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What to do, what to see? In Port Alberni, BC

Painting a Picture of Penalties

Posted on Feb 25, 2014 in Mortgage Market Updates and News

Rob McLister, CMT
Canadian Mortgage Trends

A 1/10th percentage point rate discount on the average Canadian mortgage saves roughly $800 in interest over five years.

An unfavourable mortgage penalty (interest rate differential charge) on a fixed mortgage can cost the same borrower 2-5 times that amount, or more.

By and large, lenders with favourable penalty calculations do a poor job of highlighting their competitive advantage. But ATB Financial is one lender that does it right.

ATB is one of the best lenders at showing how a “fair penalty” works:

Its website juxtaposes:

A) The penalty formula of a major bank: (Contract rate - [Posted rate for remaining term - Discount from original mortgage]) x Principal outstanding x Remaining term

B) A “fair penalty” formula: (Contract rate - Posted rate for remaining term) x Principal outstanding x Remaining term

Note that "Posted rate" in this second formula refers to the actual everyday rate offered to consumers, as opposed to an artifically high posted rate.

Various lenders, including major banks and certain credit unions, use unfavourable penalty formulas.

Conversely, many lenders use a fair penalty calculation like ATB's above. You just have to know where to find them. Any broker can name several such lenders. (We are also compiling a list of the biggest fair penalty lenders and will post it soon.)

Lenders with reasonable penalties could be well served to follow ATB’s lead and highlight this as a competitive edge on their website. By explaining and quantfying the potential savings, some borrowers are more open to paying a slight rate premium. Mortgage-Calculations (2)A lender could even create a calculator comparing its penalty versus a major bank's. The customer could enter his/her mortgage amount with some basic assumptions and the webpage would display a range of hypothetical savings (based on future rates). The potential savings could then be put in terms of an equivalent rate discount.

Despite the fact that a majority of 5-year borrowers renegotiate their mortgage before maturity, only a minority of people actually pay a penalty. Many sidestep penalties by porting their mortgage or doing a blend and increase. But those alternatives have pitfalls (you have to qualify with that lender, you may not get its best rates, and some lenders build a penalty into their blended rate).

Most people who pay penalties never expected that their circumstances would require it. That's why it's always helpful to understand (ahead of time) what a lender's penalty calculation might mean to your bottom line.


I'm looking forward to connecting. Due to being in and out of meetings both for council and business, email is typically the best way to get in touch with me. If you prefer to call, that's fine as well, it just may take me slightly longer to get back to you. Texting is also welcomed.
  • TMG - The Mortgage Group Canada Inc.
    4201 Johnston Road, Port Alberni, BC, V9Y 5R2
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