Mortgage Penalties exposed…. an in-depth study reveals unjust penalties.

On November 26, 2010, we reported that a good source told us the govt would not follow through on their promise to standardize mortgage penalties until this spring, at the earliest.

On December 15, 2010, we also reported that discounted Fixed mortgage rates were going up but Posted mortgage rates were staying the same… we stated that your mortgage penalty would not decrease as it normally does when rates go up.

We received some inquires about this article.   Questions like ‘shouldn’t my penalty go down if rates are going up?’ and ‘how could a mortgage penalty be more expensive if the Bank’s didn’t increase their posted rate?’

Okay, here’s my shocker statements….  A $200,000 mortgage taken in December 2008 will cost you $16,800 to get out of today…. but 12 years ago it would have cost you approximately $8,340 and even today, it should only cost $11,640.      Got your attention?   Please read the entire report to better understand.

WE TOOK THE MYSTERY OUT OF HOW THE PENALTIES ARE CALCULATED

We decided this needed a more detailed explanation….but a strange thing happened when we started to answer these questions…  We made a startling discovery….we caution you, the results could get your blood boiling if you had to pay a penalty in the past 2 years….We found that Banks have shrunk or reduced the spreads between their Posted and Discounted rates over the past few years….and this has had a huge impact on Interest Rate Differential (IRD) penalty calculations.  I’ll explain what this means in more detail further in this article.

(hey, quick facts… most popular mortgage product is a 5 yr fixed.. most profitable is a 5 yr fixed…  on average, a mortgage if refinanced or someone moves every 3 years… mortgage penalties affect more people than you think)

FIRST, YOU NEED TO UNDERSTAND THE HISTORY OF MORTGAGE PENALTIES

To better explain the above statements, I need to explain why mortgage penalties exist at all.   To do this we need to go back in time… in the 1990’s, mortgage penalties were capped at 3 months interest (for all CMHC insured mortgages)…This was a policy that CMHC had implemented.  Most banks just used that same formula for non-cmhc insured mortgages….some Banks still had an IRD penalty clause in their standard charge terms but the formula for calculating this was very different from today.

Back then, a few things were different…  Discounted rates on 5 year terms were only 0.50% to 0.75% off Bank Posted rates… if you had 3 years remaining in your 5 year term, the banker went to the rate sheet, looked at their 3 year POSTED fixed rate and if your rate was higher, then they calculated the IRD (usually, a nominal amount because the banker only had posted rates to compare with).  If your rate was lower, then the banker could impose a 3 month interest penalty or NO PENALTY.. that’s right, no penalty.  It was up to the banker’s discretion.  (Mr. Potter wasn’t that happy back then…but things were about to change)

But I’m getting ahead of myself.  The reason or justification for having an IRD penalty in the first place is to compensate the Bank for any loss that they may incur when re-lending the funds…

HERE’S A DIRECT QUOTE FROM THE TD CANADA TRUST WEBSITE:

“The IRD amount is calculated on the amount being prepaid using an interest rate equal to the difference between your existing mortgage interest rate and the interest rate that we can now charge when re-lending the funds for the remaining term of the mortgage.”

Did anybody get that?   The IRD penalty is there to compensate the Bank for any loss due to a mortgage being paid out and then to have to lend funds out again for the remaining term at a rate that is less than what they had in the contract…  I don’t think anyone would have a problem with that.  After all, it is a business and they can’t be expected to take a loss.   But somewhere along the line, this reason got lost or forgotten.  The current IRD penalty calculation is OVER-CHARGING borrowers.   And the Bank’s have shrunk their spread between posted and discounted rates causing borrowers to pay record mortgage penalties in the $10k, $15k and $20k range and higher!   (scroll to the top to see if Mr. Potter is smiling)

Let’s fast forward to the end of 1999.  CMHC quietly removed the 3 month interest penalty cap from their policy…probably because of competition from Genworth Financial Mortgage Insurance (formerly GE Mortgage Insurance and a competitor to CMHC).  Banks slowly changed their own policies to allow for IRD to be charged.. and today we have Bank’s using an unfair penalty calculation that does more than cover any potential loss.. it makes the borrower pay an unfair amount..

MORTGAGE PENALTY CALCULATIONS TODAY

Let’s look at the numbers..  Let’s use a $200,000 mortgage that was taken out in December 2008 at 5.54% for a 5 year fixed term… The Posted rate was 6.95% giving us a discount of 1.41% off the 5 year fixed rate.  Today’s 3 year posted rate is 4.15%.   (we’re using TD Canada Trust in this example because they have a clear explanation and formula on prepayment penalties on their website…but this formula is similar to what the other Big Six banks are using.)

Using the IRD formula from their website the penalty would be approximately $16,800.  That’s equal to 18 months of interest!!  Here’s what’s happening.  The Banks are using your original discount given at the time of the mortgage.  They take that discount, in this case, 1.41%, and subtract that from their posted 3 year fixed rated (4.15% – 1.41% = 2.74%).   The problem is that NONE of the Big Six Banks are advertising a 1.41% discount off their 3 year rate…  The best advertised rate that we could find with TD Canada Trust is through their Broker channel.  That rate is 3.60%.   So why are they using 2.74% to calculate your IRD penalty?

But what’s more disturbing is that this formula has gone unchecked by Govt’s, regulators and watchdogs for almost a decade.   Wait, it gets worse… we all know that mortgage rates have been at record lows for the past 18 months.   This alone would cost borrowers even more to get out of their mortgage.   The Banks don’t seem content with that…  They have shrunk their spread on shorter term mortgages making these penalties higher than ever…  (I can almost hear Mr. Potter laughing)

In 2007, TD had a posted 3 year fixed rate of 7.35% and a discounted rate of 6.05%…that’s a 1.30% discount.   Today, the posted 3 year rate is 4.15% and the discounted rate is 3.60%…. a discount of just 0.55%.    That reduced posted rate is costing borrowers dearly.  And to put this in a better context, if the posted 3 year fixed rate was 1.30% higher than the discounted rate today, then the penalty would be approximately $11,640 instead of $16,800 .  (as an aside, if this was 1998, your penalty would cost $8,340 because the Bank only used the Posted Rated when calculating the penalty.)

End result is HIGHER MORTGAGE PENALTIES for borrowers, MORE PROFIT FOR BANKS.

We need to get more attention on this subject.  These penalties are unfair, unjust and the logic isn’t adding up to the original reason for having mortgage penalties to begin with.  Hoping this article explains the HOW penalties are calculated…. I’ll let you figure out the WHY they are calculated this way… I think it’s quite obvious who is winning and who is losing.   (what’s that saying?  The House Always Wins.)

61 Responses to “Mortgage Penalties exposed…. an in-depth study reveals unjust penalties.”

  1. Brad Miller Says:

    I think this is a great article that explains what is really going on here. The fact of the matter is most people are ignorant to prepayment penalties and because in most instances they are stuck with having to pay them (in the case of property sales) the banks just take advantage. The more alarming thing is the assumption that all these calculations are the same between major lenders. I have seen some of these lenders use the lowest posted rate regardless of term left on the mortgage to calculate an even higher prepayment penalty. I urge anyone being faced with an outrageous prepayment penalty to review your documents at the signing of the mortgage and do the calculation based on how it is outlined to be calculated from the document you signed. Some of these lenders have changed their internal practices and hope you won’t notice or question why it differs from the stated method of calculation.

    • SG Says:

      The challenge is to make people aware… not an easy thing to do… Hopefully, this will draw some attention to the problem…
      Thanks Brad.

  2. No Debt Guy Says:

    Although I agree on creating transparency and standardization for the calculation of penalties, the banks are getting a bad rap for this. A mortgage is a contract.

    People would be up in arms if they had a 5 year GIC at 5% and a bank broke their contact and then offered them 2% for the remaining years.

    There needs to be some compensation for the banks, they are taking on the risks.

    • SG Says:

      To ‘No Debt Guy’

      Thanks for the input… I respect your opinion but I think the Banks have gotten away with too much for too long……. IRD was brought in to compensate the banks for the different between the existing interest rate and what they can now charge…. the problem here is that they are using a formula that is not accurate or realistic….. They are clearly over-charging borrowers…as I showed in my real life example… I have not seen any Bank or mortgage lender advertise a 3 yr rate of 2.74%…. and yet, this the rate they are using to calculate your penalty…

      I’m open to discussion on this… please show me where the Bank is in the right here?

  3. Brian Says:

    Found your blog through CMT’s post today. Great analysis, looking forward to reading through the archives.

  4. Lower Posted Rates – More Than Meets The Eye | Toronto Mortgage Broker Says:

    [...] ran some numbers on how penalties were affected by the banks’ actions (you can read them here). Garganis used TD’sIRD formula in his example but TD is not alone. Other lenders [...]

  5. Why Canadian Mortgage Terms Matter in Vancouver Says:

    [...] caught this article on Canadian Mortgage Penalties the other day. This is why term is so important. Many people are [...]

  6. scriptures4life Says:

    Are you going to start a petition or a Facebook group or something? I’ll sign up!

    Thanks for bringing this up!

    • SG Says:

      The govt announced some changes yesterday to make it tougher to get mortgage financing…. I was disappointed they didn’t make any announcement about mortgage penalty standardization…..

  7. Bad investments and money suckers – The Globe and Mail | National Dodge Blog Says:

    [...] investigation by the CanadaMortgageNews.ca blog says the penalties for breaking a mortgage are [...]

  8. Vancouver Real Estate Reel for January 2011 Says:

    [...] Andrew Legge – January 14, 2011 I caught this article on Canadian Mortgage Penalties the other day. This is why term is so important. Many people are [...]

  9. Vanessa Walsh Says:

    Hi there

    I totally understand everything you’ve said in this article and unfortunately am currently a victim of this scam. RBC is trying to tell me that they gave me a 1.75 discount on my rate which is currently 3.54 percent. I was looking to get a new mortgage from them for the new home I had purchased but they said the balance would have to be put on a 4 year mortgage at 4 percent (to be blended with the original mortgage at 3.54) Clearly this shows that rates have gone up since they couldn’t even match my current rate. The “discount” is how they get you. When I asked an RBC rep if rates had gone up or down since I signed up at 3.54 percent in December last year, they would not answer my question. (we know that the IRD is based on what it costs to replace the mortgage and if they could get 4 percent than I shouldn’t be paying the IRD, just 3 months interest) That’s all I needed to hear to know that they knew they were manipulating the system. I’ve now been charged $15,000 to get out of my mortgage and I plan to take it to small claims court. (ps I had about 4 years left on the mortgage which means they would have to replace it with a 4 year term)

    • SG Says:

      Hi Vanessa,

      And the penalties are only going to get worse given that rate discounted have increased even more…. The Banksters can’t lose. If they give you a bigger discount, they will just make it up on the next client when they refinance or pay the mortgage out…..

      Statistics tell us Canadians move or refinance their mortgages ever 3 years… For those of us in Fixed rate mortgages, we are going to face huge penalties at some point down the road…and the Banks know this…

      This is another reason why shorter term mortgages or variable rate mortgages make sense… The stats don’t lie… Variable rate mortgages have outperformed Fixed rates in over 88% of the time…

      My advice to you is forget about the small claims court…. Instead, go to the RBC Ombudsman’s office https://www.rbc.com/contactus/ombudsman.html or go to the Ombudsman for Banking Services and Investments http://www.obsi.ca/default.aspx.

      There is also another option…. media…. Bank’s don’t like the media.. they want to fly under the radar… There is one person that has helped several of my clients and dozens of Canadians with their problems with Big Corporations…. Ellen Roseman… Ellen is a consumer advocate and a personal financial expert…. eroseman@thestar.ca. Send her an email and ask for her help…. Let me know how it goes.

      SG

      • Vanessa Says:

        Hi there

        Thanks so much for your reply! I wrote to the Ombudsman for Banking Services and they said that they no longer deal with RBC and that I would have to go through theirs. I’m a little leary of that because I don’t see how they wouldn’t favor Royal Bank considering they’re employed by them. I have read Ellen Roseman’s articles and they are fantastic so I will definitely be in contact with her. I will let you know how it goes! Thanks again for your response.

        Vanessa

      • SG Says:

        Hi Vanessa,

        Strange that the Canadian Banker’s Association said they no longer deal with RBC…? I just wet on the Canadian Banker’s Associate website and found RBC listed… check this link out http://www.cba.ca/en/component/content/category/44-resolving-problems-with-your-bank

        In any event, I suggest speaking with Ellen Roseman… Perhaps she can help…. keep me posited… Thank you.

        SG

      • Vanessa Says:

        Hi Steve

        I wrote to Ellen and she responded within minutes! She has written to her contacts at RBC regarding the penalty and said I should hear back from them within a week or so. Should be really interesting to see how they respond. Thanks again for the recommendation and I’ll keep you posted!

        Vanessa

      • SG Says:

        Hi Vanessa, that’s great news.. I knew Ellen could help…. keep me posted… and good luck..

        Steve Garganis

      • Vanessa Says:

        Well so far Royal Bank just told Ellen I have to go through their Ombudsman so I’ve written to them but certainly don’t have a whole lot of hope. I also pointed out the fact that they did not disclose that I could make the one time yearly payment allowed in order to reduce my penalty so we’ll see what they come back with.

      • SG Says:

        Hi Vanessa,

        Keep us posted… we’re in your corner and hoping you get some positive results!
        SG

      • Vanessa Says:

        Hi Steve

        I wrote you back in October and thought I would share my results in my battle with RBC. I’ve finally just gotten a response back from the RBC Ombudsman. To be honest I wasn’t expecting them to come back with anything so I guess it’s a small win. Based on the fact that I brought up my right to have the chance make a lump sum payment prior to closing the mortgage (which would have saved me about $1500) as well as the fact that I saw a small discrepancy between the discount they gave me on the mortgage (1.65%) and the discount they quoted in their letter to me (1.75%) I have been told by the Ombudsman that they will be contacting me so that they can reimburse me in the amount of $2,500.00. At this point I think to try and fight for anything more would probably be a waste of time and energy. Anyways thanks so much for all your input on my situation and for keeping people informed! This has definately been a huge learning experience for me!

        Thanks
        Vanessa

      • SG Says:

        Hi Vanessa,

        Well, it’s good to see you got something back…$2,000 from a $15,000 penalty… but it pains me to see Canadians, like yourself, having to fork out these obscene amounts of money to the banks, especially when the penalties are unjust and probably not legal… that’s right.. I think, if challenged in court, the penalties would not be allowed.. the basis for penalties was to cover the difference between what the bank could lend money out for and what your rate is… Today’s penalty calculations do not work that way..

        By the way, have you seen the class action lawsuit again CIBC bank for cryptic language regarding penalties? http://bit.ly/zxIrkn
        Maybe RBC is next? I’m sure you would sign up for this if there was a list….

        And one more note… I have come to a conclusion that the BIG SIX banks should not be considered if you are taking a fixed rate product… that’s a strong statement, but their penalty calculations are just too biased and we have seen several non-bank lenders step up and offer rates and terms just as competitive or even better, than the banks.. but without the unfair penalty calculations… if you ever need advice about a mortgage, don’t hesitate to contact me…

        Steve

  10. Onin Says:

    Hi Steve,

    I just recently got a Variable-Closed mortgage through Industrial Alliance this year, and my lawyer said that if I “break” my mortgage I will be only paying a penalty. Several months later I was re-reading my mortgage documents, and I found this confusing clause (word-for-word) on my document–

    Up to the this Anniversary date of the term, upon closing of a sale of the property by a sale representative to a bona fide arms length purchaser, repay all of the outstanding principal, and pay the accrued interest subject to the payment of a penalty equal to the higher of the following amounts:

    A.) 3 months interest calculated at the mortgage rate on the balance of the principal reimbursed in advance or;

    B.) the difference between the balance of the principal owing at the time of prepayment, and the present value of all monthly loan payments to the date of maturity together with the present value of the principal outstanding at the date of maturity. The present value of the principal outstanding at the date of maturity is calculated at an interest rate differential discounted at the “Yield of Government of Canada Bonds” on the market with the equivalent term to maturity plus 0.90%.

    Based on the above information, will I potentially be paying IRD penalty if I break my mortgage with 48 months remaining on my 5-year term? But my lawyer said I’ll only be paying 3-months penalty? I’m selling my house because I’ll be relocating because of my job. Thanks for your help and more power to you sir.

    -Onin

    • SG Says:

      Hi Onin,

      If your lawyer is telling you that the penalty is 3 months, then I wouldn’t argue… However, I also read the fine print and couldn’t really see what the penalty is for Variable rate mortgages at Industrial Alliance… I’ve made an inquire with Industrial Alliance and awaiting their response. Will advise.

      Steve

      • Onin Says:

        Hi Steve,

        A million thanks for taking time to reply to my question. Hopefully Industrial Alliance will get back to you with a reply. More power to you sir!

        -Onin

      • SG Says:

        Hi Onin,

        3 month interest penalty for variable rate. Industrial Alliance confirmed with me today.

        Steve

      • Onin Says:

        Thank you Steve for confirming with Industrial Alliance with regards for the penalty. All the best to you!

  11. ijaz Says:

    dear sir i need some info about fix for three years renaming months are 33 i have to sell home because my wife lose job i cant keep continue i ask my lender they talking about 20,ooo thousand i am relay worry besuse i got kids and they are taking all my down payment please i need help please god blees u

    • SG Says:

      Hi Ijaz, I’d be happy to help . Feel free to contact my office.. visit my website at Needamortgage.ca.

      In times of hardship, some banks will give the client a break but I would need to know some more details.

      Steve

      • Onin Says:

        Hi Steve and Ijaz,

        It’s really sad that the financial industry doesn’t really give a crap about its customers when it come to mortgage penalties. The least that they can do is standardize the calculation/computation of the mortgage penalty fees, and to make the formulas for calculating the penalties and the fineprint transparent to the client PRIOR to signing the mortgage contract. We’re all human beings here, and I don’t understand for the life of me why businesses nowadays seem to lack some humanity and compassion. All the best to you Ijaz and I hope for a very good outcome on your situation.

        -Onin

  12. David Hewlett Says:

    I am currently fighting with the RBC bank over my mortgage IRD calculation. I had 3 years left on a 5 year term. I asked the bank to allow me to renew the mortgage early to a 7 year term as I was expecting interest rate to go up just as I was hitting the renewal date.

    I was offering them more business at a higher interest rate. Their response was to insist on a $12000 penalty. What other business in the world would charge you a penalty to give them more business at a higher rate.

    I am trying to get the Alberta Government to go after them under the Alberta Fair Trade Act. I do not know if this will work but I want to work at getting this issue out in front of the media. If you have been a victim of this unfair practice please contact me as I am working on a putting together a list of people who have this issue and develop a strategy to take this issue on.

    The only hope to resolve this is to get enough people and lot of attention on this issue.

    Please email me at david . m . hewlett @me.com I have added extra spaces to stop robo spam just take them out.

    • Steve Garganis Says:

      Hi David,

      I wish more people got together and took a stand…I truly believe the current prepayment penalty calculation formulas that are used by the BIG SIX Banks, and some of the Lenders, is wrong.. I question the ethics behind making someone pay for a discount for the duration of the mortgage term…. this just isn’t right…

      Current mortgage penalties are not a true reflection of the BANK’S cost or loss… CIBC has a Class Action lawsuit pending regarding penalties… I’ve had another reader tell me he is trying to find other TD Bank clients that may have been a prepayment penalty… he wants to take it further… I applaud you all.

      And the part that is most frustrating is that the small lenders.. the one’s that people think are not as safe…they are NOT making borrowers pay for the discount for the entire term when calculating prepayment penalties… keep up the fight.. let me know if I can help…

      Steve

    • Terry Says:

      We are having a similar problem at this minute. We will join you and whatever you are doing re: law suit. We are TD clients and they are not bending at all. We have been with this bank for 30 years and have currently two mortgages with them on two different houses. They expect to collect 12800 from us for a 283,000 mtg. I thought the Government wanted to encourage people to lower their debts. OMgoodness! The Big banks are just WRONG! They should be STOPPED! I will help. I have time and I have energy. I will e-mail on your other account too.
      Terry

      • Steve Garganis Says:

        Hi Terry,

        I’d be happy to review your penalties… can’t promise that I’ll find any savings but I’ll take a good look at your options… contact me with more details..

        The BIG SIX BANKS have inflated their penalties…. it’s a terrible situation… the govt has turned their backs on Canadians.. they promised to standardize the penalties in the 2010 Federal budget…but withdrew the promise this year… I have another reader that is interest in starting a lawsuit against TD… with your permission, I can give him your contact info… I don’t have any details about his issue or progress but you may want to explore… Let me know and I’ll put the two of you in contact…

        By the way… there is a class action lawsuit against CIBC… it hasn’t been heard by the courts yet but you may want to follow it… just google it by typing in CIBC class action lawsuit mortgage.

        Steve

        Steve

      • Terry Says:

        Thank you very much for answering Steve: I would love for you to send me the contact or send my contact info to the other angry TD person. Maybe we can find a way to get a Class Action suit going too. We do understand the options available to us – not great ones, but we will pursue those for sure. We have taken step one: the pre-letter to the TD Bank manager. The next step will be to begin legal proceedings. It might cost us money, but we actually don’t care at this point. It is “the principal of the thing”. Let me know if others have TD issues too and we can slowly collect a following. This really needs to be stopped.
        Thanks again,
        Terry

      • Steve Garganis Says:

        Hi Terry,

        I suggest putting up your contact info on this post… there are others interested in taking action… would be good to see happen.. If I can help, just let me know…

        Steve

  13. oliver Says:

    i have a mortgage with cibc and the penalty fee is $10 000, any news on the lawsuit? do any of the other banks consider helping with your penalty to get your business? thanks oliver

    • Steve Garganis Says:

      Hi Oliver,

      I think your story is one that’s happened often…. and needs to be told to the rest of Canadian borrowers… Thank you for providing me further details in a separate email…

      So your Banker tells you to get out of your Variable rate mortgage 3 and a half years ago….and into a 5 yr fixed rate because the economy is faltering…. What? Are you kidding me? That’s exactly the time you shouldn’t be locking in…. Any experienced advisor should know this… I personally issued a formal recommendation to my own clients in October 2008 advising them NOT lock into a long term Fixed Rate.. but to stick with their existing Variable rate.. or to consider taking a 1 yr fixed or another short term product until the market settled… http://bit.ly/blBrnc

      I continued to issue similar recommendations for the next 3 years…. and have only recently been recommending 5 yr fixed rates as a good option… So you take their advice like most people would, and lock into a 5.95% rate….OUCH!

      And you’ve had to pay an inflated rate of more than 3.00% higher, for over 3 year!! (Imagine paying 3.00% more per year on your mortgage…!!!) And now you want to get out of that higher rate and into these record low rates but are told you have to pay a $10,000 penalty…. double OUCH!! Another slap in the face…

      I would seriously consider contacting the CIBC Ombudsman and the Canadian Banker’s Ombudsman to complain… Let’s discuss further… I’d like to try and help if possible…

      Steve

  14. doug Says:

    i am in the process of initiating a small claims suit against the royal bank for providing me with an inaccurate mortgage pay out. does anyone out there have any advice.
    doug riot@telus.net

    • Steve Garganis Says:

      Hi Doug,

      I’ve put your message up… and I have a few other readers that want to take action… hoping you can connect with some… keep me posted.. let me know if I can help..

      Steve

  15. charlene Says:

    We also are in a position of a $ 23,000 to leave scotiabank, not sure how they can get away with that when they will turn around and lend the same money, to someone else, what are they loosing ?? Nothing just gouging the consumer, we recently did a refiance we had a cmhc insured mortgage, paid them thousands, when we did the refinance the bank said Cmhc wouldn’t insure we had to go to Genworth because Cmhc didn’t believe the appraised value did Cmhc reimburse the money for the premium not a chance we had to pay Genworth another 15,000, let me know if there will be a class action suit for large penalties, and sign us up

    • Steve Garganis Says:

      Hi Charlene,

      CMHC thinks your home is worth less than Genworth appraised it for…. This is terrible.. I think someone should have been a little more aggressive and challenged CMHC… Not sure there is anything we could do now… But with regards to penalties, I suggest you post your email so that the other readers may contact you… so far, there appears to be a growing number of people that are tired of being gouged with unfair penalties… I have posted your comment… take a minute to read some of the other names… there is a growing number of people replying… keep me posted… let me know if I can help.

      Steve

      • charlene Says:

        I tried talking to CMHC to get some of the premium back and they basically laughed in my face

      • Steve Garganis Says:

        Had you been my client, I would have paused my Genworth approval and gone back to discuss with CMHC… getting money back from them is probably not gonna happen… but I have seen CMHC take a second look at appraisals to help determine value…. I hate even telling you this now as I don’t want to add fuel to your fire.. but it’s something you must be aware of…

        steve

  16. charlene Says:

    Cmhc needs a shake up too

    charlene/ cdenny11@hotmail.com

  17. caithy w. Says:

    Beautiful article. Unfortunately its true what you are saying. Right at this moment I`m trying to negotiate penalties with our bank. But what I`m trying to make happen is for them to waive the discount that they say they gave us up, because that discount is nowhere stated in the mortgage agreement, there’s no paper stating that they gave us any discount, and I personally do not remember that they gave us any discount. The branch manager couldn’t even pull out any proof that they have given us that discount. They calculated 1.9 discount and it changes the penalty significantly. If they weren’t calculating the discount the penalty cost would be 75% less.
    I`m wondering if this will force them to exclude the discount out of penalty calculation because its nowhere shown but in their system (computer software)??? if anyone has any idea please write back.

    Thanks
    Caithy

    • Steve Garganis Says:

      Hi Caithy,

      You’ve said it well.. and I see you understand the problem.. i only wish more borrowers would take the time to understand why penalties charged by the banks is unethical… There are several other major lenders that DON’T calculate penalties with the same inflated formula….

      Steve

    • Alexey Says:

      Hi,

      Read your comment to the article. What was the outcome of the debate with you bank? I am in the same situation now and the bank (TD) insists on the huge penalty. About 15 months to the end of the term.

      Thanks
      Alexey

      • Steve Garganis Says:

        Hi Alexey, TD has not changed their penalty calculation.. None of the BIG SIX Banks have… and that’s too bad… the govt said they were going to implement a standard penalty calculation.. but that promise has come and gone.. almost 3 yrs ago… instead, they are making Banks post online penalty calculators which really show how much Banks are gouging borrowers… if you need help or would like some advice on your current penalty… just call or email me… i’d be happy to take a look and see if there are any loopholes in your penalty quote….

        Steve
        416 224 0114
        steve@mortgagenow.ca

  18. Gary Says:

    I would like some help on this numbers game. It is bloody confusing. RBC is asking me to pay $3823.94 IRD penalty on an investment property I sold. Balance used to calculate is $85,453.03 / Interest rate is 3.59% / Discount was 1.6% / Term reaming 36 months / Comparable term used to determine applicable posted rate is 3 years / current posted rate is 3.65% / rate used for calculation is 2.05%

    With this info do I have any case here? I have another mortgage that I will be paying off with the funds from the above property sale and they want $7k plus ! Can anyone shed some light. I already spoke to bank manager and he said NO nothing we can do even with all my future business and 22 year history with them. I went to office of RBC ombudsman and filled out their online complaint line but it was vague and I feel like a sitting duck. Any info or help?

    I would love to join a class action on RBC

    Thanks
    Gary

    • Steve Garganis Says:

      Hi Gary,
      You probably don’t need to be told this, but do you realize your penalty is equal to over 14 months interest!!? How crazy is that?

      I do agree.. this is just another example of an inflated penalty being charged by a BIG SIX BANK. For the Bank to use a rate of 2.05% to calculate your IRD is completely ridiculous and unreasonable. IRDs were created to help cover the difference the client rate and current rates… and the best advertised current 3 yr rate for RBC is 2.99%… Your penalty should be just over $1500… unfortunately, you will have an uphill battle with this… You might consider filing a complaint with the Office of the Superintendent of Financial Institutions (OSFI). Banks don’t want any complaints. If enough people bring up their concern to the govt, eventually, they must start to listen…

      BIG SIX BANK mortgage penalties have been a real pet peeve to me. I have seen far too many borrowers held hostage or forced to pay obscene penalties… The penalty calculation is unjust, unfair and it has to stop.. Speak up and continue to share your experiences.. Let me know how it goes….

      Steve

  19. W. John Says:

    I am in the process of renewing my mortgage with the Royal Bank.
    Five years ago I took out a 5 year mortgage with the Royal Bank and the loans officer told me if I wanted to break it, it would cost me about three months interest but when I tried to renew my $85000 mortgage a year or so early the penalty was $4000 or $5000 – I decided to wait.
    Today I am about to renew my mortgage and am considering a five year mortgage again (RBC), but may need to move or get out of mortgage in a few years ( hopefully not).
    The loans officer is again, telling me there would only be a small penalty of maybe $1200 but she will not disclose the formula on how they calculate the early payment penalty. I have tried to call Royal Bank supervisors, but it seems to be top secret or no one knows. And I want to know if the formulas for calculating early payoffs have changed from my last mortgage now that interest rates may be on the way up.
    One website says they take posted rate for term closest to what is left on your mortgage and deduct the
    discount you received and that is your IRD. That will be a disaster if I need to get out of mortgage and interest rates have gone up! I would have thought the penalty would be less if interest rates go up, so I am thinking this must be a mistake.
    The loans officer cannot produce my contract or a sample until I am ready to sign on the day of my renewal ( Royal Bank).
    The only answer I am getting from anyone – including my lawyer is if your worried just take out a two or three year mortgage instead.
    I find this frustrating as it would really help to know what the penalty might be, as I try to
    plan my future. I believe it is my right to know! These discharge/early payout penalties need to be more transparent to the consumers that want to know.
    Do you have any advice?

    • Steve Garganis Says:

      Hi Wendy,

      Good speaking with you today… It’s unfortunate your RBC rep can’t give you clear answers or guidance… I think if you are selling in 3 yrs, and are not sure about whether you will buy another home, then I would take the 5 yr variable rate… or the 3 yr fixed rate… I like the Variable because your penalty is capped at 3 months interest… we also think interest rates won’t go sky high in 3 yrs… it will probably go up but if you are comparing an RBC penalty of $4k or $5k, then take the Variable… Hope that helps.. I’d be happy to arrange a good mortgage for you… with clear and fair penalty formulas..

      Steve

  20. akm hossen Says:

    Hello Steve,

    Hope is that all well. I wanted to close my mortgage with TD. So I went to bank today and they told me that I have to pay $14000 fine. I have 23 months left on my mortgage. My rate was 4.49% and now posted 2 years is 3.04%. I asked the banker, how did you come up with this figure? He said I did receive 1.36% discount at the time of the mortgage contract. I showed her the contract, and inform her, where it shows the discounted amount? And I also asked her, where is the documents that I signed for the discounted amount. She and the bank manager couldn’t answer my question.. According to my calculation I should only have $8000 penalty. I was planing to make a complain and get lawyer involved. Please help.

    thanks

    hossen

    • Steve Garganis Says:

      Hi Hossen,

      I’m sorry to hear that you got stuck with this penalty.. Unfortunately, this isn’t anything new. Making anyone pay for a discount they received but didn’t use, is ridiculous, unfair and in my opinion, unethical and probably not legal.. but I don’t know of anyone with deep enough pockets to file a lawsuit and challenge this… Think about it.. you were given a rate discount off posted rate.. it was 1.36%… you benefited from that discounted for 3 yrs. Ok, but why make you pay for that discount for the next 2 years when you aren’t deriving a benefit?

      Penalties were brought in to compensate Banks for potential loss.. but when you add in this so-called ‘discount’ into the equation, the numbers get skewed and are not realistic. Just like in your case, the current 2yr posted rate is 3.04%…your rate is 4.49%… the difference is 1.45%. This is what your penalty should be based on per year… but Td adds in another 1.36% (what your original discount given was) to increase your IRD to 2.81%. Why? No one can give a good answer… to increase the penalty so you either don’t leave or if you do, the Bank makes a tremendous profit.

      Had you gone with one of several other Lenders in Canada, you would only have paid a penalty of around $7,500.

      I’m amazed at how many Canadians still think their local bank is their best friend. Wake up Canada. They are huge business.. The most profitable in Canada… 5 of the top 10 most profitable corporations in Canada are Banks… And yet they feel you need to pay an even higher penalty!!

      You can and should complain to TD’s ombudsman…. not sure if you will get any results but complaints must be registered and the more complaints the more of an issue it becomes.. I would also speak with Ellen Roseman from The Toronto Star.. she has been very vocal about penalties.. perhaps she can help…

  21. RW Says:

    Hello Steve. I read your article and replies with great interest. I am consdering a lawsuit against BMO in Alberta. I have done considerable research and I intend to challenge them in court on multiple points. Breach of the Competition Act of Canada and the Fair Trade Act of Alberta, breach of contract, having a flawed and ambiguous mortgage contract (thus void), failure to provide legal receipt, etc. What I am in need of is expert witnesses. I have made many inquiries, and no one wants to invest the time to take on big banks and their army of lawyers.

    I have two questions;
    There is strength in numbers. Are you aware of anyone in Alberta (preferably Edmonton area) who has had canceled a mortgage in Alberta in the last 2 years and been charged obscene cancelation penalites?
    Can you recommend how a poor Albertan (travel agent) can advertise for witnesses to testify in court against Bank of Montreal?

    PS in your next article you might want to mention the Bank’s posted rates are an arbitrary, fictitious number, that is only used in calculating the mortgage cancelation penalties. The bank’s claims that they are providing a discount is actually fraud as no one pays the posted rate and no one has paid the posted rates for many years. In Canada it is illegal to offer a discount that is not a true discount. Also you might want to advise your clients to read their original mortgage contract. If the posted rates and specific reference to discount rates are absent from the contract then they are not enforceable in court. My understanding is that with contracts that pertain to real estate “if it is not written down it does not exist”. Verbal agreements are never valid in real estate.

    ALSO why do the banks not deduct the 20% (sometmes 10%) amount that everyone is allowed to pay once per year, without condition, from the cancelation penalties. I believe RBC does this but other banks do not. This would have the effect of lowering the penalty by 20%. If the bank manager is supposed to offer you advice and act in your best interest why does he or she not mention this???

    One more very important point, your lawyer works for the bank, not for you. You pay your lawyer,but he does what the bank instructs him to do. If anyone is paying out their mortgage and subject to penalties make sure that they instruct their lawyer to pay the penalties and inform the bank it is UNDER PROTEST, Otherwise they cannot sue later.

    OK one more point. Why does the bank not give the client that pays out the mortgage, and pays penalties, a very detailed statement that shows how the penalties are calculated? Isn;t a detailed receipt for services required by Canadian Law?

    You write great articles and expose a beautifully crafted complex con game very well

    Keep up the good work and know that you are not alone in the battle against big banks

    GREATDAY
    RW
    Edmonton

  22. Mike Mitchell Says:

    TD Penalties are a rip off. They just charged me 19 months interest penalty on a mortgage with 36 months left on the term when interest rates barely changed. The loans department, and the local manager could not have cared less. Be careful and read the mortgage even though they complicate it so nobody can understand it. Should have bought shares in TD – they have tripled in the last 5 years. No wonder everyone hates banks.
    Mike Mitchell – Kamloops, BC

    • Steve Garganis Says:

      Mike, that’s just terrible and almost hard to believe. I say ‘almost’ because if you asked 100 Canadians what they would expect their penalty to be in your situation, none would guess it could be 19 months interest.

      Put another way, if you had a $200k Mortgage balance at 3.50%, your penalty would be over $11,000.

      This is why we need to focus more on the terms and not just the rate. I’m sure you will join the ever increasing number of Canadians that will never use a BIG SIX BANKS for their mortgage.

  23. Terry Saxby Says:

    I support the reduction of abusive mortgage penalties in Canada. The Interest Rate Act should have stopped this practice, but didn’t…Why not?

    Calculating the Interest Differential using the original posted interest rate and incorporating a discount in the calculation is in my mind a dishonorable if not dishonest practice and is an obvious cash grab by some banks. To my knowledge most if not all of Canada’s largest banks enjoy these windfall profits.

    The Minister of Finance should have stopped this practice, but did not…..Why not?

    CMHC should simply not do business with those lenders that employ this sneaky practice.

    If our government is going to recognize our banks as being “systemic” to the health of our economy they have a responsibility to introduce legislation to ensure that they behave themselves.

    The current penalty is not at all reflective of a replacement for lost revenue by the bank, but is simply a sneaky way to obtain a larger interest rate.
    This practice involves each bank attempting to capture a customer…… thus preventing fair competition.
    For competition amongst banks to work the consumer must be able to move freely amongst them or to move to alternative lenders.

    This should not be a race by the banks to sign up as many customers as possible in order to enslave them for life.

    If I was a non-bank supplier of mortgage funds ie. a Credit Union or Insurance Company I would be screaming blue murder. If the banks lock people up for life….How are they going to be able to continue operating a viable mortgage department?

    The very group that earns a high discount and as well cautiously takes a five year mortgage to ensure their ability to meet their obligations are the ones targeted to pay the highest penalties.ie. Seniors.

    Seniors moving into retirement or nursing homes. Seniors moving into an apartment. Seniors moving into manufactured home retirement communities. Seniors moving into more affordable housing. Seniors moving into in-law suites. Seniors relocating to less expensive accommodation of any sort ….for any reason.

    Can you imagine the nerve of these banks to target the very group of customers that have through their lives provided the banks with their business profits and a Legislative environment that virtually ensures their profitability.

    It is my opinion that our Canadian banks are getting far too big far their britches and need to be taught a stern lesson through the introduction of substantial changes to existing Legislation
    .
    To suggest for one minute that the banks are going to behave themselves just because they now have a well written voluntary “Code of Conduct” is ludicrous.

    Some Bankers would have you believe that they are addressing this problem by improving their disclosure, educating the consumer, the recent introduction of the Bank Ombudsman and the creation gloriously omnipotent complaints department.

    You have got to be kidding!

    Where are our Politicians?

    I have got a far more efficient idea….do away with this deceitful practice.

    Saves a lot of time and energy….doesn’t it!

    It would seem to me that there is a lot of activity towards the legitimization of this dishonest practice and the illusion of propriety…. when it would be, once again, far more reasonable just put an end to it.

    We are giving the Fox far too much say as to what goes on in the chicken coop.

    After all they cannot be blamed for behaving like Foxes. We all know that a Fox will kill chickens with every opportunity.

    It is our job to lock them out of the chicken coop ….. Period!


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