One of the easiest ways to ensure you’re getting the best mortgage rate around is to renegotiate your financing terms when interest rates are low. Which is great… except for one small problem: penalties. Banks are notorious for slapping borrowers with hefty penalties, especially those who are looking to wiggle their way out of a long-term fixed rate deal.
It used to be that borrowers could anticipate a penalty charge that amounted to approximately three months’ worth of interest at their current rate. Today, most lenders charge a penalty that is based on three factors:
- The current and past interest rates
- The outstanding balance
- The number of months left in the mortgage term
This is knowns as the Mortgage Rate Differential (IRD). Unfortunately for homeowners in search of a best rate mortgage, the IRD is now significantly higher than in the past thanks to rock-bottom interest rates.
Two years ago, the Finance Department promised to review this debilitating financing snag. And while it took slightly longer than anticipated, last week, the government announced a brand new mortgage “code” that would require financial institutions to:
…provide more information on how prepayment charges are calculated.
and
…explain the differences between mortgage products, including ways to pay off a mortgage faster without incurring penalties.”
Putting a Stop to Unfair Penalties
This announcement was eagerly received by consumer groups, who have long charged banks with obscuring penalty descriptions with legalese and vague statements. Take the task of calculating your IRD, for examples. Banks insist that it’s impossible for consumers to calculate the potential charge for a best rate mortgage renegotiation, which is why they refuse to provide an understandable formula. Banks also fail to provide consumers with easy access to inputs (like comparison rates) that would make it easier to calculate prepayment penalties.
It’s this sort of convoluted information that has the Financial Consumer Agency of Canada up in arms. In fact, the FCAC feels that some lenders’ disclosures actually “hinder a consumer’s ability to decide on mortgage prepayment.”
What to Expect Moving Forward
Now, when shopping for a best rate mortgage, banks will be required to provide borrowers with:
- The formula for calculating the exact repayment charge. This must be provided in a language that is clear, simple, and not at all misleading.
- If the penalty formula is complex, the lender must provide the borrower with a simply way to estimate penalties.
- A description of all of the necessary inputs that are required to calculate the penalty. This will include things like the posted rates at originations, future value, outstanding balance, applicable interest, etc.
- Clear instructions for how to obtain each of these inputs (or the actual values themselves).
- A helpful worksheet or example calculation to show consumers how to figure out their penalty.
Lender’s will also need to provide consumers with annual reports that describe the borrower’s prepayment privileges, the dollar amount of available prepayment options, an explanation of factors that could cause a penalty to change and a list of any potential penalty fees. Lenders are now required to provide customers with up-to-date input figures annually and connect customers with a staff representative who is knowledgeable about penalty calculations.
Finally, lenders will also be required to post calculators (similar in scope to online mortgage calculators), that help determine “reasonable” penalty estimates.
Don’t let penalties prevent you from owning your dream home. Now, thanks to the efforts of the FCAC and the Finance Departments, Canadians can rest assured knowing that they’re receiving the fairest rates and services possible.