Mortgage penalty shocker, part two
May 27 2009 by Ellen Roseman
This is becoming a hot issue as the penalties for borrowers trying to get out of fixed-rate mortgages just keep going up. I highlighted it here two months ago and have done recent Star articles here and here.
I’m concerned for a few reasons:
– When it comes to calculating an interest rate differential penalty, lenders can do what they like. There is no standard formula, nor is there any federal legislation or oversight. So, how can consumers challenge the bank’s math?
– Going to the bank’s ombudsman isn’t a solution. Most don’t even deal with complaints about rates or fees. Their view seems to be that if you had read your mortgage contract, you would have known a penalty was charged to get out early. You didn’t need to be told of the risks when taking out or renewing the mortgage.
– Using the mortgage prepayment privileges can make the IRD lower. But do banks tell borrowers? Not in every case, that’s for sure. Why isn’t there a law that this option must be made available to clients?
– Selling your house because you can’t afford to stay there is bad enough. It’s worse when a giant fee added at closing can swallow up whatever rewards you expected to make from the sale. Shouldn’t lenders warn financially stretched borrowers that they should plug the numbers into their planning?
After reading the comments below, I hope you agree that something needs to be done to help borrowers. These IRD penalties disappeared for a few years, but now they’re back with a vengeance.
SC
May 27 2009
I recelty closed the sale of my condo and was charged a $20,000 penalty. My father made a prepayment of 20% just prior to closing, which lowered the penalty to $15,000. Now I’m still in a terrible position.
My mother had given us a portion of her line of credit ($20,000, on which she was paying interest) so we could afford a down payment for our condo. Now I’m in the position of telling my mother her money is gone, because PC Financial is going to keep it.
Given the economic climate right now, I maintained no equity from the sale, nor did I maintain the money I had put down.
Not only was it a hard decision to regress in terms of real estate, but we are now facing the tension of having to absorb this huge amount.
Tensions are rising. I’m sick to my stomach every day over the stress of allotting the net proceeds to involved parties when there just is no money left. PC Financial has kept it all.
I wrote a letter to Galen Weston, CEO, as follows:
Dear Mr. Weston:
I have been a faithful consumer of PC products since I was a young child. I have always been impressed with the poise and originality with which the brand has been marketed. I’ve also been impressed by the measures PC has taken to forge awareness among its consumers on matters environmental.
I have always viewed PC as a brand of the people and was therefore compelled to choose PC Financial as the lender from which I would acquire my mortgage.
Unfortunately, my opinion of PC has been substantially soured in recent days and I feel it is my responsibility to warn family, friends, colleagues and consumers in general of PC Financial’s attempt to retain a substantial penalty from my sister and me upon the closing of our condo May 22.
I did not sell my condo and retire my mortgage with PC because I was interested in acquiring a lower interest rate. I didn’t sell my condo so that I could live the high life with the net proceeds. I sold my condo because I wanted to remain self sufficient and save money for future investments.
I am moving from my Yonge street condo (complete with beautiful amenities) to a townhouse at Keele and St. Clair, where I will rent a room for $500 a month. Clearly, I am a frugal Canadian citizen attempting to maintain financial autonomy amid an uncertain economic climate.
I assure you that the decision to sell my home was a difficult but necessary choice, as I could no longer afford to live there.
I have admired President Choice’s sense of public responsibility, but I’m afraid that is no longer true. Public responsibility goes beyond diminishing the use of plastic bags and extends to allowing ordinary citizens to maintain financial autonomy.
If I am forced to pay the $20K PC Financial wishes to retain from my condo sale, I will be in debt for years to come. I risk going into bankruptcy. Clearly this is troubling for a hardworking teacher who is doing nothing more than attempting to provide for herself.
I am not looking for a handout. I just cannot absorb the $20K and I would hope that the financial sector of this empire that champions public responsibility would reflect that same public responsibility in their retention of penalties.
Rob McLeod, CIBC spokesman
May 27 2009
Hi Ellen, your query to PCF regarding SC and the prepayment fee for the mortgage was referred to me.
As you know, banks are currently offering historically low interest rates on mortgages, which benefits clients buying a new home or borrowing for renovations or other purposes.
As a result of these low rates, prepayment charges for breaking existing mortgages that were taken out when rates were higher have risen, since they are based on the difference in the rate of the mortgage being prepaid and the rate in effect today.
Early prepayment charges for mortgages are outlined and disclosed in the documentation provided to clients when they take a new mortgage, or when they renew their existing mortgage.
As always, clients should consider their personal financial needs when choosing the term of their mortgage, particularly if they feel it is possible they will need to break their mortgage contract before the term is up.
It is always advisable for mortgage holders to check with their financial institution about any penalties that may apply prior to taking a decision to sell their home.
In this case the client did not contact us prior to agreeing to sell the property. We have responded to Ms. C.
NK
May 27 2009
I tried to renegotiate four mortgages wth TD. I was given penalty fees on April 21st, then again on May 15th.
Here are the penalty fees on April 21:
$15,800
$5.200
$7,200
$4,600
Total = $32,800
Here are the penalty fees on May 15:
$22,395
$8,974
$11,504
$7,983
Total: $50,856
My plan is to make a 15% prepayment in Dec 2009 and another in Jan 2010, then refinance elsewhere.
Unfortunately, what I noticed at TD is that all their mortgage officers are teenagers, just fresh from their training. They are not empowered to negotiate.
Slowly moving my assets from TD.
AG
May 27 2009
As an independent mortgage broker and a former senior bank employee with 27 years of banking experience, I find it alarming that so many bank personnel have no idea how to process clients’ requests for credit — and more alarming, the amounts of errors involved in calculations.
I understand there are calculators available to the employees, but unfortunately if the incorrect information is entered into the calculator, you get the wrong answer!! It’s as simple as that!
The lack of accountability is atrocious - with senior bankers only getting involved when damage control is needed. What is wrong with that picture?
I don’t rely on the bank’s calculations any more and I suggest my clients should not either. There are many available IRD calculators free online and they are spot on.
The only problem a client is faced with is the possibility of the IRD increasing during the time of application for refinancing to the time the transaction completes. The IRD changes each time the interest rates change.
Also, some lenders offer an “open” period during terms greater than 3 years. For example, at some institutions, the open term occurs within the last 2 years of a 5 year term at which time a 3-month penalty is the max.
Individuals should check for the possibility of an “open” period in their closed mortgages and also for the ability to make lump sum prepayments to reduce the final penalty.
I love your column!
NK
May 27 2009
We are in the process of trying to sell our home. I requested a mortgage discharge statement from TD Bank over a month ago and they have not yet provided me with one.
In order to cover what we believe might be the penalty for breaking our mortgage contract early, we have had to increase the price for our house (making it difficult to sell).
Due to the current economic climate, my husband was laid off a few months ago. I am currently on maternity leave. Keeping up with our mortgage payments is not easy and prompted our decision to sell.
However, if we are going to end up owing money because of these penalties even after selling, it does not make sense to sell. At the same time, I am not sure how much longer we will be able to cover the monthly mortgage payments.
After reading your article, I am nervous that the penalties will be even higher than we thought. I will update you when I finally hear from the bank, but considering how long it is taking to get a simple discharge statement I am very nervous about what they are going to say.
AB
May 27 2009
We took a TD Canada Trust 5 year fixed closed mortgage at 5.35% in Sep 2006 (it was blended with a previous smaller mortgage from our old home).
Recently we met with a bank representative to discuss our options, either paying the penalty and getting a new mortgage, or signing up for another 5 years at a lower blended rate.
We were truly shocked at how poorly informed the person who met with us was.
We had estimated the IRD penalty at about $7,000 plus discharge fees. We were quoted an amount of just under $12,000.
The rep was unable to provide an explanation (“that’s what the system calculated”), but when we pushed she got someone on the phone who explained that apparently we had received a 1.4% “discount off their posted rate” in place at the time.
We don’t remember receiving this “discount”, but it’s consistent with rates on the Bank of Canada website.
However, does ANYBODY ever pay the posted rate? I believe these discounts should be printed within the mortgage agreement to avoid confusion.
As for the blended rate, the rep quoted us 5.36% for 5 years, which is HIGHER that what we’re paying now!
Once again, we pushed, another rep came in and quoted us 5.11%, still not low enough in our opinion.
We were expecting something in the range of 4.5 - 4.75% or so.
Ultimately, we decided just to increase our payments on the current mortgage. We’ll revisit the issue perhaps next year and see where we stand.
I can assure you that we will find a new lender at that time. This was just another poor experience I’ve had with TD Canada Trust.
DP
May 27 2009
I have an excellent story for your column regarding interest rate differential fees.
I work for Scotiabank but chose to have my mortgage with TD Bank when I purchased my home in Calgary last May. I then accepted a transfer with Scotiabank to relocate to Atlantic Canada.
I relocated with Scotiabank to New Brunswick on Feb. 9th. Scotiabank was going to buy my Calgary residence at a premium (higher than current market value) and would cover a three month interest penalty, which is a standard charge when paying out a mortgage early.
Our relocation package does not include Interest Rate Differential costs, nor do I believe has anyone encountered this issue before that has been transferred.
However, to my surprise, when I received the mortgage discharge statement to sell my property in February, TD Bank was charging me an interest rate differential of approximately $22,000 plus a $300 reinvestment fee, instead of a typical 3 month interest penalty!!
So now, of course, there was a substantial shortfall between funds available to pay out the mortgage and what the mortgage balance was when this interest penalty was included.
To pay out the mortgage on Feb. 13, 2009, the interest rate differential was initially $22,000. However, since then, interest rates have dropped even further.
This means that my interest rate differential is now $33,522.15, plus a $300 re-investment fee, for a grand total of $33,822.15.
TD Bank refused to waive any portion of these fees so that I could sell my house. I was initially unable to obtain a personal loan to cover these fees so that my house could be sold at a higher than market value. My mortgage payments also fell into arrears because I was now paying for two residences.
I escalated this issue from the branch level to the TD District Vice President, Nancy Leary and the TD Ombudsman. Neither the DVP nor Ombudsman would reduce the fees so that I could sell my home.
The DVP sent me a letter stating, and I quote, “Please be advised when you received your new TD Canada Trust Mortgage, a copy of your Mortgage Commitment was provided . . . which clearly outlines the agreed to Prepayment Privileges including the information on Interest Rate Differential process. Therefore we are unable to comply with your request for reimbursement of these penalties.”
They were prepared to foreclose on my residence in Calgary rather than waive/reduce the fees.
As I write this email to you today, TD Bank has reduced the Interest Rate Differential from $33,522.15 to $28,463.98 plus still charging the $300 reinvestment fee.
The only reason TD Bank reduced the differential fee is because of the efforts of a Calgary company called Mountainview Mortgage Ltd., which will work with clients such as myself to reduce bank penalties and fees.
How they reduce fees, when the DVP and Ombudsman wouldn’t, I don’t know, but they are very effective and I highly recommend this firm.
I have now obtained a loan with TD Bank to pay the interest rate differential so that my house can finally be sold on June 5th. It was either a loan or face foreclosure.
I am a single parent. I care for my three children and my mother who is fighting breast cancer. My life is challenging enough without having to deal with a foreclosure, so I chose the loan.
Until I tried to sell my home in Calgary, I had never heard of an interest rate differential. After dealing with this issue for five months, it is highly unlikely that I will ever purchase a home again.
ML
May 27 2009
I have a similar problem with Communication Technology Credit Union (Comtech). I was told about the IRD penalty, but there was no mention of a prepayment lump sum.
If I hadn’t mentioned to her that I had read you could put a lump sum payment to reduce the penalty, the Rep I was talking with would have never mentioned it to me. She was quite surprised when I talked to her about it — and their lump sum is a whopping 30% of the mortgage balance (the article I read indicated 20 - 25%).
Even then, she tried to discourage me, saying they had to have the money before the mortgage can be cleared and on top of that I will have to pay a discharge fee of $375. Clearly, they are discouraging clients to break their mortgage.
I wanted to take advantage of the lower interest rates as I am 50 years old and want to reduce my mortgage when I am 55 or 60.
She indicated that if I get the mortgage with them again, then I will not pay any penalty but it has to be locked for another 5 year term and the interest rate will be the differential between my current mortgage and the mortgage they are offering right now.
My potential mortgage rate will be 4.49%, which is still a great deal of money considering I saw interest rates as low as 2.95% for 3 years.
BTW, I had asked her what my penalty would be for next year since this is the 4th year of my term and she never replied to me.
DS
May 27 2009
I have a similar story with TD Canada Trust. I sold my condo in March this year and am closing May 29.
I am leaving to move in with my girlfriend and assumed that the penalty to break the 5 year closed mortgage would be 3 months interest penalty. (I was 2 years into a 5 year $172,000 mortgage.)
I spoke to my branch about the closing and was told that the fee would be about $7,000 (this was before the rate dropped, so the fee will be higher now)!!
I was shocked over this and when I asked the financial adviser to explain why this was happening, all she could say was that the bank has the right to chose the IRD.
I asked where that was listed in the mortgage and she could not explain this to me, she continually kept saying that was what the computer was telling her.
I met with her twice to ask for an explanation as to why the bank was doing this and to explain the figures and all she kept saying was that “it was in the computer”. She had no explanation as to why the bank was doing this.
I asked to see the manager of the branch and was told that he was out for 2 weeks (which he was, when I asked for a replacement I was told that there was none). I asked for more clarification and was told to “go and get a lawyer if you don’t like what the document is saying.”
The real kicker here is that I asked about putting down the 15% and was told that was not necessary, as the bank assumes that amount and calculates the penalty based on the mortgage less 15%!!!
I asked how that was possible and she again could not give me an explanation. (This woman was not a mortgage specialist but a financial adviser.)
I got the distinct impression that she was trying to stonewall me at every turn, either she is not qualified to deal with mortgages and was trying to cover that fact up with intimidation or she was trying to purposely stonewall me. I do not know.
I finally was able to get in touch with the branch manager and actually found him quite helpful. We went over the mortgage and the first thing he suggested (as I suggested) was to pay down the 15%, which I was able to scrounge up from friends and family as a short term 1 month loan.
However, I still pushed to see if the bank could do anything to reduce the penalty. He finally called me back last week and said that TD Canada Trust cannot do that “because if they did it for me they would have to do it for everyone.”
I am so frustrated because I have been with TD for 30 years and they treated me with indifference at every turn. My girlfriend and I will be buying a house in 2010 and the only thing that TD Canada Trust has done is guarantee that I will NEVER use them for a future mortgage or loan… they won this battle to get the roughly $7,000 off me but will lose out in the end for any future mortgage I get…
If they had offered me a chance to put down some more money or ANYTHING to make it look like they were willing to help I would have felt better, but they treated me with indifference.
I did not make a lot of money on my sale of my property and whatever little I did make they are taking. That amount may not seem like a lot to them, but it is all that I have now that I have sold my condo. They know that and could care less…
JimE
May 28 2009
I don’t feel all that bad for these folks who have to pay these penalties to get out of their mortgages. Come on, people, don’t you read the contracts before agreeing to them!?!
Looking to blame financial institutions is just a way of masking the truth… Let’s face it, you didn’t read or understand the mortgage agreement, and now you want someone else to take the fall for it.
You signed an agreement that says you’re going to pay x% interest for y amount of time. You entered into a contract. Now, interest rates are x%-3%, and you want a new deal?? Why are you so special that the financial institutions should agree to this?
If interest rates were x%+3% instead, and the bank came to you and said “we want to adjust your fixed rate because interest rates have gone up”, you’d go nuts. But now the shoe is on the other foot.
Same goes for the prepayment issue. Why is it the bank’s fault if you don’t know that you can prepay 10% or 20% of the principal each year. It’s written in your contract… take the time to read it.
But, no. People like SC quickly sell their home, and then even more quickly, look to blame the banks because they think they’re getting a raw deal. It would have taken just a few minutes of her time to check the contract or call her bank BEFORE selling the condo.
A good (but expensive) lesson learned.
Tejas
May 28 2009
The biggest scam is that they take into account the discount of 1% or 1.5% they gave you off the posted rate when they calculate the IRD.
Suppose you are in a 5 year mortgage term at 5.5%, which you got 3 years back, so you have 2 years left now.
Suppose the interest rate now is 3.5%, so your penalty should be based on 5.5% - 3.5% (i.e. 2 %).
But if the posted rate was 7% when you signed 3 years back (but you got it for 5.5% since you negotiated or a mortgage broker negotiated for you), guess what? They will charge you a penalty based on 7% (posted rate then) - 3.5% (current rate) instead of 5.5% (what you are paying) - 3.5% (current rate).
Tejas
May 28 2009
This is how TD calculates the IRD.
Note: they will take into account the posted rate when you first signed your mortgage, not the rate you are paying in your current contract.
So basically, they will take into account the discount they gave you off the posted rate back then when you signed for your mortgage.
To estimate the Interest Rate Differential amount:
Step 1: ________ (A) the current interest rate under your mortgage expressed as a decimal (for example, 6.75% = .0675)
Step 2: ________ (B) the current interest rate that we can now charge for a mortgage term offered by us with the term closest to your remaining term. The interest rate will be our posted interest rate for the term minus the most recent discount you received
Step 3: ________ (C) A - B = C, which is the difference between your current interest rate and the interest rate in B above (write C as a decimal)
Step 4: ________ (D) the amount you want to prepay
Step 5: ________ (E) the number of months for the remaining term of your mortgage
Step 6: ________ (F) (C x D x E) ÷ 12 = F, F is your estimated Interest Rate Differential amount.
Dave Ings
May 28 2009
Ellen, I admire your work but on this particular topic I must agree with JimE and suggest that you are way off base.
A deal is a deal and JimE points out you wouldn’t support banks re-opening mortgages when rates go up, would you?
Consumers always have the option of taking an open mortgage and avoiding the whole problem. While they entail more short term risk, most studies suggest they save money over the long term.
Tejas
May 28 2009
I like ING Direct. They allow you to make a 25% prepayment on your mortgage annually without any penalty .
If you break your mortgage, they calculate the IRD as if you have already made the 25% prepayment, which greatly reduces the penalty you pay. You don’t have to actually make this 25% prepayment while breaking the mortgage, but they include that in your IRD calculation, which is great.
With other banks, you actually have to physically make the prepayment allowed either through your savings or line of credit etc. if you want to reduce your IRD penalty.
Ellen Roseman
May 28 2009
To JimE and Dave, I agree that penalties are in order when people lock into a fixed term and want to get out early. But lenders have to do more than write contracts telling people that a penalty will be charged.
Hoe helpful is that? Most contracts are hard to read because they’re drafted by lawyers who don’t want people to read them. If they did, they would use plain language, examples, bold print warnings and graphics to make them more inviting.
Taking a five-year mortgage is seen as a less risky option than getting a variable rate. But in a recession when rates drop sharply, the five-year contract is much more risky because of the IRD penalty.
If you want people to make an informed choice when they opt for fixed over floating rates, lenders have to tell them about the risks of getting out early when they take out the mortgage in the first place — and tell them again when they ask about renegotiating or selling their homes. Train all staff to get the message across clearly and not rely on a complex document no one reads.
Life is unpredictable. You can’t blame people for signing long-term mortgages that allow them to avoid the ups and downs of interest rates. Lenders often advise first-time homeowners to take the safe route.
But it’s not so safe if the same rate swings end up costing fixed-rate borrowers $20,000 or $30,000 if they have to take an early exit because of job loss or reversals.
I’m not saying mortgage penalties should be outlawed. But I want banks to make a real effort to tell people how damaging they can be. It’s a communication issue.
I’d also like to see rules for how the IRD penalties are calculated. Banks could publish them on their websites and provide calculators for people who want to know in advance what they may come up against if they get out before the term expires.
Finally, lenders should tell people that an IRD penalty can grow substantially in a falling-rate environment. Any delay can be costly. People shouldn’t make decisions based on an early quote that turns out to be much too low.
Scott L
May 28 2009
Below is the letter I sent to complain about HSBC services to the Canadian HSBC Ombudsman:
Dear ombudsman:
My reason for contacting you is simple. I have been grossly overcharged on my mortgage prepayment penalty.
Some time ago, I was having lots of financial problems and struggling to pay my bills, my line of credit was growing and I wasn’t able to recover in any way.
I initially approached my branch to extend the line of credit, as I believed at that point I could indeed recover. That help was not forthcoming.
I again sought help to reduce the cost of borrowing. I met with my local advisor in the branch and again explained that I wanted to extend or renew (whichever term is best applicable) to resolve the growing debt.
I’m a married father of 5, my most recent having been born just back in January. I needed to resolve this situation urgently and for the long term. This is about surviving.
After some discussion, explanation of the extensive ‘fines’ imposed by HSBC, it was recommended to convert the line of credit to a loan and deal with it that way. I did exactly this. I borrowed $18,000 and after completing all the paperwork I received the funds.
To my surprise, the loan was $1,300 more than requested. My local branch explained this was ‘insurance’ — all five years worth in advance.
So, not only was I paying interest (at a rate higher than my mortgage), but I was also now paying interest on ADVANCED fees. Of course, they would be refunded if I paid off early - not much chance of that now, was there?
Though I recognise this might have been in the fine print somewhere, it was not at any time explained to me before the loan had been completed - but now I was stuck, no room to manoeuvre.
While the net effect was to clear my ever growing line of credit, it did nothing to reduce my outgoings. Needless to say, my debt grew more still (and now by an additional $400 per month for the loan) and I was literally left on a large number of occasions, at the store, with insufficient funds.
I even had to work from home as I could not pay for my train travel to my place of work. The advice was obviously unsuitable in my situation and forced me re-think from the ground up.
Since I was now at serious risk of failing to pay my bills, which would ultimately end up in losing my house, I decided to go back to my original idea of re-doing my mortgage and actually reducing my payments, so as to manage everything once again. I was struggling and couldn’t risk losing the roof over the my family’s head - the rest of our lives were already on hold.
I wenr back to my financial advisor, who did all the calculations and worked out I could consolidate everything under a new mortgage term, with reduced interest rate, and pay a cancellation fee based on industry standard practice (that is, approx 3 months interest or approx $4,000 in my case).
Of course, I didn’t want to pay this much, but realising the gravity of my situation, knew I had no choice but to consolidate the debt.
I approached my local branch to confirm the actual balance of my loan (without the hidden advance insurance charges) and the cost of breaking the mortgage. They responded with an IRD penalty calculated at $7,779.80.
Well, the only HSBC advertised rate that I could find for a 3 year term is 5.44%.. My rate is 4.94%…There is no loss for HSBC…
It’s worth noting that I was asked at this point if I wanted to extend the loan if I was having difficulty. The answer was no as I already was in deep enough and needed to consolidate it, not extend it.
My local branch asked about my intention to move the mortgage. I was informed that HSBC is now offering 3.99% for 3 years closed, perhaps a last minute attempt to recover my business. But this offer was much too late and only days before funding the new mortgage…
Why wasn’t this rate offered to me 2 weeks earlier when we started the discussion?
Why wasn’t the option of refinancing my debts through my mortgage offered last year when we reached out for help and were pushed into HSBC Debt Consolidation loans — loans that are amortized over a short period of time, with higher rates, higher payments and hidden prepaid insurance fees?
On closing, the final costs (which I was TOTALLY staggered to note) were more than $10,000. I could not understand why I was charged this totally unbelievable sum.
Given the economic climate, my personal situation and the fact I am trying to dig myself out of a deep hole, I am dumbfounded as to why HSBC has in fact buried me and my family even deeper.
GC
May 28 2009
I went to my bank to find out the cost of breaking my mortgage and was told it would be based on the IRD.
So I plugged in my current fixed rate, subtracted the current 3 year fixed rate (3 years remaining), which came out to be roughly 1.2%, giving a penalty of approximately $11,000.
However, the bank quoted me at $24,000 instead and I was appalled.
Apparently, the correct calculation is to include the discount I received in the IRD. So this would in fact be the posted rate when I got the mortgage (1.5% higher than what I have currently at 5.35%, the current rate).
My IRD almost doubled, doubling my break fee. If this tiny but rather important detail had been given to me, I would’ve just gone with ING Direct, which would offer me the same rate without a discount.
Instead, staying with my current bank as a loyal customer to get this “discount” actually penalizes me.
NK
May 28 2009
My issue with TD Canada Trust is much the same as what you wrote about.
1. I contacted the bank a few months ago on 3 different occasions to determine my mortgage penalty rate. The representatives at TD Mortgages (telephone line) quoted me a number of approx $2K.
2. This amount was within my tolerance and prompted me to list and sell my property.
3. When I contacted the bank branch on May 21, 2009, the representative quoted me a number closer to $10K, five times higher than the original quote.
4. I questioned this amount and the branch rep said sorry, they cannot be held accountable for information relayed by mortgage reps on the phone. I find the response disgusting and a “Don’t care” approach towards a legitimate issue.
5. I contacted the Branch Manager and his response was sorry, I can’t help you because it was not one of staff from the Branch. When I quoted content on the website, he was not interested. When I asked for the issue to be escalated, once again a don’t care attitude.
When I asked who the next senior person was, no name or contact info given and the only comment was “Someone will call you back.” When asked if he was interested in retaining my business, no response and no care.
I even asked if there’s anything you can do to help and he said no, sorry, it is what is stated in the contract.
I did some research and found this to be a breach of the company’s Code of conduct.
I did my own research and found the name of District VP Steve Winters. I left Mr. Winters a message to call me back.
6. I have sold my property to close on June 1st, 2009. I will be purchasing a property in the next few months — and no levels of TD staff have expressed interest in my business.
Overall, the bank has been misleading and provided no help to resolve this issue. Financially speaking, I borrowed $168,375 in March 2007 and was paying $487.25 bi-weekly for past two years.
My remaining principal is $158,400 and now the bank is telling me my discharge fee and amount owing is closer to $169K. This is absurd, considering I am paying the bank more than what I borrowed (i.e. my payments over the last two years = $0) and all through the home selling process the bank misled me.
RL
May 28 2009
My ex-wife and I have finally sold our home. Four months ago, the penalty was $4,000. We called this week and they have now told us it would be $14,500!!!
If rates go down again by July 10, it could get up to $20,000!!
I will be calling them again to see if they can give me some kind of extension to buy a new home, instead of the 3 months they have given me so these penalty charges would not apply.
It’s a terrible feeling becasue we basically broke even on the house and now this
ML
May 28 2009
My wife and I have a mortgage through CIBC FirstLine. The current value is about $290K.
Back in November, I became a victim of the Nortel troubles, which has meant that we’ve had to put the house on the market. We were informed by FirstLine that our early-payout penalty, which was already absurdly high at $14,000, has been raised to $24,000 due to interest rate differentials.
Ideally, we’d keep the house and probably find another mortgage provider when our 5 year term expired. But we only bought this house a year ago. Our current circumstances (trying to live on roughly 1/4 of our previous income) forces us to sell the house.
I’m used to early-payout penalties being on the order of 3 months interest, but $24,000 is just an awful lot to swallow.
It means that unless we get exactly what we’re asking for the house (the assessed MPAC value, basically), we’ll end up owing the bank money when it’s all done. That just seems wildly unfair and inappropriate.
KA
May 28 2009
I have 31 months to go on my RBC fixed rate mortgage. I’m paying 5.1% and have used my double up and 10% per annum prepayment without penalty privileges.
I wanted to prepay a substantial part of it and I was advised that the current posted rate for the same term mortgages was 3.75%, so I was expecting and had mentally accepted a 1.35% a year penalty for the remaining 31 months.
When the calculations were done, however, the penalty demanded was 2.4% a year.
Why? Because the calculations are done on a “posted to posted” basis and the original posted rate was 6.55% (the 5.1% “had been discounted by 1.45%”). First time anyone had told me !
So I changed tack and said in that case I would like to remortgage at 3.75%. Would RBC please let me have the same discount of 1.45% they gave before, that is a net rate of 2.7%. They refused, of course.
I was told “off the record” that the IRDs “are to deter 90% of clients from prepaying.”
The “posted” rate is completely artificial. It’s a marketing ploy. So how can RBC justify using posted rates to calculate IRDs? Actual to actual is the only fair way to do this calculation.
Tejas
May 29 2009
Good article on the IRD by Sam McDadi. I guess the only way to cushion the IRD penalty a bit is if you port (transfer) the mortgage to another property, since you only pay the penalty on the difference as shown below.
“For example, if you had a $400,000 mortgage and were carrying a $300,000 mortgage over to your new home, the penalty would only be assessed on the $100,000 mortgage you discharged.”
http://www.mcdadi.com/articles/stateoftheRealestatemarket.html
Mortgage Talk
It is important for sellers to understand some of the issues I have seen surface with these exceptionally low interest rates.
If you are obtaining a mortgage, you are fortunate to be obtaining some truly historically low interest rates. The decision between taking a variable rate mortgage versus a fixed rate mortgage should be evaluated with your mortgage consultant and/or your realtor to assess the pros and cons of each option. Be mindful although rates are exceptionally low, lenders are definitely exercising more caution with their lending policies.
If you are selling your home, PLEASE, PLEASE, PLEASE, be sure to know what your mortgage discharge penalty will be for breaking your mortgage prematurely (assuming you are not porting your mortgage). The banks will charge a fee which is the greater of either a three month interest penalty or the interest rate differential if you break your mortgage before the maturity date.
In the past, the three month interest penalty was typically used to calculate your cost. Because interest rates have dropped significantly, the interest rate differential is now frequently being employed to determine the borrower’s penalty.
Interest rate differential is defined as the difference in the interest rate charged on your mortgage verses the current existing mortgage rates.
If for example a borrower is currently paying 6.0 % interest on their home mortgage and the current rate is 3.5% the difference (6.0% - 3.5%) = 2.5%. This 2.5% will be charged for the months remaining on your mortgage.
To illustrate, if you are carrying a $400,000 mortgage at 6.0% your monthly payment is approx $2,559. If the current rates are 3.5% the payments would be $1,997, the difference being $562.00 / month. If you have 48 months remaining on your mortgage, the penalty would be $562 x 48 = $26,976. (These figures are based on mortgages amortized over 25 years).
These numbers as witnessed in the illustration above can be staggering and the lenders unfortunately are not easing up on these charges.
One of our sellers sold their home 3-4 months ago and the lender had indicated their penalty would be approx $10,000 at the time of the sale. They found out a few weeks prior to closing, the penalty (due to further reduced rates) had increased to approx. $27,000.
This came as an incredible shock to the seller. Unfortunately the client was not in a position to pay this penalty and the bank would not negotiate this fee. The deal did not close.
There are other clients I know that have been assessed in excess of $30,000 to $40,000 in penalties to break their mortgage. This to me is totally outrageous.
These lenders are truly taking advantage of consumers who in many cases are in a very difficult predicament.
Interest rate differential was implemented by lenders to ensure a client didn’t break his/her mortgage prematurely to take advantage of lower market rates.
Since the borrower made the decision to take a longer term mortgage, this penalty basically washes or negates any savings that may accrue from breaking one’s mortgage and going to another lender offering lower rates.
I do, however, believe that many sellers are being forced to sell because of true financial hardship being endured and, as a result, this excessive charge is crippling them financially.
The lesson learned is, please know in advance what all your closing/transactional costs will be before you enter into any agreement of purchase or sale.
Tejas
May 29 2009
In reply to KA who said this (the “posted” rate is completely artificial. It’s a marketing ploy. So how can RBC justify using posted rates to calculate IRDs? Actual to actual is the only fair way to do this calculation.)
You are absolutely right that actual to actual should be the only way to calculate the IRD as the bank is only losing money based on what rate they are lending to you right now ( your actual rate ) & the current rate .
They are not lending to you at the original posted rate, which was 6.55% back then, but they are lending to you at the 5.1% rate. So their loss is based on 5.1 % & NOT on what they could have or should have lent to you a few years back .
Greg Lague
May 29 2009
On a slightly similar note, I would like to warn everybody using a mortgage broker to do their due diligence before renegotiating their mortgage.
I used a broker with Capital Mortgages here in Ottawa to break my existing mortgage at 5.8% and take on a new one at a much lower rate in order to save thousands and pay down the principal early.
At that time, I also took out $10K more to do some home renovations. I was informed of the penalty and made to believe this was the final penalty amount. After doing the math, it made perfect sense and so I made up my budget for home renovations.
To my utter surprise, the penalty had changed at the last minute and was over $1,200 more then expected.
Of course the broker, looking out for his commission on a fixed rate mortgage, had neglected to bother me with the details of penalties and what is possible when closing the existing mortgage.
The lenders play by no rules and can ding you at will, it appears. He explained this all to me AFTER I was shortchanged and called him up to ask why the penalty was larger than what he quoted me!
I complained to Capital Mortgages and to the previous lender (First National) that this was unfair practice, but both have pointed the finger elsewhere for blame or simply ignored me.
If you are using a mortgage broker to exit an existing mortgage in order to take advantage of lower rates, I can’t warn you enough to ask for all the details and get IT IN WRITING!.
Mind you, I have it in writing and that still wasn’t enough…
Greg
Ottawa
BR
May 29 2009
Here’s a letter I wrote to the Canada Mortgage and Housing Corp. about mortgage penalties:
I have read many reports in the media of people who have been affected by the predominant use of the “Interest Rate Differential” prepayment penalties applied by banks when people need to improve their current financial situations or sell their homes because of loss of income.
I appreciate the objectives defined within the governance of your corporation. Unfortunately, I do not believe that Canadian financial institutions are passing on people’s rights to the Annual Pre-Payment Privilege Percentages or Amounts, typically documented within the signed mortgage contracts, when calculating the IRD penalties.
Any unused prepayment privilege amounts for each of the years that the mortgage has been paid (within a given term) should be discounted from the mortgage amount owing before calculating the IRD penalty.
In order to provide this privilege, financial institutions would have needed to account for the potential reduction of interest collected for each year where the prepayment allowance was provided.
This would actually represent a “real” forecasted conservative mortgage amount, which earnings should have been based upon.
I find the current practice of the varied IRD penalty calculations to be unfair and frankly unethical. People should not be penalized on the unused cumulative prepayment allowance amounts for each of the paid term years of the mortgage contract.
The terms and benefits of the contract should be in force for the given years in which the payments have been made.
The current state of our economy cannot support these types of penalties when people are struggling to make ends meet with reduced incomes and the looming potential of continued job losses.
I believe that people would be more accepting of a prepayment penalty if was presented in a respectful manner and based on real interest income loss. rather than the current method which makes people question the integrity and ethics of our financial institutions.
I believe the Canadian people are fairly intelligent and should be respected in our communication.
My recommendation is to make sure that all mortgage contracts provide complete penalty calculations as a specific example to the terms and conditions of the contract as of the day of signing.
This will eliminate confusion and the perception of hidden intent behind the legal language of the contract.
It is my hope that my writing will have your consideration in directing assistance to the many people that deserve it at this time.
FJ
May 29 2009
My client sold their property with a scheduled closing date of June 1, 2009.
On Jan. 19, we went to TD bank for discharge information on a mortgage. At that time, TD Bank quoted us a three months’ interest penalty of $3,375.27.
This information was then used to sell the property at a certain price that would allow the seller to walk away with a few thousand dollars in their pocket.
The lawyer got a new statement from TD Bank on May 21, showing that the prepayment charge is now $15,665.72. (This is based on interest rate differential vs. what they quoted in January as a three months’ interest penalty.)
The lawyer now advises us there is a SHORTFALL of $7,414,79 to close. This is in stark contrast to RECEIVING thousands of dollars upon the closing of the property.
Do you think anything can be done here?
Susan
May 29 2009
I too am a recent victim of the same penalties. I became very ill suddenly in Feb/07 and was confined to a wheelchair, unable to work.
My husband, three young children and I found ourselves going from two incomes down to one. This was a very tough time and we found it extremely hard to keep up with everything financially, as I was sick until April/08.
We ended up having to put our house up for sale, hoping it would pay our huge debt. We let our bank know, and at that time, we were never told we had to pay a penalty for the remaining time on our 5 year term.
Finally after a year, we have a buyer. When we called the bank again, they informed us we had to pay a $7,000 penalty.
We flipped. We never accounted for this in our sale price and never once were we ever informed. Not even our realty fee is that much!!!!
I called a mortgage consultant at TD head office, who said if we had sold a year ago we would have had to pay $2,000. Had I watched the news I would have known there is a recession and that is the reason for the jump.
She even admitted they had documentation that I was ill and figured this was why I was selling, but there was nothing they could do.
I am devastated. Here I thought we were finally getting out of debt and now realize we are still in it.
Why were we never informed? Even when they went over our contract at the beginning. they skipped explaining IRD to us.
We were first-time buyers and were so excited we could get a mortgage. We thought our rep was reading us everything before we signed and never looked at it again. Our mistake.
Now we are forced to rent, as we don’t have any money left to buy. We are having to start all over again, but when we get back on our feet and have a down payment, I know for sure I will not be using TD ever again.
We are thinking of moving all our business elsewhere after the house closes.
————————————————————
Kelly Hechler, TD Bank spokeswoman:
Hi Ellen – Wanted to close the loop with you on this. We talked to Susan and have covered the IRD penalty.
We are thinking of other ways we can help her as well.
Susan D
Jun 1 2009
I see the point about a contract is a contract and people wouldn’t want their rate to increase when rates are going up but, on the other hand, when people need to get out of a low rate mortgage when current rates are high they don’t get a redemption bonus. I think this whole IRD thing is nothing but a windfall for the banks and completely unfair. There is no common way of calculating it and obviously from all of the comments on the various websites it is something that is not explained. It’s buried deep in the the Statement of Charge and made so difficult to calculate on your own it’s no wonder it’s not explained. It’s a moving target and the rates used to calculate it are so ill defined that it should be oulawed.
I don’t have a problem with a fair penalty that reimburses for lost interest but let’s make the “lost” interest calculation transparent. Right now it’s left to the banks to come up with whatever they want and we know where that leads - ripoff! Don’t tell me that the banks are actually losing money with these low rates - on the other side of the fence when someone buys a 5 year bond or GIC from them and wants to cash it in early they don’t get the interest rate to date - they also get charged a penalty for early payout - so who’s the winner here? To say a contract is a contract is fine but when it’s so one sided as to be this ridiculous then something needs to be done about it.
Martin
Jun 1 2009
I agree that some penalty is required, but the banks are not open and telling us what it is.
I was lucky enough to sell my house before buying another. After the sale, I went to the bank to find out what my penalty would be. They told me it would be 3 month interest or IRD, whatever is higher.
This was in late February and my house closed in late April, less than two months later. The bank told me my penatly would be $3,000 for 3 months interest, buy on closing April 24th this amount jumped to $4,500.
When I called the branch to discuss, they couldn’t even tell me what the rate being used was. They had to call head office.
Shouldn’t this info be right in the mortgage discharge paperwork? If thiswas being done aboveboard, it would have been.
The bank is making exactly the amount of interest that we agreeed upon when we entered the mortgage with a penalty of 3 month interest. The gov’t needs to get on the banks, since they are stealing money from honest, hard working people.
I think most people understand they need to pay a penalty, but that should be in writing and explained up front. As you can see in my case, banks calculate the penalty to get as much money from you, not just cover your interest responsiblitiy.
I moved my mortgage from TD for other reasons. This just confirmed to me it was the correct choice.
I think we should all fight until they start treating us with respect, because right now the banks don’t see it that way. Push for all you can get.
Scott
Jun 2 2009
When I was looking to sell my condo in order to purchase a home, I did what I believed to be the proper due diligence any consumer should do before making a decision of this magnitude.
I went to a mortgage broker to find out what kind of rate I could get on the new mortgage at that time. I took that to TD Canada Trust, the bank my current mortgage was with, in order to compare it with their quote and their prepayment penalty.
We sat down with a “Financial Advisor” at TD who calculated the numbers and ran us through each scenario. We could:
A) Port our current TD mortgage to the new home and obviously increase it to make up the difference
OR
B) Eat the prepayment penalty from TD and go with my mortgage broker.
I wanted to stick with TD as I do a ton of business with them (Visa, Insurance, Brokerage, Banking etc.) To keep my mortgage with them would have been so much easier.
This was at the end of February and we were quoted a prepayment penalty of around $2,700. We did a few more rough calculations and we all agreed that financially it would work out better to go with the mortgage broker.
The TD rep said he didn’t want to lose our mortgage business but that it made more financial sense for us. Dismayed, I started the arduous task of applying to a new institution, jumping through all their hoops and setting up all the paperwork.
The condo sale settled on June 1st and my lawyer called me to inform me of a shortfall because of a prepayment penalty of $13,300.
I very quickly became familiar with where this number came from and how it is outlined in virtually every mortgage contract. I have no issue with the calculation (other than the discount rate that they apply) and it makes sense to me how it’s done.
I called the TD call centre and a lady was kind enough to walk me through how it’s calculated and what the calculation would have been back on March 1st of this year.
Had my financial advisor actually done the IRD calculation and not the 3-month interest when we sat down with him, he would have seen that the prepayment penalty would have been around $8,700!!
I can tell you right now that had he quoted me $8,700 and not $2,700, I would have kept my mortgage with TD and avoided all of this.
We went to him for his ‘expertise’ as I don’t know the ins and outs of how this is all done and it basically has cost us $10,000 in additional prepayment penalties.
My issue is not with the calculation, but with the incompetence of the people working at the TD branches.
I currently have messages in with the Financial Services Manager and the Branch Manager, as I believe they need to stand by the quality and accuracy of the advice that comes from their staff.
Unless something is done, all my business will be pulled from TD along with my father’s (who co-signed on my original mortgage), which in the long run will end up costing TD thousands of dollars more than the cost of this prepayment penalty.
Do they care??? Probably not.
At some point these people need to be held accountable for the oversights or mistakes made by their people that end up costing us, the clients, who rely on their ‘expert’ advice to make important decisions.
Any suggestions or thoughts on how I should elevate this would be great.
Steve Zussino
Jun 2 2009
This was an interesting article that has me curious about my mortgage agreement. What obligation does the bank have in this?
These penalties are huge money for most people.
Tejas
Jun 3 2009
To Scott:
I think you have a case since you were given or quoted a wrong penalty by the TD staff & you took a decision based on that.
They should have told you that in your case the penalty is the IRD penalty & NOT the 3 month interest penalty. They gave you the wrong information.
If you have this wrong penalty quoted to you in writing or recorded (phone/answering machine), it’s going to be much easier. They might not refund the entire amount, but might be willing to eat up 50% as a good will gesture & to keep your business.
Send the letter you wrote over here to the following:
1. http://www.td.com/ombudsman.jsp (TD Ombudsman)
2. http://www.obsi.ca/ (Independent Ombudsman for Banking Services)
3. http://www.td.com/comments.jsp#step2 (Elevation to a Senior TD Officer)
4. http://www.fcac-acfc.gc.ca/eng/consumers/Complaints/default.asp
(Financial Consumer Agency of Canada)
There is no guarantee any of the above will do anything for you but you can always try.
MM
Jun 8 2009
I can understand everyone’s surprise when they find out about the penalties involved with paying out a mortgage prior to maturity.
However, we have to understand that when we agree to the specific terms of a mortgage and sign the contract, we can’t expect the bank to rewrite the contract because rates drop - just as we would not tolerate the bank opening the contract and increasing our rates when they increase, with no consequences.
People seem to want everything to go their way. They want the best rate possible, locked in for 5 years, but when they change their minds, they should be able to renegotiate the contract with no penalties. Life just doesn’t work that way.
Stop blaming the banks and accept that you made a mistake when you signed a 5 year mortgage.
C. Poling
Jun 8 2009
Our family relocated to Canada from the United States in June 2007 for a 3-5 year assignment. TD Canada Trust set us up with a 5 year fixed (we had asked for a fixed).
We knew there would be a penalty, but expected the worst case to be the 3 month interest. Now after the assignment ended prematurely and we relocated back to the States, we put the house on the market, where it sat for over a year.
We had the beginnings of an offer back in November 2008 and were quoted a penalty of around $10k. We finally have a signed contract on the home this June, which is $40k less than we owe.
We were completely dumbfounded to learn that our new mortgage penalty is now $62k!
US Mortgages do not typically carry such penalties and when they do, there is a defined maximum.
On all the mortgages we have had for various homes bought and sold, this is by far the biggest ripoff we have ever encountered.
TD has simply referred us to the mortgage insurance company for resolution. The mortgage insurance (which we paid for ) apparently does nothing for the homeowner, but definitely protects the bank!
GS
Jun 8 2009
May I suggest that all of your injured parties contact the Real Estate Board about lack of service from their listing agents.
All reputable companies have in their portfolio a mortgage verification form, which a lot of companies insist is signed and forwarded to the appropriate lending institution before they will accept a listing from their salespeople.
Most respectable agents, in their presentation to the prospective seller, will promise to verify what their balance is on existing mortgages and the cost to discharge or assume.
Upon presentation of any offer, the net amount (purchase price - mortgages - discharge cost - RE fees - approximate lawyer fees) should be shown to the seller.
I am now retired but spent 30 years in real estate and saw many incidents where the public lost thousands of dollars because of incompetence.
ES
Jun 8 2009
My son and I (as joint mortgage holders) have been negotiating for a new mortgage with Scotiabank, which currently provides the mortgage on our property.
The penalties are indeed much higher than the three month interest sum and we were shocked to hear that there are two (or more?) ways of calculating the penalty.
It appears that mortgage providers commonly do not advise clients thoroughly of these penalties, which thus tend to be discovered by the client only when unusually sharp drops in bank rates occur and re-mortgaging potentially becomes beneficial.
This situation, associated with the “fine print” syndrome in many legal documents, is in my opinion just another example of how government allows its citizens to be hoodwinked by big business and lawyers, to the benefit of the corporate world and the demise of its citizens.
Why is it that persons with imperfect vision are expected to have to read such material?
Why is it that such important details of a document are not required to be summarized in legible print in non-legalese on a one-page outline (with relevant cross-referencing if essential), so that the client is made properly aware of the conditions at the onset of negotiations?
Why, also, are clients not provided options that, for example, give the opportunity of choosing a class of mortgage that provides for reduced penalties, probably in exchange for a slightly higher interest rate?
We should remember that Canadian mortgage lenders, if astute, get good returns with excellent safeguards should a default occur.
In Canada, even under current market conditions, most property values still exceed the outstanding principal on the mortgage (with the possible exception of insured mortgages). This gives even more force to the argument that, basically, mortgage lenders should be very well positioned, in whatever circumstance, to make a good return on investment.
It seems to me that the penalty system is really a device to stop people transferring to another mortgage lender and to preserve excess profit-taking when the bank rate falls.
In our case, it has become evident that unless we shift to a variable rate mortgage, the best option is probably to shift to a blended mortgage with the existing mortgage lender. No doubt the penalty was designed precisely with this intent.
Tejas
Jun 8 2009
Reply to MM @ June 8 , 2008
No one is arguing about the IRD penalty .
The only problem is that the banks don’t clearly mention this to you when you sign the contract (it’s buried somewhere in the fine print), but they are more than happy to mention to you the much lesser 3 months penalty when you ask them about penalties to break your mortgage.
Both these penalties should be clearly mentioned & highlighted to the customers when they sign the contract.
Philippec
Jun 12 2009
I had a recent experience (last week) that I’d like to share on the topic of lowering my mortage interest rate.
I bought a house in June 2008 (just one year ago). At the time, we got a pretty decent rate, at 5.39% for a five year loan on a 40 year year term with Scotia through a mortgage broker, (which, by the magic of bi-weekly payments, should be fully paid in 33 years).
Seeing the recent very low rates, I was curious if my rate could be made lower, so i called my banker. Since I read your column, I was not surprised to learn that to get the lowest rate possible, I would have to pay $17,000 in interest rate differential penalties.
The banker suggested that by reapplying for a new 5 year mortgage, he could “mix” my current rate with the current low rate, prorated on the number of months left on the original contract (and maybe some other factors) and I could get a lower rate with no penalties to pay.
After he ran his numbers, I got a lower rate of about 5.17%, which translates into about a $20 lower payment each two weeks.
That is not a whole lot, but I’ve instructed him to set the new payment amount to the same amount I used to pay, which means that I will pay my mortgage 2 years sooner…
I am satisfied, even though I didn’t get the killer rates they advertise, since I will still profit from the current low rates and end up paying less interest in the end (and finish paying the mortgage sooner).
Keep up your good work, you are always interesting to read.
steve payne
Jun 18 2009
Hello, I have been struck by this same situation.
I as advised by my bank after I accepted an offer for my property that my IRD penalty is 40k. I have a 5 year fixed mortgage at 5.7 per cent and have approx 38 months left on it. CIBC is the institution part of the Fortune 5 network.
Now I have read a few comments here where we are told to suck it up, you signed it you should have known, don’t blame the banks etc. Perhaps some extra diligence would have been in order, but I do believe that the banks have or should have the requirement to spell the penalties out in easy, simple, in your face language. They certainly do to get our business.
I have also spent the day talking to real estate people. They had no idea. I called my MPP. He had no idea. No one knew this. If I had known prior to selling, I would have tried to get a higher price for my home.
If I take the interest, including the 40k penalty that I have paid over the past 18 months, it works out to close to 80k. Now isn’t there an anti-loan sharking law in this country?
I have not done the percentage calculations on this amount, but please I am sure it is astronomical and maybe even illegal.
I am able to port my mortgage, at least some of it, into an investment property. It’s not my choice, but I am forced to do this. I am perhaps lucky to be able to do this and take a lesser hit. I feel greatly for the people who will see their hard earned savings gone and be pushed into welfare.
Perhaps we need to be more like the French, take it to the streets, make them listen, make the politicians listen. I appreciate being able to vent a little here. Is there a lawyer out there? Do I hear the ground swelling or murmur of class action?
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 of 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 a 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.
Ellen Roseman
Jun 29 2009
ScottL,whose comment is posted above (May 28), finally had his complaint resolved by HSBC Ombudsman — subject to the usual agreement to keep details confidential.
“I can honestly say that I feel had you not intervened the outcome would most likely have been quite different and for that I must thank you,” he said.
The ombudsman agreed that he hadn’t been given good advice about his mortgage. The economy was changing rapidly and he was running out of choices. His contract was not explained to him and if it had been, he wouldn’t have signed it.
Hope this encourages others to keep fighting.
Dirk Theurer
Jul 9 2009
I’ve looked everywhere and cannot seem to find any mention that the TD may be calculating the IRD penalty incorrectly.
Note: I’m fully aware of - though not very happy about - the IRD penalty clause (and agree that the TD could be more transparent about it) in my mortgage contract with them.
The TD mentions “similar mortgage” in the IRD prepayment clause in their “Standard Mortgage Terms” (dated December 14, 2005) which was included in my fixed-rate mortgage of July 2007. Specifically, in section 5.06, subsection (d) (page 16), it says:
[...] The “_Differental Interest Rate_” is the difference between (A) the _Fixed Interest Rate_ and (B) the current interest rate for a _Similar Mortgage_. [...]
Their actual calculation is based on anything but “similar mortgage”. For an example, please see:
http://deafwiggle.com/ird
In my case:
Original posted interest rate: 7.24
Original interest rate: 5.79
Current posted interest rate: 5.2
Outstanding balance: (as an example, enter 200000 in here)
Months remaining: 40
The left column calculates based on “similar mortgage”; the right column calculates the um, “TD way”. TD’s method of calculation (using the above noted interest rates) calculates about 25% higher.
My TD Branch Manager and the TD District Vice President insist that TD is calculating everything correctly and refuse to resolve this. The DVP suggested I contact the TD ombudsman - which I did. They told me that they could not do anything.
SD
Jul 14 2009
I’m not endorsing these folks, but wondering if anyone has experience with this firm (or others like it)? http://www.mortgagepenalty.com
They charge 50% of however much they get the payout reduced so it’s pretty steep, but better than nothing.
Ellen Roseman
Jul 16 2009
Hi, SD. The link you gave is for Mountainview Mortgage, the firm that helped DP (see comment above, May 27) reduce her mortgage penalty.
I called Paul Brick, one of their mortgage specialists and a former classmate of mine from Montreal, and he didn’t want to publicize the tactics they used to get lenders to lower their penalties.
He said they would be less effective if the word got out. But it appears they are effective, for sure.
I always believe that when it comes to large-dollar transactions, it’s better to go into a negotiation with a seasoned professional on your side.
JG
Jul 16 2009
Does anyone know, what happens when I’m selling to downsize, therefore “porting” my existing mortgage to a HIGHER rate? The posted rate now is .6% higher than my existing rate…. Any answers would be great. TD is doing an investigation as we speak!
JG
Jul 16 2009
But my principal is nearly a third of what the original is…. That seems to be a problem:) They have said my penalties would be anywhere from 7000 to 19000 over the last 2-3 weeks so… I’m still waiting and calling EVERYONE< EVERYDAY 1/2 day!!
BM
Jul 22 2009
I agree with Al.
I have worked a long time in the financial services field and this is just another revenue stream for the bank. They might as well call it a “service charge.”
However, I have to commend the banks on sending out the same consistent message to all their clients that IRDs are the consumer’s cost of doing business. They certainly don’t want to spoil that for one another.
Personally, this has become one of the worst customer satisfaction issues out there for me.
I recently decided to move to a larger residence and I was shocked by the voracious appetite for revenue the bank has. Not only is my mortgage increasing by 2.5X the current principal and they are going to make $100’s of 1000’s in interest from me, but the bank wants me to pay the IRD on the 11 months I have left on my current mortgage.
Where is the loyalty that banks have to their customers for coming back? I got a great rate, but could I have taken my business elsewhere and gotten a better rate?
I think next time I will shop my mortage around. In the meantime, it would be best to take full advantage of the options to pay down your mortgage and be out of bank servitude as soon as possible.
Amr
Jul 29 2009
***Another Trick****
Beside doing a lump sum payment to reduce your penalty, there is another trick that worked with TD and reduced my penalty by 8-9%.
Before discharging the mortgage, you can request to change the payment period to weekly payments and double the payment amount.
This will reduce the calculated interest that the bank would get during the remaining period and this will reduce your IRD.
Just make sure to request the information statement about your new calculated IRD. Some bank staff refuse to give it to you and others don’t mind.
LB
Jul 30 2009
We have found ourselves in the same situation. My husband and I are living on pensions and due to the decline in our retirement investments, we are trying to get a lower interest rate mortgage.
We are 2 years in on a 7 year, closed, cashback mortgage at a 7.35% interest rate.
We tried to switch to a lower interest rate through our bank, but they refused us, so we went to a mortgage broker. He was able to find us a rate of 4.3% on a 5 year mortgage, but our bank (TD Canada Trust) is charging a $35,000 penalty - $19,000 on the mortgage and $16,000 on the orginal $23,500 cashback.
I do not understand how they can do this. We would be paying the whole mortgage out, so how can they charge us an extra penalty on the cashback when it is part of our total “borrowed amount”? Do we have any recourse?
Sean
Aug 7 2009
My wife and I recently purchased a larger home as our family has grown from having a 3 year old son Connor, to include twin girls (Alexis & Hailey).
We are getting frustrated with our existing mortgage provider Bank of Nova Scotia.
Over the past month, the bank has positioned the mortgage payout options to both my family and to our mortgage broker (Monster Mortgage) as being flexible, with even the possibility of penalties being waived if we take a new mortgage with them for our new home.
But in the last few days, we and our broker have had no success in getting the branch to honour those discussions.
In my last attempt to find an amicable solution, I spoke with the branch manager this morning. She told me that the options discussed were subject to change and therefore they did not have to honour them.
She went on to say that the original quoted payout penalty of $2,700 was now $5,919.45 (subject to a further increase).
She stated she would discount the payout penalty by 20% ($1,183.45) totalling a payout of $4,736 only if we enter into another mortgage with them.
She told me that her decision was final. My only recourse was to escalate my file to the Office-of-the President.
My concern is that our situation is time sensitive and I believe the lender can be delayed beyond our closing date.
————————————————————
Great news. We signed our mortgage and the revised penalty was reduced from the latest rate of almost $6,000 to about $1,899.
We are bridging our mortgage for a week so that I can paint and get the house ready for the little ones.
Thanks so much for providing your recent support. Also, the information from your past articles, I believe, helped in providing us enough insight to be extra diligent when it came to such an important purchase.
Please feel free to share our story.
Al
Aug 8 2009
Sean, that’s great news! Good luck with the new mortgage and house.
I had no luck with Firstline at all. No reduction in penalty, in fact they quoted about $16,000 penalty for me.
Pretty awful, I think, and in these terrible economic times in Canada (I’ve just had my second pay cut in the past year and the company has stopped everyone’s pension as well), it’s frustrating to see Financial Companies milking us for every penny while offering no flexibility.
SD
Aug 13 2009
Vancity credit union recently backed away from a plan to raise line of credit interest rates based on custome/member backlash (see story here: http://www.cbc.ca/canada/british-columbia/story/2009/08/11/bc-vancity-line-of-credit-rate-hike.html). This indicates to me that some of the financial institutions (maybe just credit unions?) might back away from IRD penalties if there was a large enough public outcry. Most of the individuals I’ve talked to were not aware of IRD penalties until I told them my story. Is there a way to bring more media and customer attention to this issue?
Dirk Theurer
Aug 18 2009
I’ve noticed more complaints here about the TD and its IRD penalties. While I don’t particularly like that IRD penalties exist at all, I paid my IRD penalty (in late March). When I did, I could not reconcile how the TD was calculating it, and all my efforts to have the TD demonstrate the legitimacy of their IRD penalty calculations were in vain (they have demonstrated nearly zero interest in discussing my issue).
If anyone else is interested in this issue, I’ve put together a web page where you can see how - and by how much - the TD is over-charging their IRD penalties.
I have now filed a complaint against the TD with the OBSI (www.obsi.ca). It apparently may take some time to resolve this issue.
Lou Piriano
Aug 23 2009
I am a Realtor and Mortgage Broker in Ontario. Prepayment penalties are clearly outrageous, impossible to predict and calculate for the average borrower.
A posted comment earlier said a reputable Realtor would obtain a Mortgage Verification Form filled out by the Lender at the time of listing, which would detail costs of paying out the mortgage. I received one from Scotia Bank in Hamilton, Ont., which only detailed a $270 discharge fee.
In fact, they charged over $20,000. They claimed the form did not pertain to the penalty, just the fee to register the discharge. Nonsense! The form is clear and asks for all costs.
The point is the consumer must ask for a payout statement to get a more accurate idea of what the lender is up to. This will detail all costs (exclusive of rate changes). The Realtor does not usually have access to this, but it’s usually requested by the lawyer before closing (too late if you have signed an agreement to sell).
There are still lenders who don’t charge based on an intial mythical discount. Get expert advice before signing and get it in understandable written form.
Bob Costa
Aug 28 2009
What if you sell your property and are not going to repurchase something, can your lawyer hold back all the discharge fees? Would the outstanding amount go into collection?
AC
Sep 6 2009
I think it is all about planning your next few years. It is actually a very good process here in Canada that you have to “renew”, so you can review, your mortgage every ‘x’ years (unlike many other countries, where you commit for the whole amortisation term with the lender!!!)
Especially after reading this column (I feel is a very constructive discussion) when one is now aware of the costs of breaking a mortgage.
So if you know that you may need to sell your house in the next 2-3 years after your mortgage is up for renewal, just convert to an open mortgage or even a “secured line of credit” instead of the mortgage (if your mortgage is 80% or less of your property value).
One cannot blame the bank when one has not planned successfully over the short-term, say next 5 years.
Well, under ‘emergency’ circumstances that were not planned, one has to pay the price!
Mark
Sep 16 2009
My wife and I have also been blindsided by TD Canada Trust when we sold our house and found out the final prepayment penalty from our lawyer. They used IRD and an excessive “posted” rate.
The worst of it all is that we walked into a TD branch, sat down with a mortgage specialist who confirmed we would be charged 3 months penalty.
After being charged the IRD, we escalated it and the “specialist” confirmed he talked to us and did communicate the 3 month penalty but it wasn’t valid because we were just “talking”.
We’re continuing to escalate it to the OBSI. Frankly I don’t care if they don’t help. We’ll take it to court if we need to. There are already a few cases that set a precedent for just such a situation.
BTW, you may feel powerless but the internet is a powerful place! Feel free to join my Facebook group called “Burned by TD Canada Trust”.
Joanne
Sep 29 2009
Thank you so much for your website. I’ve learned so much about IRD.
Our family is selling an investment home, and I have been shocked by a penalty quote of $25,000. ScotiaBank advised a rate of 7.24%, rather than using the 5.25% that is written all over our contract. This makes a difference in thousands of dollars. I didn’t even know we had a discounted rate.
I don’t understand how they can legally get away with this. There is nothing written that they have to use the posted rate versus the discounted rate. In fact, the writing in our contract states “between your existing mortgage interest rate and the interest rate currently charged for a mortgage similar”.
Could anyone share how they have the legal basis to do this?
Thanks everyone for their information. It has been just excellent.
Dirk Theurer
Oct 1 2009
Mark,
Thank you for starting your Facebook group. I’ll be joining shortly and posting two stories about my experience with the TD. I have two complaints started at the OBSI and will be letting this blog and your Facebook group know of anything that transpires.
CJ
Oct 13 2009
A friend just sent me your articles on mortgage penalties. You can certainly add my husband and me to the growing number of people screwed over by their bank in this manner.
When we bought our first home, a condo, back in 2007, we KNEW we would have to move in less than 5 years. We discussed this at length with our Scotiabank Mortgage Specialist.
There were two definite scenarios:
1. My husband would be offered a job in the United States, and we would have to sell our condo and rent over there.
2. We would have children, and we would have to sell our condo and purchase a bigger home.
Regardless of what happened, we knew we would be selling in 2-3 years, minimum. We asked our mortgage guy what would happen if we needed to sell in these two scenarios.
He assured us, on at least three separate occasions when we brought the topic up, that our penalty would be in the range of $3,500. And if we stayed with Scotiabank, that penalty would in all likelihood be absorbed by the bank, should we get a bigger mortgage for a bigger home. That’s it, that’s all we were told.
We thought that was completely feasible, so we went ahead and signed the mortgage.
About a year later, my husband was offered a job in Chicago. We contacted our mortgage guy to ask him what the penalty would be if we sold at that point. His response:
“Here is the info you requested. Just to give you an idea, I used July 31/08 as the payout date and the penalty is $3,241.95. This will change when you have a specific date you will be paying out, but this will give you an idea.”
As it turns out, my husband didn’t take the job and we didn’t sell our home at that time. But we rested easy, knowing that we had a solid figure in mind for when we DID sell our home.
A year later, we started looking for a new house, as I am expecting our first child. We found a new townhouse for approximately $100,000 more than our condo.
We called Scotiabank and were preapproved for 3.8% rate, and of course we were delighted and purchased the home right away.
Last week, less than 20 days before closing our home, we contacted the bank to see what the holdup was on finalizing our mortgage. We were told that in order to secure the low rate, we would have to pay greater than $17,000 in penalty.
Imagine our surprise! We were expecting $3,200 at most, and to be honest we sort of figured the bank would absorb that, considering we were staying with them for a substantially higher mortgage.
Nope, $17,000 penalty and that’s final. Of course, they said they could do a blended rate for us, which would mean 4.64%, and then the penalty wouldn’t occur.
We went so far as contacting the Office of the President, but of course it did us no good. They just said this was the price for breaking our contract.
Any information given to us by our previous mortgage specialist was outdated and wrong. And even though I have the email stating the $3,241.95 penalty, they couldn’t consider that a contract.
We’re horrified. We feel like we were bullied through and through. As first-time homebuyers, we trusted our original mortgage specialist to disclose the information we were asking for, in full.
We specifically asked about penalties on several occasions, making it clear that we would be moving in less than 5 years, no question. Never did he suggest that we would pay one cent more than $3,500. And so we signed our mortgage in good faith, trusting that we had asked the right questions and had received full answers.
The fact is, had we known, we would never have purchased a home in the first place. We could have saved literally thousands of dollars if we had kept renting.
And now we have a new mortgage that is far, far higher than we ever anticipated… we wouldn’t have purchased our new home if we had known we would suffer such incredible consequences.
So… yeah. Add us to that list. We’re horrified that even going as far as the Bank President didn’t get us anything.
We certainly thought that, in a gesture of goodwill for the misrepresentation of which we were victims, the bank would try to offer us a more reasonable rate… however clearly, our good faith was poorly spent.
Looks like we have no choice now but to go with the blended rate… right?
JC
Oct 28 2009
I am writing about a grievance I have with the CIBC.
In 2007, my son bought a house in Huntsville and secured a mortgage from CIBC, which I co-signed. At the end of September 2009, he sold the house because he had moved to a new work area.
When he put the house up for sale, he phoned CIBC and was told the penalty to pay out the mortgage would be $3,000 (a little more than three months of mortgage payments).
It took several months to sell the house and he finally had to accept an offer lower than he had hoped. However it was just about enough money to pay the mortgage, penalty, lawyer and real estate fees.
The day of the closing (Sept. 30), the lawyers phoned CIBC to get the exact amount owing and was told the penalty was not $3,000 but $9,000. A
At this point, there was nothing my son could do except give a promissory note to say he would clean out his savings to pay the real estate fees (about $7,000) because there was no longer enough money from the sale of the house.
Unfortunately, he had borrowed money for some major repairs on the house to make it saleable and now he was left with that debt, as well as nothing in his savings.
The real estate agent said he had never seen a bank charge so much on such a small mortgage (around $138,000). He said we should talk to CIBC.
We talked to two customer service reps and the manager of the local CIBC branch and they all said it didn’t matter who told him $3,000. They had the right to charge $9,000 and since the mortgage closed, there was nothing more they would do.
They said if he bought another house in 60 days and took out a CIBC mortgage, he would get the money back.
I said ‘Why would he borrow from CIBC again? And even if he wanted to, his savings are cleaned out and there is nothing left for a downpayment.’ That, however, was all they would offer.
To me, it is unethical for a bank to change the amount. CIBC said the lawyer should have phoned a week before the closing, but what good would that have done? My son could not, at that point, back out of the deal.
My son is 26 and has been a CIBC customer all his life. My whole family are CIBC customers and I can’t believe they did this. Please let your readers know that CIBC is not a customer friendly bank and it is definitely ‘borrower beware’. Thanks.
14sherman
Nov 8 2009
Some are using the argument that they wouldn’t want the bank to come to them when things are bad (for the bank) to up their interest rate…… but they do !
My line of credit, which I have the signed paperwork for stating that it would be at prime rate, has been increased by a full percentage point because things are not going well for the bank. They stated in their letter that because of the current financial crisis their revenues were not high enough so they needed to increase the rate !!
Suzy
Nov 23 2009
Hi, I’m sick to my stomach just writing this.
We got a mortgage in December 2008 for $250,000 with TD. The mortgage specialist told us that we had to take a 5 year closed term to get the 4.99% interest rate, so we did exactly what she said.
Now we are in November 2009. My husband and I decided to move back east to be able to be closer to our family members (my mom is sick, so I want to be able to take care of her).
We listed our house and we sold it in 2 days with a little profit. We called the same mortgage broker and she told us that we now have to pay more than $14,000 in penalty fees.
I found that info in my contract the other day, but you have to be pretty damn smart to figure out that amount! So we ask if there’s anyway we could waive those fees. The answer was yes, if you take a mortgage of the exact same amount with us.
Well, there’s a difference between buying a house in Alberta and buying a house in NB. We finally found a house for $150,000 and then, even if we take our new mortgage with them, they are still charging us $8,000 in penalty fees.
And now to make things worse, we are closing in 8 days and we still didn’t receive a mortgage approval from TD, which says we need to pay our car loan in order for them to approve our mortgage.
The worst part is that we sent all our paperwork more than a month ago and they gave us that ultimatum 10 days before closing. My mortgage broker is on vacation in Hawaii and she doesn’t want to transfer our case to somebody else while she’s away.
Bottom line is we would have been able to pay our car loan if they didn’t charge us that ridiculous amount of money in penalty fees. I will never deal with that bank again and I will take all my accounts elsewhere!!
Brian
Dec 3 2009
It is the bank’s right to charge what is in the contract, so be aware before you sign. By going through my contract I was able to find that my mortgage contract has a different description of prepayment penalties from what is currently written in what Scotiabank calls the “Personal Credit Agreement Companion Booklet”.
Scotiabank uses the calculation in this booklet as the basis for calculating mortgage penatlies. However, I am bound by my agreement and not this booklet, which Scotiabank has updated since I signed my agreement more than two years ago.
What does this mean? Well, they are probably using this bank-favoured calculation over any other calculations because no one calls them on it. If your agreement doesn’t outline the same calculation or verbiage, then call them on it.
Bank representatives just automatically defer to the “system” calculation without bringing up your individual contract.
On a funny note, my Scotia adviser provided me with the actual formula they use to calculate this penalty and then called me back to say “I forgot one important little clause about using the same discount that you originally received, which could impact your payout”. Funny I say because that “one little clause” is the biggest little clause that impacts your penalty payout.
I was lucky because this clause was not in my mortgage contract, so I argued against it. In addition to this, Scotiabank was supposed to provide me with the better of two Interest Rate Differential calculations - they did not.
I’ve heard the same thing many of you have heard from your bank representatives - “I just put the information into the system and it provides me with the penalty payout and the system isn’t wrong.” I can tell you absolutely that the system can be wrong and many times their system does not take into account what you are entitled to.
So if the system doesn’t know and you don’t know, chances are you are paying a lot more than you should. I got my penalty down from $7,000 to under $2,500 based on this, and it will be much less if I sign again with Scotia, which I haven’t yet determined.
Three important questions to always ask the bank:
How is the penalty calculated?
Where does it outline the penalty in my contract?
How can you help me get it lower?
Good Luck.
Ampere
Dec 3 2009
Lots of discussion about the TD Bank, but you can add Scotiabank to the list. They quoted me an IRD but can’t/won’t tell me what original posted rate (and therefore discount) is being used to calculate the IRD. I can estimate that the discount being used is nearly double the one I actually received. Also, it appears that they are using a 25 year amortization, while my mortgage is a 15 year amortization. Plus, it appears they are using a monthly payment whereas my mortgage is an accelerated bi-weekly payment. I get it, that banks are entitled to be compensated for loss of principal/interest/reinvestment due to my paying off my mortgage early. However, shouldn’t the IRD be based on the ACTUAL loss to the bank rather than to some arbitrary punitive money-grab? The actual loss to Scotiabank is an IRD based on:
1) The discounted rate I received and have been paying, not the so called “posted rate” at the time.
I can tell you that if I had been charged the “posted rate” from the start of my mortgage, there would, in fact, be a zero dollar loss to Scotiabank, because I never would have given them my business in the first place.
2) An amortization based on 15 years, not 25 years.
3) A payment of accelerated bi-weekly, not a monthly payment.
Are there no regulations requiring that the banks/lending organizations be transparent and provide consumers with discharge statements stating the exact “posted rate/discount” used and the method used for calculation?
The IRD should be based on real economic loss (based on the specifics of each mortgage contract). This would also mean that in times of rising interest rates, that the discharge payment would not equal “3 month’s interest” but a much lower, say 200-dollar-range “administration fee”. There is no real economic loss to banks in a rising interest rate environment since they are able to reinvest the funds at a higher rate.
A practical question. I am trying to verify the posted rate that Scotiabank is trying to charge me. Does anyone know where I can go to independently confirm what the historical posted rates were for 5-year, closed, residential mortgages? I found the “Average Residential Mortgage Lending Rate – 5 Year” (report V122497) on the Bank of Canada website but these are just averages (link: http://www.bank-banque-canada.ca/pdf/annual_page57_page58.pdf).
I’ve contacted the CHMC, but they responded that they don’t have that information.
I contacted various mortgage brokers and Scoitabank but no one seems to know if/where historical posted interest rates are kept.
Just a note: The Scotiabank “personal banking officer” did tell me I could use my 15% prepayment privilege to reduce the IRD. I asked if a 15% reduction would automatically be applied (one time) before my mortgage was discharged and I was told “No, we don’t assume that customers will use their last prepayment option”. Just another run around money grab so that the bank will make some money in interest/fees, since customers have to then use their personal lines of credit or take out open loans.
Wonder whatever happened to sound business practices and customer service … let alone common decency and the ethical treatment of one’s customer base?
You have to laugh though, when the Canadian Chartered banks proudly come out with their annual “Corporate Social Responsibility” reports … ah you have to love irony!
Elizabeth Blair
Dec 14 2009
I think its time for consumers and industry professionals to petition and lobby our government to change the rules on this IRD penalty calculation. It is a penalty calculation that is not much different than what a loan shark would do.
It should be illegal. 3 months interest penalty is enough, period.
Barry Chisholm
Dec 18 2009
For those who think clients should “read the contract before you sign it” and you’ve only got yourself to blame…as a mortgage professional myself, I can tell you that these clauses are very ambiguous.
The standard used to be that they would charge you the difference between the posted rate when you pay out and the rate on your contract. So, you could justify their charges simply by looking up the posted rates, and with a simple online calculator you could figure out ahead of time what the penalty would be.
However, many have changed this clause to read “at the reinvestment rate” at the time you pay out. There is no set rule as to what reinvestment rate means. The result is, they can literally make up any number they like without recourse.
This is not a well regulated aspect of the mortgage industry. I am personally fighting with Investor’s Group Mortgage over this issue on my own mortgage, which I obtained prior to becoming a mortgage professional.
Using today’s posted rates and the rate on my contract, the penalty should be $11,566.
However, they claim the reinvestment rate is actually 1.25% lower than their posted rate, so the charge is actually $20,095….
Elizabeth Blair, www.missmortgage.ca
Jan 1 2010
I believe that there will be great negative fallout for many home owners down the road, unless home owners are given the option to freely re-finance their mortgages to obtain lower rates now, as rates remain low.
Once mortgage rates climb, those who are very new home owners, who took out 35-year amortizations 5 years ago, have accumulated little equity. At the same time, they have increased their household debt load, and their ability to carry a mortgage renewal at a higher mortgage rate will be a huge challenge.
Government must step in and force banks to change the rules. The IRD Penalty should be illegal and banks should be limited to charging only the standard “3-month interest penalty” instead of the IRD penalty being used today.
I already see the IRD choking many mortgage holders, who are simply looking to move out of a higher mortgage rate into a lower mortgage rate, or perhaps even get out of a mortgage obligation due to current financial pressures (for example, a lost job).
I just returned from visiting the States and read an article in the USA Today. It discusses how Texas banks have held a strong position, based on their tight regulations, even when many other banks around them failed. An especially interesting point is that the state of Texas prohibits banks from charging high mortgage penalties. You can read the article in the USA Today, at the following link:
http://www.usatoday.com/money/economy/2009-12-28-texas-banks_N.htm
Ottawa is presently reviewing Canadian mortgage rules and may change financing rules to increase minimum down payments and decrease the extended amortization of mortgages (currently at 35 years) – these would be very positive moves to make.
Texas banks have done well and their tough guidelines governing the mortgage financing industry have been the very reason why the housing fallout there has been minimal.
If you want to express your concern about the IRD penalty, and you live in Mississauga or Streetsville, you should write to the Honourable Bonnie Crombie, Member of Parliament, to ask that the Government work to remove the IRD penalty in use today by our banks. Her email address is: crombie.b@parl.gc.ca
Sony
Jan 7 2010
Everyone talks about the IRD penalty on a closed fixed mortgage. What about variable rate mortgages?
Say I just bought a house taking a 5 years closed variable rate of 2.25% and in 1 or 2 years I can’t afford it any more because variable rate rise to, say, 5%. What will happen? How is the IRD calculated with variable rate?
Cindy
Jan 21 2010
We’re in the same situation. We renewed our mortgage with Firstline in July 2008 at 5.59% over 19 years. We’ve been making biweekly accelerated payments the whole time.
We are having our third child (unexpected) and need to buy a bigger house. When I called to get the mortgage payout, they told us it would be $173,800…that is $3,800 MORE than our original amount borrowed!!! That would mean we’ve been making payments for 18 months for nothing.
We were offered to port our new mortgage into the existing one, but only if we stay with Firstline.
The only way to fix this is to stand up and fight the lending institutions. The banks shouldn’t be allowed to bully people with their own hard earned money.
NK
Jan 22 2010
CIBC has just charged us $46,000 for breaking our mortgage. We had a 7 year term on a $530K mortgage and were almost four years into it.
We’ve taken this up with them, but so far no progress.
One month of interest for us was about $2,300. This penalty is equivalent to 20 months’ interest.
Had we waited a little longer before selling (5 years), the most CIBC could legally charge was about $7,000 (three months’ interest).
The IRD equation looks deceivingly simple and no one would think of challenging it BEFORE signing their mortgage documents.
It would take someone with a sophisticated understanding of math, statistics AND banking to appreciate how much it could all add up to. Actuaries are paid handsomely for this kind of risk calculation!
Stronger regulation is urgently needed because banks like CIBC can’t regulate their greed. We’ve paid them lots of interest over the course of our mortgage and now, in addition to that, they’ve laid claim to one third of the profit on our home.
Pity the unlucky person who sells for what they bought at, or sells at a loss!
Life doesn’t work in neat parcels of time, so penalties for breaking mortgage terms shouldn’t be usurious.
We are one of many Canadians being stung by the IRD clause and something must be done about it.
Morrigan
Feb 4 2010
I have a question that I hope someone can answer.
We bought our house with a 5% fixed rate mortgage/20 years. We made extra payments (as is allowed) and when it came time to renew after our 5 year fixed rate was up, we only had 10 years left on our mortgage.
We renewed, then a year later I received a very large chunk of money from an inheritance. We decided to put that money down on the mortgage and it almost paid off the mortgage entirely. The bank charged us an IRD upfront of several thousand dollars.
We just recently finished paying the mortgage off entirely. We went to the bank, asked if there were any final fees, he told us no. That we were no fully discharged, that we had to wait “about 4 weeks” to receive the discharge papers that we could then take to the Land Registry office and remove TD Canada Trust’s name from the deed.
Today I received from TD that I owe $560 to discharge the mortgage.
$300 in a Reinvestment Fee
$260 in Discharge/Transfer Fee
I would like to know why I have to pay these fees. When I paid the IRD penalty for paying my mortgage off early, I asked my banking “specialist” about fees and he said: “oh, you know banks, we take the money upfront, not at the end for mortgages.”
None of these fees were mentioned. I was there, making sure at the beginning of January, that my mortgage was fully discharged and he said it had been.
Is this right? Can I fight these fees tacked on at the end - which just seem like a ballsy way to squeeze an extra $560 out of us.
Also, with terrible customer service like this, and with such mental incompetence, why would I EVER want to invest any more money in TD Canada (dis)Trust? They *just* got my mortgage paid off - now thousands of dollars are freed up, which I probably would have invested in TD (at least partially) - but now with this bullshit, they are getting diddly squat and I am looking for a new bank who can appreciate my business.
So long, TD. You really know how to kiss your customers goodbye!
HB
Feb 28 2010
LET’S FORM A COALITION AND FIGHT THE BANKS TOGETHER TO GET OUR MONEY BACK!
HB
Feb 28 2010
The IRD is an OPTION for the bank. It has two ways of charging you a penalty:
– 3 months interest,
– IRD.
In economic hard times, the bank could be using the 3 month interest penalty to help their customers but they have chosen not to. They took all the profit from the sale of my house and I HAD to sell.
So you guys who are defending the banks, you obviously have lots of money to lose. I don’t.
And let’s remember, ICBC IS ALREADY POSTING HUGE QUARTERLY PROFITS!! Oh ya that’s our money.
PM
Mar 13 2010
I recently contacted the TD Bank for an early payout on a mortgage held by them on a transfer of title. I calculated the Interest Rte Differential amount due and came up with $4,800 (which isn’t too hard to stomach).
When the bank calculated the penalty, they came up with $8,500. I questioned them about it and this is what I found.
The rate of the mortgage was 5.35% on a 5-year term. The remainder of the mortgage was 18 months, but they used the 2-year rate of 3.95%.
That should be a difference of 1.40%. Instead, I was shocked to find out that they claimed the mortgage was discounted at the time of financing by 1.35% and the Interest Rte Differential Penalty should take that amount into account. That is the reason for the high difference.
I think it’s shocking and I won’t take this lying down. I have no choice but to pay the penalty to get out of their mortgage, but I will contact whatever financial watchdog there is to put a stop to their gouging.
If they are entitled to the difference, then it should be the difference based on the mortgage rate in effect, not what it would have been 3 years prior. Obviously they gave the rate at the lower amount because the client was a good client. Now because he’s moving his mortgage, he’s no longer a good client?
THIS MUST BE STOPPED AND I WILL DO EVERYTHING IN MY POWER TO CHANGE THIS! What the public doesn’t realize is that if they allow the property to go “Power of Sale”, only the principal and to date interest is owed, no penalty. Maybe that’s the way to go.
Julie
Mar 17 2010
You can add RBC to the list as well, and if anyone can offer advice on this please do. We renewed our mortgage with RBC at a rate of 4.5. We since purchased a new home, and sold our current house. Our contract with RBC was until 2013. We met with their broker to discuss rates. She offered us a 30yr at a blended rate of 4.3. We asked her about the current rates and she said that in order for us to get a lower rate we would have to close the current mortgage and pay a penalty fee of, well it started out as $7151, on a $171,000 mortgage but by the end of the meeting when written on paper suddenly changed to $8330? We asked why because we were not closing the mortgage with them as per say, we were actually increasing the mortgage, and she just kept talking about breaking a contract. We also asked her to break it down for us on paper, and her response was, What are you asking me a break down of? What is it you need to see on paper, so she hand wrote some of her figures, perfect!!
Anyways, my question is why she couldn’t give us the lower rate and still lock is in unto the contract ends 2013.
Also if she is giving me a blended rate, why do I have to pay the CHM Fee again?
Thanks,
Julie
PM
Mar 27 2010
Hey Julie, it seems the banks do what they want. I have written a complaint to the Ombudsman for Financial Institutions, but I don’t know where it will go from there.
Maybe if the government was bombarded by people who have had to pay these exorbitant penalties, something might be done about it. You might also want to write a letter to the CEO. Maybe you might get some sympathy there.
I had a friend who was asked for $35,000 as a penalty. When he threatened to let the property go Power of Sale, the TD bank reduced the penalty to $15,000.
Was your mortgage not “portable”? You might have wanted to consider an equity line of credit for the amount over and above your old mortgage. Good luck with it.
We had to pay the penalties, but I am still fighting it because they charged us on what the rate was back then and not what the fixed term was on the mortgage. They get you every way they can.
HB
Mar 28 2010
I have a question , if you do the “power of sale” route that means you are defaulting your loan and that means you are damaging your credit rating and that the bank would not give you another mortgage. Is this correct?
disappointed
Mar 30 2010
Just paid ~ 20K to close a ~ 300K mortgage due to sale of house. Ouch!!
“Re-investment rate” in contract is a very suspicious reference in the IRD calculation, which can have costly consequences.
My documentation on this penalty charge from the bank is just 20K, but no calculation to back up penalty. I guess when you are making millions, 20k is small change for a fat cat.
Unfortunately, the PR generated by this IRD calculation “option” is not positive… but this is the bank’s “choice” and will have to live with the consequences of its actions when they really need public support for their business.
The term “loan shark” is the first thing that comes to mind when referring to a bank. For a proud Canadian, this is saddening and quite the tarnish for someone who held our banks quite highly … yes, I feel I just got “worked” over.
Michelle Thomas
Apr 1 2010
Home Trust is disgusting! After 5 years of mortgages with them, I am ready to tear my heart out.
We were self-employed and went through Home Trust for our very first mortgage in 2005. It was a one year mortgage and when we re-mortgaged with them in 2006, we also got a line of credit. We eventually rolled the line of credit into the mortgage and then, when the economy nose-dived, our business died as well. We had to move out of our own home and rent it out!
In October of 2009, my husband took a position with Canada Post (where he used to work) and we went to Home Trust to once again refinance. Our mortgage was not over yet but we had several terrible tenants and were a bit behind.
We did not get anything from this new mortgage, other than the 2 months of payments that were due. The fees they charged on each of our mortgages was insane!
For the mortgage in October, we told them that it was a rental unit now and we were looking at taking a transfer with Canada Post to Nova Scotia, as the cost of living is lower. The only mortgage they would offer us was a 2-year closed at 7.75%! We had no other choice! They verbally told my husband that they would give us a mortgage as soon as we got to Nova Scotia, no problems.
We took the transfer and went to NS in December ‘09. Our townhome in BC was on the market and we again checked with Home Trust about a mortgage in NS. Again, ‘no problem’.
We had a firm buyer on our home (in August of 2008, we had sold the townhome for $260,000 to a couple, we signed the papers, the bank had said yes to their mortgage, and the next day, the US economy tanked. The bank pulled the mortgage. Our home sat on the market for another year and sold for $204,000….).
So, we waited until all the papers were signed and the purchaser had their financing in place. We couldn’t back out! We contacted our sales rep at Home Trust and sent in the MLS info for the property in NS that we had placed an offer on.
After waiting for a week, Home Trust came back to tell us that their underwriters were only doing mortgages for Halifax. We are 90 minutes from there! They refused to give us a mortgage. They did state, in an email, that if we wanted to move to Halifax they would get us a mortgage there in a day!
Now we were committed to the sale of our home and, as we no longer qualified for their 90 day refund policy on penalties, we were hit with an $11,000+ penalty…..that left a whole $204 for our lawyer to give us at the end of our sale. It is being put in my bank account today, April 1st! I really wish this was an April fool’s joke. After 5 years of mortgage payments and $30,000 in renos, we made 0.1% on the sale of our home.
Home Trust effectively took everything we had and we are now starting from scratch! Their reasoning is, of course, that our mortgage was at 7.75% and if they were to mortgage someone right now, it would be at 3.84%, so they would lose $11,000.
They also told us that they would never give us a mortgage for 3.84%, so I have no idea how they can use that as the rate differential. And in order to even qualify for the 90 day penalty refund, we would have to re-mortgage with them for the exact same amount as our other mortgage and at 7.75%. But, of course, they will not mortgage us outside of Halifax.
This is NOT ethical!!! How can Canada and CMHC allow this to continue! If the interest rates were reversed, my mortgage currently being at 3.84% and the prime rate being 7.75%, would Home Trust give me an extra $11,000 because I let them out of MY mortgage early? Only in my dreams! If anyone is planning a class action lawsuit, I will definitely be there to join and support.
Home Trust’s motto is that they don’t make you jump through hoops, what a lie!
The worst part, my 5 year old keeps asking my husband why he doesn’t have his own room with his own toys, since we are currently living in a tiny 1 bedroom cottage, now we can tell him the truth: Home Trust stole all our money!
IRD issue
Apr 9 2010
I have to break my mortgage and I’ll have to pay a penalty for about 3.5 years remaining and for a rate differential of about 1.1% and principal of $70k (reduced after all pre-payments allowable). Not a big deal, it goes to about a $2,500 penalty.
I understand the bank’s position that they charge penalty on the rate differential, since this is the money they would make if I didn’t break the mortgage contract.
However, this statement is not true because if I want to close a mortgage, then I will use all my pre-payment options in every year of the mortgage. That means that the bank would not get $2,500 in interest, but somewhere around $1,200.
The banks do not consider pre-payment options when they calculate the IRD penalty. I would like to see this regulated and the banks forced to take it into account when calculating the penalty.
For example, in my case, I can use 25% (of original amount) pre-payment which is $37,500. The mortgage anniversary is November.
So in November, I would pay $37,500 reducing my principal to about $30,000. Next November, I can just pay it off, no penalty. So the bank charges more than the fair amount.
We should start a legal challenge.
FK
Apr 12 2010
Really sorry to hear about all of the troubles you’ve all faced here. The learnings from this page helped me a lot.
My mortgage with Firstline has about two years remaining. However, we decided to upgrade to a larger house (in a different area, essentially the same cost).
After reading the stories above, I had a good understanding of IRD penalties, and after spending about 20 minutes discussing them with my Firstline mortgage consultant, we found a way to avoid them almost completely.
By purchasing our new house and selling our old one with an identical closing day, and keeping the original 5-year rate we had in 2007 (5.06%), we avoid the IRD by bringing them a ’seamless transaction’.
I know that this doesn’t help anyone forced to sell and not purchasing a new place, but for those in portage situations, it is a way to maximize your profit from one home to another…
JWC
Apr 12 2010
I still fail to see how it is the bank’s fault you don’t know what you were getting into financially when you took out your contract loan. That’s what it is… a contract. Between the bank and you, on your word and some evidence you’ll pay them back. To assume that risk is where they get their money.
It’s not really the bank’s fault that you got laid off, or that interest rates tanked, you agreed to pay them for 5 years. End of story. Why did you lock in for 5 years in the first place? Why didn’t you get a variable or open rate mortgage? These options were around the whole time…
When the rates go back up in a couple of years, do you think it would be fair for the banks to cash you all out of your 3.69% mortgages just so they can make more on interest when it goes back up to 5.5%? There would be a holy uproar, and well deserved. This is exactly what you are proposing to them, and then calling them greedy and grasping to boot.
I don’t understand the sense of entitlement at all. I sympathize with your life situation, but taking it out on the banks when it was clearly spelled out at the start isn’t going to help. It’s hardly their fault you couldn’t be bothered to read your contract, or be responsible enough to retain an accountant or attorney to interpret it for you. People don’t generally lend eachother half a million dollars with no guarantees in place… why would you expect different?
RC
Apr 13 2010
Thanks for everyone for sharing their stories. Living in Canada for only 10 years now, I’ve come to the realization of how happy I could have been in my native place of birth in terms of banks and their mortgage system.
The stories being told here are outrageous, but still… always there are these few people who do not (or do not want to) understand that any contract can have abusive (consumer) clauses, which may make them invalid.
It is not true that just because it is written and signed, it can’t become irrefutable; on the contrary !! Any undergrad lawyer student knows that… and people here should know that as well.
The differential in the economic power between the parties involved in a mortgage contract (bank vs. consumer) should be sufficient to allow any judge to rule in favor of the less powerful, that is, for the individual, given that the bank is still getting its chunk based on the 3-month amount.
But again… we are in Canada, not in my native land where, for sure, the rights of any consumer/family would come first.
HB
Apr 13 2010
This is a reply to JWC, April 12. You must be a banker!
You say it’s not the banks’ fault that we lose our jobs and need to sell our homes. Maybe not, but don’t forget it’s the consumer (the banks’ customers) that keep the banks in operation.
So why should the goverment bail out the banks when they mismanage their business? They did and where did that money come from? Taxpayers. So get your facts straight before you come here and post your thoughts.
And you go tell all those people who lost their homes that the bank had every right to be greedy. You seem to forget that the banks do have options!!!
ringo
Apr 16 2010
Does anyone know how the IRD works on variable prime minus mortgages?
PM
Apr 28 2010
TO JWC……I can understand where you’re coming from. But, if the mortgage rate on the mortgage is fixed at (let’s say 5.25%) why would the interest differential be based on what the going rate was at the time? A deal is a deal.
When you invest in a GIC for 5 years at say 4%, the bank doesn’t give you the 5% if you collapse it early. So one way or another, it’s always in the favour of the banks.
SnS
Jun 2 2010
I work in the Financial Services sector. I am well versed in the bond markets, understand mortgage pricing, respect pre-payment obligations etc. I have no interest in trying to avoid a fee. When it comes to money, I cross every I and dot every T.
My concern is the total lack of transparency with respect to the IRD calculation and, as many contributors have indicated, the ability of banks and other mortgage lenders to articulate those calculations.
My Fiancee and I are expecting a baby. As a result, we made the decision to start combining assets. This, of course, included our house, which we did not buy together.
We were told by the city that the only way to get title changed was to have both our names on the current mortgage. No problem, we’ll just add a name to the current mortgage.
Not so fast. Our mortgage product is no longer offered, therefore no changes are allowed to be made.
Putting another name on the mortgage — that is, adding a borrower — would ultimately strengthen the lending institution’s position. Strange and frustrating.
After much back and forth, we were presented with 2 options:
(a) Pay out the $15k penalty and renew the mortgage with them? ??????? After they refused to co-operate with our request to add a name??? Not happening!
(b) Or be patient and wait for the remaining 2 years to renew. With a child about to be born, not a situation we felt comfortable with.
After much deliberation, we were essentially forced into closing out our current mortgage. Before we did this, we made the call on May 5th and were given (in an email) a penalty of $15,600.
Our mortgage was funded on June 1st. Thinking all this drama was behind us, we were pleased. Unfortunately, our lawyer called us to inform us that the IRD fee was actually over $20k.
My assumption was that something was wrong, as I had done the calcs myself and received the email from an employee at the institution less than a month before. Wrong!
As it turns out, our mortgage had 1 year, 11 months and 30 days left on it. So the bank didn’t use a 2 year mortgage rate to calculate the IRD. This one day moved the calculation to a 1 year rate, which of course is much lower and caused the $5k difference.
If our mortgage had been funded on May 31st, it would have remained at $15k. So for one single business day, this mortgage provider has decided they are out 5+ thousand $$$$.
At no point was this communicated to us in the dozen calls and emails we had. Even the most informed person can be stung. This is the problem!! Nowhere in their paperwork is this illustrated.
We have yet to hear back from anyone. I am, however, hoping the difference is paid back to us.
adel Di Palma
Aug 20 2010
All banks’ loans and mortgage contracts do not conform to fundamental justice. Please contact me for more info, Adel, mylife.freenow@gmail.com