About time Mortgage Penalties got some publicity!
Posted on Sep 18, 2012 in Mortgage Market Updates and News
Anybody who reads my mortgage blog regularly, knows my favorite thing to write about, and my biggest criticism to our mortgage market (which I really believe is over all managed very well), is Mortgage Prepayment Penalties! I often post that I think the average consumer is typically taken advantage of when it comes to their penalties, as it's not something that's ever discussed with them when they sign up for their mortgage.
Of course the average borrower knows their will be a penalty if they break their mortgage, that much should be obvious, but the amount of that penalty, can often come as a shock to a mortgagor. What's more, the fact that your penalty can vary by thousands of dollars lender to lender, seems to be even more of a shock to borrowers.
Many lender, including the big 6 banks, calculate the penalty based on their 'posted rate', and not the rate you're actually paying on, the discounted rate. This can drastically increase your mortgage penalty. But wait, you'd think that at least you're getting the good rate right? Wrong, although the 'discounted rates' are good rates, they're actually the comparable rates to other lenders, so you're not getting any better rate than if you were to go with a non bank lender.
Right now you can get a 5 year fixed rate with Merix Financial at 3.15%, you can get a 5 year fixed with Street Capital Financial at 3.09%, TD Canada Trust is offering 3.19% for their 5 year, although they also have a 5 year posted rate at 5.24%. Obviously you'd be crazy to take a posted rate when other great rates were available, and likely TD wouldn't offer it to you, they'd offer their discounted rate (subject of course to borrower and property qualification). So why are you paying your penalty based on the imaginary rate that has nothing to do with your mortgage?
TD Canada Trust isn't the only lender out there doing this, quite a few do. And technically, they're not doing anything wrong. This is how they calculate their penalty, and they disclose it to you when you sign your mortgage papers. The problem is, you don't have any direct comparison to how other lenders calculate theirs, and likely don't even know to ask, so you just assume it's normal.
Until very recently, there has been little to no media coverage of posted rates and how they can significantly increase a mortgage prepayment penalty. I'm happy to be reading more and more on the topic lately and even see some legislation come in to try to equalize the playing field so to speak, and allow the average consumer tools to directly compare. The Financial Consumer Agency of Canada recently passed some legislation on the topic http://www.fcac-acfc.gc.ca/eng/industry/obligation/codeCond/mortgage-eng.asp.
There are now calculators available online for most large lenders so that you can enter your mortgage term into them and see how the penalties differ. When I entered mortgage terms of $200,000 at today's rates with a 25 year amortization, I was even surprised by the variety of penalties I calculated. From uder $1000 all the way up to $9500! So you can see, it's important to know what you're getting into before you sign. As I always say, there's more to your mortgage than your rate. These penalties can cost you huge in the long run if you don't know what to look for. Hopefully one day, we'll move into a system where the penalty calculation is standardized across Canada, but at this point, take advantage of the tools available and never be afraid to ask questions.
Also on this topic:
With any questions about mortgage penalties please feel free to contact Sharie MArie Francoeur, 250.730.0239 firstname.lastname@example.org
-Sharie Marie Francoeur, Mortgage Professional with TMG The Mortgage Group Canada Inc