Quite frankly, it’s long overdue. Our mortgage industry has been pushing for years for banks to clearly define their penalties. Finally a few lenders are now putting their penalty clauses in their commitments but most have them contained in a 30 page mortgage charge which is given at the lawyer’s office(which clients never read) as the mortgage is closing.

The federal government in its wisdom will now make it mandatory for full disclosure for penalties.

We see it first hand because of the number of mortgages we handle from many different lenders. Lenders now can pretty much do what they want when lawyers asked for a discharge from the current mortgage. And there is no recourse. There are two penalties for paying out a mortgage early. One is the 3 month interest that applies if the new mortgage rates are higher than the existing or the IRD or interest rate differential. Simply put, it’s when rates go down the IRD goes up. Here’s how it works. First take the principal balance, multiply it by the difference between the previous high interest rate and divide by 12. Multiply that number by the remaining months on the mortgage term to get the approximate IRD payment owed. Banks do not even have to tell the client how the IRD was calculated in the first place so there is no way of telling if there was a mathematical mistake or not and so basically clients are at the mercy of the mortgage company they are exiting from.

The Financial Consumer Agency of Canada has receivede over 100 penalty related complaints since the beginning of the year and is investigating some of them. In many cases, the banks are going way too far because they are making their calculation on the basis of what was the posted rate was at time of the mortgage and not on any discounted rate that was agreed upon with the customer. Last week we had this happen to one of our clients. With only 12 months remaining on his mortgage the bank is charging him 5,000 dollars for breaking his mortgage. This is unfair and wrong and we urged our client to file a complaint.

This is one of the major benefits of a variable rate mortgage, the penalties are a simple 3 month interest so there are no games being played. The Feds are making changes so that banks are forthcoming about their penalties. Call us for the best mortgage advice and a free analysis of your mortgage situation. Our best 5 year fixed rate is 4.34%. Best variable 1.7%