Lender aims to take the pain out of penalties

Lender aims to take the pain out of penalties

Lender aims to take the pain out of penalties

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 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.
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  • B. Mighton 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.
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  • Bruce Schoenne - PaylessPenalty.com 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
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