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The Big Story: Prepayment clarity

New code of conduct rules for lenders mean they must clarify prepayment and penalty terms for borrowers. While brokers welcome these changes, they feel they don't go far enough. This week we spoke to Nick Kyprianou, CEO, Equity Trust Financial and Deepak Bansal,Ron Alltree, Kunaal Bhalla, Sarah Makhomet and Jonathan Tillger, of Dominion Lending Centres Mortgage Village. Find out on today’s The Big Story, on MortgageBrokerNews.ca TV, your home for industry news, opinion and analysis.

Video transcript below:

John Tenpenny, Mortgage Brokers News TV
John Tenpenny:
 Hi, I’m John Tenpenny, Editor of CMP Magazine and welcome to the Big Story on Mortgage Broker News TV.

When is good not good enough.  A new code of conduct regulations, lenders must now provide borrowers in writing all information about prepayment charges, including how the lender calculated any and all charges.  What’s not good enough for brokers is the fact that the new rules don’t include a standardised IRD formula for all the lenders.
 
Sarah Makhomet, Broker, Dominion Lending Centres, Mortgage Village
Sarah Makhomet:  I do not believe so that the recent changes have gone far enough.  And here we are talking about IRD interest rate differentials, calculated penalties for fixed mortgages at time of exit out of them.  The government have done a window dressing, all they have done is put the plain language, asked financial institutions to put a plain language as to how they are calculating them.  However, it is not standardised to the point where we could say that every single financial institution would calculate it using this method.  So at the moment it is still incredibly challenging to understand what a penalty truly will be at the end when the client needs to exit a fixed rate mortgage.  I do believe if such a method is put into place, it would make it significantly easier to calculate the IRDS and it would make, it would benefit our clients and I think it would benefit our industry as a whole.
 
Deepak Bansal, Broker, Dominion Lending Centres, Mortgage Village
Deepak Bansal:  I think they have made the right changes in the sense that they have made it easier to, an easier language to understand, but they definitely haven’t gone far enough.  Many lenders today have different methods of calculating these penalties and if they had just come out with more of a standardised calculation, it would have been a lot easier for clients to understand.  
 
Kunaal Bhalla, Agent, Dominion Lending Centres, Mortgage Village
Kunaal Bhalla:  I think the recent rule changes were good for us to have more clarification for the client so it was a good thing.  I don’t think they went far enough inasmuch as the calculation itself that’s used to calculate the penalty.  It’s very complicated, it’s difficult to know for us as mortgage professionals to understand the calculation, let alone the general consumer.
 
John Tenpenny:  Calculating prepayments are difficult even for brokers, let alone clients.  So it’s the responsibility of lenders and brokers to ensure their clients understand everything about prepayments.  
 
Jonathan Tillger, Broker, Dominion Lending Centres, Mortgage Village
John Tillger:  First thing I foundd that is looking at the prepayments and the penalties, that’s probably the most confusing when it comes to clients.  Clients have no clue what they are getting into or rather what it takes to get out of the mortgage.  So with the steps they are taking, I think it’s a good start and the fact that they are saying what’s going to be in clear language but I don’t know if it’s far enough because I think that what does clear language mean, until I actually see what’s been written and how it’s presented I don’t know for sure whether that’s the best presentation to a client.  I think at the end of the day, it’s the responsibility of the lender whether it be through a broker or through a bank to actually sit down and clearly explain, listen if you do got to get out of this mortgage sooner, here’s how your penalty is going to be calculated.
 
Ron Altree, Mortgage Planner, Dominion Lending Centres, Mortgage Village
Ron Altree:  I think the fact that they put in place a code of conduct to be able to track the kinds of information that the borrower should have access to is a very positive thing.  Whether or not they have gone far enough, perhaps they haven’t in terms of being able to examine what the results of this code of conduct is.  But I think the basic thing is, we need more information headed to the borrowers, so that they are really better equipped to make intelligent decisions and that our job as advisers that’s the lender’s jobs as the lenders and responsible lenders, let’s make that work for the clients in the right way, give them the information that they need, it’s a very positive step forward.
 
John Tenpenny:  The code also means that lenders must provide borrowers with an annual update on prepayment terms and possible penalties.  Lenders say they welcome these new rules and will ensure that the IRD penalty calculation is easy for borrowers to understand.
 
Nick Kyprianou, CEO, Equity Financial Trust
Nick Kyprianou:  I think they do go far enough and I also think the transparency and the clarity is very important to the consumer.  At Equity Financial Trust we are going to make it very clear.  So it’s either a 3 month penalty which is very easy to calculate or interest rate differential.  We are going to use the Royal Bank posted rates as our base rate to calculate, so if there is 2 years left in the mortgage, you look at your 2 year rate with Royal Bank posted, look at the face rate of your mortgage with Equity Financial Trust and the difference between the two will be your interest rate differential.  We will also have an online calculator put on our website by November of this year, so people can work out their 3 month penalty and their interest rate differential so they can calculate it and see whichever is higher, so they can make their financial decisions based on that.