Lender aims to take the pain out of penalties

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It is a familiar story – a client looking to refinance, but facing a prohibitively high penalty.
Still, Bruce Schoenne of PayLessPenalty.com has a solution, one some brokers may say sounds too good to be true.

“We pay down your mortgage by the maximum pre-payment privilege allowed,” says Schoenne. “This lump sum payment reduces your mortgage thereby reducing the amount of your payout penalty. There is no cost to use our service. On closing, PaylessPenalty.com simply splits the savings 50/50 with the client.”

That arrangement, says Schoenne, has proven so popular, he is in the process of franchising the idea out across Canada.

“Since the launch of the Payless Penalty we have had numerous inquiries about franchising the idea, giving agents exclusive territories.  We're currently working on that plan and are in talks with a number of brokers and agents,” he told MortgageBrokerNews.ca. “They like the branding – they will use their own collateral and financing.”

Schoenne admits that the idea is so simple people think that there is a catch.

“The money that we pay goes directly to the lender for the prepayment, and that is returned to us with only an incidental per diem charge,” he says. “If it is a case where no lump sum can be paid back to us within 30 days, then a 5 per cent per annum charge is calculated on that money.”
Mortgage Broker Beth Jeysman of Verico KC Mortgage says it sounds like a good idea, but the savings would need to be substantial to use the service.

“It sounds reasonable, but I would have to determine if it would work,” says Jeysman. “I have clients who are facing $13,000, 14,000 and $15,000 in penalties. In a lot of those cases, they (the clients) wouldn’t want to do it, because the savings would not be that much. And there are some who have mortgages that don’t allow a pre-payment.”

The average savings for a client is in the $500 to $600 range, but Schoenne does cite an example from last week where one client saved $1,879 in penalties on a total penalty payment of almost $18,000.

“The reaction has been nothing short of overwhelming.  You'd think that lenders would hate the idea but in fact it's a great tool for them to attract new clients that might otherwise not consider moving because of the cost of a penalty,” says Schoenne. “Mortgage brokers and agents (are) the same thing. They see this as a great opportunity to attract new clients and at the same time offering their clients an ‘unexpected’ bonus they might not have otherwise been made aware of.”

For example, if a client was facing a $20,000 penalty because he or she had three years remaining on a five-year-fixed term mortgage, PayLessPenalty.com would loan the client the maximum pre-payment amount, thereby reducing the principal owing and the total penalty. If the penalty was reduced to $18,000, the client would receive $1,000 and PayLessPenalty.com would receive $1,000 (plus whatever prepayment was loaned by PayLessPenalty.com to the client initially).

“So long as there is a mortgage that has an unused portion of the pre-payment option available it doesn’t matter if the mortgage payout is part of a property sale or refinance,” says Schoenne. “It also doesn’t matter if the mortgage is a first, second or third mortgage.”

PayLessPenalty.com will also get a registerable mortgage as a guarantee, in case the deal goes south.

“We haven’t had that happen yet, or had to use that option,” says Schoenne. “It is hard to imagine a deal that would require this action, but it is available so we can protect ourselves.”

Schoenne wants to be clear that he does not want to step over mortgage brokers or agents.

“We do not arrange mortgages and we do not offer advice or recommendations on mortgages. All questions regarding their mortgage needs are referred back to the broker or agent,” he emphasizes.

For Jeysman, she’d half to hear more about how PayLessPenalty works.

“I’d love to know more about it before presenting it to a client,” she says. “Being wary, it is something that ‘sounds too good to be true.’”

  • Welbanks on 2013-02-26 6:11:09 AM

    It sounds interesting, but I'm curious to know what the fees for registering the mortgage are... is the amount used to determine the fee reduced by this amount? So if there was normally a $2,000 fee and the registration cost was $300, is the remaining $1,700 savings split between PaylessPenalty and the borrower? I can appreciate the need to protect Payless, but the savings needs to be pretty significant to the client to justify the cost and trouble of going through all of this.

  • B. Mighton on 2013-02-26 6:29:59 AM

    I have had ,on occasion,found that the lender gave the client the reduced penalty --ie if prepayment was 20% then the lender 's penalty was only on 80% of balance outstanding.Brokers should check with the institution for their policy before entering into this arrangement. Could save a lot of embarassment & costs.

  • Bruce Schoenne - PaylessPenalty.com on 2013-02-26 9:31:16 AM

    As part of our protection the documents a client signs includes a registerable mortgage. We are NOT registering a mortgage on the property unless and that's a bit unless the refinancing/home sale doesn't fly.

    If the deal does not fly the client is given time to pay us the funds back. If that does not occur then and only then would we register the mortgage against the property. AND only at that time would a fee be incurred for registering the mortgage. This is a worst case scenario and we have not run into this yet. Bottom line is we do not want a mortgage on a clients home and we'll work them to find another way.

    Brokers do their own due diligence on the client and the deal so the chance of the deal not flying is remote at best. To that point there is no cost so a savings fee of $2,000 would be $2,000.

    The savings do not have to be substantial for a client to benefit. At the end of the day any savings is more then they had before the process.

    I'd suggest bringing the idea up to the client regardless of if you think the savings is enough or not enough and let the client decide. Providing them with the potential of a cost saving solution to a problem will do nothing but make you look good.

    We look at this service as a value add for the broker. I'm available at any time to take a call on the workings of the product. 1-877-492-5164

  • Bruce Schoenne - PaylessPenalty.com on 2013-02-26 9:34:20 AM

    With respects to B.Mighton's comment, we'll look into that before any paper work even gets started. We have a list of institutions that allow for this so we can tell pretty quick if this is the case. Only after that step has been completed do we move to paperwork.

  • Rebecca Awram - Origin Mortgages on 2013-02-26 9:48:49 AM

    ING used to do that.... reduce the penalty assuming a 25% paydown of the mortgage first that was 'penalty free', so to speak. I've never seen another lender do that as a matter of course, but have negotiated the penalty down a similar amount (15% - 20%) if the client is not switching lenders. Or of course, as many brokers already do, I've had clients pay down their mortgage (from savings, loan or loc) the maximum allowable amount before requesting a payout statement. All normal things.... this is not revolutionary, but could be good for clients that don't have the $$ to do this on their own.

  • Bruce Schoenne on 2013-02-26 1:41:10 PM

    Your absolutely right Rebecca, we have in no way re-invented the wheel, what we have done is provided the service for people that do not have the funds to do this themselves.

    Some brokers/agents have done this themselves for clients but you're cautioned to ensure you have the necessary paper work in place to protect yourself if something goes wrong.

    I'm also not sure if somewhere in this process there might be a conflict for the broker/agent if they do the deal.

  • Leon Tucciarone on 2013-02-27 2:14:43 AM

    As brokers, we should be providing this service and guidance to our clients anyway. I have been doing this for over 20 years. It is always great to get any kind of chatter going when it comes to penalties....Most lenders will allow a borrower to maximize pre payment penalties from the proceeds of a sale or a new mortgage in the case of a refinance (from the funds that come into solicitor trust on the day of funding). Rather than make one payment to the existng mortgage holder, you make 2.....a maximum prepayment......and then the final payout to discharge at a reduced amount. You have to ensure that you advise the solicitor accordingly to ensure they request the discharge to ensure that is done. Many lawyers either don't know or are left with insufficient time to do it so do not assume they know. There has been class action lawsuits won against Canadian financial institutions on this. Royal Bank in particular was at the heart of that law suit and they now automatically calculate discharges this way. Still, others, like CIBC Firstline made policy changes to restrict the client by not allowing any prepayments within a week of discharge.

  • David Grossman on 2013-02-27 5:21:58 AM

    This sounds like nothing more than a gimmick. The mortgagor could pocket 100% of the savings by exercising the prepayment by him/herself. If they aren't liquid, get a line of credit from the bank, take a cash advance on a credit card or borrow the money from a friend or family member. http://www.alltalktv.com

  • Bruce Schoenne on 2013-02-27 6:59:44 AM

    David you're right, clients can do this themselves and it would be the way to go hands down. However "most" people don't have the funds or a LOC or the $50,000-$100,000 to put on their visa's. We're filling a niche for those that don't have the money.

    Don't much see that as a gimmick but I respect your opinion.

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