Lenders to be more consistent with prepayment penalties

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Next to slow turnaround, unclear mortgage penalties are one of the biggest concerns for many brokers – especially given how many different ways they are calculated.

“There are so many different ways lenders calculate penalties – certain lenders will use the posted rate and not the discounted rate that was offered to the client,” Narish Maharaj of Dominion Lending Centres Mortgage Mentors told MortgageBrokerNews.ca. “Others will subtract the client rate from the T BILL rate and subtract the client’s rate to determine the penalty.”

According to Mararaj, not only are certain lenders doing whatever they can to saddle clients with the largest possible penalty, it can become confusing when dealing with all the various rules.

“Trying to figure out the penalty is frustrating [from lender to lender] and many of them are creating much bigger spreads," he said.

It’s a source of growing frustration for brokers, especially given the fact that so few Canadians read their mortgage documents and fully understand them.

According to a recently released study by Scotiabank, only 33 per cent Canadian homeowners admit that they have read their entire mortgage agreement. And only 27 per cent fully understood the details of their home loans.

And with 60 per cent of people who took part in the study believe prepayment privileges as the second most important factor in choosing a mortgage, just below rate.

"Buying a home is both exhilarating and stressful, which is why a meeting with a financial advisor to understand all of the terms and conditions of a mortgage agreement will ensure customers get the mortgage that is right for them," said Scotiabank's David Stafford, managing director of Real Estate Secured Lending of the report’s findings. "Flexible features like prepayment privileges, bi-weekly payments and the ability to port your mortgage can save customers thousands in interest and fees over the long term."
  • Blair Goodman on 2015-06-05 12:28:22 PM

    The federal government needs to step in and set a single formula that all lenders are mandated to follow, thus protecting all consumers.

  • Mortgage Guy Geoff on 2015-06-05 1:26:48 PM

    @Blair...perfectly stated. Its that simple. I'm typically NOT in favour of any government intervention but here's a case where it makes sense. A better informed consuming public allows/forces all of us to be better operators, thereby improving the overall experience for everyone, not to mention how it would further level the playing field for the brokerage community.

    Having said that I completely understand that as good people we should live up to the commitments we make, especially legally binding agreements. However I recently had a customer quoted by his current bank approx $8300 in penalty on a mortgage balance of about $160000. As a result this guy is not going to be able resolve some recent financial troubles and will likely have to resort to even more drastic measures.

    The really atrocious part is the penalty charges that are calculated using theoretical/posted rates that are far in excess of what the lender would have actually realized had the mortgage not been broken. So you end up compensating them for money they actually weren't ever going to make.

    While I admit its within the letter of the law, it simply doesn't seem right some how. It's like "Goliath" gouging "David" simply because they can.

    Now wonder all of the big shiney towers downtown have their names on them.

  • Peter Pasula on 2015-06-05 2:00:20 PM

    The big banks have all reduced their posted rates below 5 yrs terms, thus creating a massive IRD day one after signing a 5 year fixed mortgage. A recent TD client with 2.79 fixed rate and 3.5 yrs remaining on the term was quoted +$50k for a penalty. Low rates like this should not have any IRD penalty. All the big banks are the same and yes Blair the gov't needs to step in and fix this issue. You cannot allow banks to arbitrarily set posted rates only to beef up pre-payment IRD penalties.

  • Omer Quenneville on 2015-06-05 5:50:18 PM

    The only reason the banks have posted rates is so the banks can empty the pockets of their customers. No one pays posted and no one should pay a penalty based on posted. As for TD and their $50K, I always tell my clients the reason why TD has the green comfortable chairs is because you are going to be there for a long time. Once they have you, they will penalize you to your last breath and even after your last breath, they want their penalty.

  • JR on 2015-06-08 11:21:25 AM

    Check out the FCAC website. Lenders are required to provide written disclosure of the prepayment penalty calculation prior to the borrower signing a commitment letter. If the penalty is more then the borrower should make a complaint to the FCAC. I beleive most of the big banks will have a prepayment calculator on their website.

  • Elizabeth Biderman on 2015-06-08 11:34:06 AM

    I fully agree with the above comments. The penalties imposed on the clients are atrocious. My clients were gauged for $21k penalty at the time of sale by Scotia Bank. I felt so guilty - I could do nothing about it and really at the time of signing the contract there is no way for us brokers to fully explain how the penalty works. In some cases clients are forced to get the 5 yr fixed term to qualify for a mortgage for their house and when something unpredictable happens bank takes most of the equity they have acquired. I am sure there is something that we as broker's community can do to affect the change.

  • Omer Quenneville on 2015-06-08 12:02:00 PM

    Banks seem to like to sell insurance. Maybe when someone is forced to take a 5 year fixed to qualify it should come with insurance that if they have to break the mortgage prior, the insurance will cover it.... or better yet, set a standard fixed penalty on forced 5 year mortgages (I'm teasing about the insurance option).

  • Ron Butler on 2015-06-08 12:14:55 PM

    The ultimate truth is that no matter what information the bank provides on it's website or how easy it is to use the calculator; if rate inputs from the future are required to do the calculation only David Copperfield or someone else with a crystal ball can accurately do penalty calculation.

  • mono line lender on 2015-06-08 3:05:24 PM

    Firstly we must clear up something about any FI and their discharge policies.....the term penalty is inaccurate. It is a misnomer. It is not punitive, it is truly interest rate "compensation". How it is calculated by the institution is down to practicality and market conditions. One who breaks one's mortgage contract is contractually subject to making the partner in that contract whole. How benevolently the calculation is made, is up to local standards. Regardless of your view, there is no good faith transgression here. Additionally, the suggestion one could negotiate a discharge fee in advance and have a third party backstop it is not tenable. Funds are advanced day of contract no way to predict rate environment, cost of funds or margins can be locked in on the "never-never plan". Actually I correct myself, many of us have a low content offer where the discharge payment is prescribed. MY bad.
    Banks selling insurance? It makes money in an era where mortgage spreads are thin and operational and origination costs are high. More importantly it makes the client very sticky. In fairness, banks do a good job on this and are unapologetic about being in the business of recruiting new clients and keeping them. The fact that none of this is news (discharge, cross sell etc.) and the howl of "foul" by many here fly in the face that a big 5 is still the number 1 supplier to this constituency.
    You can't bash the banks in one breath and support them in the next.

  • Ron Butler on 2015-06-08 3:22:56 PM

    @mono line, we often agree but on this one we have divergence, if the wording of the penalty clause in a bank's mortgage disclosure docs is running to 11 or 12 paragraphs and requires inputs of rates to be determined in the future to calculate the numbers then we have start to think about a willful intention to make the calculation unknowable to the client.

    If the banks have the honestly to say in the disclosure "a very real chance the break penalty will exceed 4.00% of the mortgage balance" then I feel they have at least achieved a kind of accurate disclosure but the truth is that is not what is going to happen.

    I contrast that to many monoline disclosures where the penalty calculation is straight-forward and clear.

    My argument not about the penalties being onerous, it is about the disclosure being so hard to understand that it becomes deceptive.

  • mono line lender on 2015-06-08 3:46:04 PM

    Fair comment Ron. At the risk of being self aggrandizing, our calculation is based on the face rate and simply expressed. Wait a minute! I'm anonymous (Omer calls me "bogus", thought that was a little harsh, I was hoping for "enigmatic"), so I'm not promoting my company's advantage. I agree that the legalese is hazy in some FIs and it comes down to "caveat emptor". I know you personally explain the ins and outs to your clients, many don't. I agree a ton of language and complexity doesn't make for a happy client, however my point is two pronged.
    1. there is nothing immoral or punitive about the calculations, irrespective of the mortgagee (again not me). The expression of it at outset is truly the issue. Lack of clarity.
    #2. More a question I suppose.
    If most of the ire here is aimed at the Big 5 and the way the calculate discharge and wrap your client up in cross sell....? Why do you guys (I know not all) support them so thoroughly and then complain when they do what they say they're going to do?
    Not trying to shout anyone down, just trying to provide an alternate theory of the crime.

  • Ron Butler on 2015-06-08 4:00:33 PM

    The answer to why would a broker would send a lot of business to banks is fairly simple: we need to!!

    ETO over $200K, ratio exceptions on plain vanilla conventional deals (30 / 46 is still a very good deal at 19% LTV but a monoline cannot do it), mortgages over a million, it turns into a long list some days, so brokers will ALWAYS need pure balance sheet lenders and the banks are the big dogs we have to use.

    In spite of the banks penalty issues and retention teams a broker's first duty is to get the client the mortgage............ period; if the deal fits a monoline, that's fantastic let's do that mortgage with a monoline but the number one priority is: we have to get the client their mortgage approved, whichever lender it is. That's why we are all here.

  • mono line lender on 2015-06-08 4:18:33 PM

    Touché Ron. See, I get that. It's the hyperbole and some of the histrionics here that I challenge. Balance sheet, big deals etc is a thoughtful informed rationale to my question.
    I like it better when we agree.

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