest prepayment privileges at 25% increase per month and 25% per year without penalties. Most banks are at 15/15.
This means if you come into a bit more money, you can pay off your mortgage sooner without penalty. This is the reason they call their mortgages, “UNmortgages”.
Hope this helps you and others.
Leo
May 9 2010
To Dan Heresford: I agree totally with what you said. It’s about personal accountability and responsibility. The only thing that I wish is, that the banks were a bit more forthright about their offerings, so that people could compare apples to apples.
What we’re missing today is respect and fairness on BOTH sides. Banks count on the fact that people won’t read their contracts (or don’t care about penalties, remember that people aren’t thinking about the end of their mortgage when the get it) and people view banks as faceless corporations that are just money grubbing scum.
That’s one of the things I appreciate about ING. They seem to be fair. I should mention that I have nothing to do with ING other than being a happy borrower and investor.
I don’t mind losing a couple of tenths of a percent on a product to be treated fairly. After all, what’s a $1000 over a 25yr mortgage when it costs $10,000 to get out of it when you are forced to move after a few years due to something unforseen.
RJG
Jun 23 2010
We are all living in a so called democratic society that is run as a dictatorship. Right from the top down. Politics, commerce (banks) and the rest of our system.
My wife and I are at the point of downsizing due to my health and have sold our home and purchased another with a $60,000 less mortgage. We were told that we could port our existing mortgage and pay a $3,700 penalty.
Was all just words. Now reality strikes…no porting of mortgage, actually no mortgage at all…been told to go elsewhere and we will have to pay over $13,000 for breaking the mortgage contract. lol
Okay, so living in a dictatorship is that way. We no longer are able to make a choice or decision, whether rich or poor, just do as we are told. Sit down and shut up and we will decide your fate.
We do live in a democracy and also have the Charter of Human Rights, yet who at the top is protecting our rights?
That is the real issue and problem with the banking system. They are allowed to do what they feel is right and okay.
I agree with most comments. We have no voice and the legal system is not being allowed to address this issue.
If we all continue to sit back and lose our rights, soon we will be just like a third world country…the rich ruling over the poor and the rich owning everything.
Robert Manahan
Jul 27 2010
I’m going through a divorce and the IRD penalties will push both of us out of the owning market because of the high $$ we have to pay.
I was never informed of all the implications from my broker or AGF…and they charge you for EVERYTHING, fee here and fee there, everywhere a fee. Oh wait, I’m breathing, probably a fee.
All I can do is live in the same house as my ex and wait for the IRD to drop. That’s the answer, pathetic. You might think extenuating circumstances might be an exception, as in most other businesses.
Faceless companies with customer service agents who know NOTHING about what they are supporting, again, pathetic.
Heather
Aug 24 2010
Bridgewater doesn’t use their interest rate today that they lend out at - they use the BOND rate to calculate the IRD. So that’s what the bank would get if they invested my outstanding balance in the bond market vs my 5.25% 5yr fixed mortgage rate. Talk about the lowest common denominator!!! That’s why they want eight grand to end a $110,000 mortgage. 3months interest could never come into this equation.
scott
Aug 24 2010
My dad lives in Canada and I live in the USA. He told me that he cannot get a mortgage in Canada that doesn’t include a prepayment penalty. Is that true?
Prepayment penalties are not common at all here in the USA. You can make extra payments and pay it off with zero penalty.
Lois
Aug 29 2010
This is a great discussion. I’ve learned a lot.
Thanks to you all for the explanations, details, calculations etc. It really helps to see them laid out like that.
Cindy
Aug 31 2010
As far as I can see this website is only a place to post your comments and disbelief in what is actually happening to the hard working sector of this back breaking, money grabbing financial world in which we live. Banks are regulated by our government. Start making it public, contact your local papers, Member of Parliament, in addition to this website to let everyone know what is going on with your situation. Passiveness does not work. May be start with dealing with your own local credit union. Tell them what has happened to you, how it has affected you, so they don’t make the same mistakes as the big corporations (too many fat cats at the top doing diddly squat). I know, tomorrow, I will be contacting my local Member of Parliament to express my concerns on this disgusting conduct of business which should also be reported to the Better Business Bureau.
Allan
Sep 1 2010
We have recently tried to refinance to keep from going bankrupt. We were prepared for the penalty we were quoted of $12,000.
Then, when it was time to pay out with an approved refinance, we were told $27,000 and only if we sold our house.
Now the amount is astronomical, based on what the supervisor at Home Trust says. We are about to lose everything and they won’t do a thing for us.