Mortgage penalty rules change… finally.. well, sort of…

The Federal govt announced some changes to protect Canadian Consumers… including rule changes to credit cards and mortgage prepayment information.   Here’s a link to the entire news release.

For our purposes, we are focusing more on the mortgage prepayment announcement.   Here’s a link to that portion of the news release.

There are 5 Elements to the Code of Conduct for Federally regulated institutions.  The changes must be implemented within 6 to 12 months.   In short, the new Code of Conduct rules will require these lenders to provide clear disclosure on how penalties are calculated, along with online calculators and access to knowledgeable staff that can be contacted through a toll-free phone.

The good news is that we should finally see the end of penalty calculation mistakes… and this disclosure will make the consumer more aware of just how much a mortgage penalty can really cost them.  (if you’re a regular reader of CanadaMortgageNews.ca, then you’ll know how openly critical I have been about the banks and their over-inflated penalty calculation formulas…. it will be great to see the Bank’s try to explain to clients why they must pay penalties of 3 to 20 months worth of interest like we’ve seen in the past few years … and how that’s a good thing).

While I applaud the Federal govt finally taking action with regards to mortgage penalty and prepayment disclosure, it’s still not giving us the mortgage penalty standardization calculation, that we were promised back in the budget of March 2010.   here’s a link to the March 2010 release.    The govt might want to look at HOW the penalty is calculated and what purpose or reason there is for a penalty, in the first place.

A little history……

Penalties should not be a profit centre for the Banks…  Penalties were brought in decades ago, as a means of compensating Lenders for early payouts.   Mortgages having an interest rate that is higher than the Bank’s current interest rate.   They used to just charge the difference between the two rates… That seemed fair.   But in late 1999 and in the early 2000’s, the battle for market share grew… Mortgage Brokers made consumers more aware of other options… consumers decided to shop around at renewal time…  it was the beginning of mortgage transfers.   Lenders were competing for your business.  Banks had to offer greater discounts, and with more frequency, than they had in the past..  the Banks decided they would charge borrowers a higher prepayment penalty.   The changes were brought in very quietly, without much notice by most Canadians…. unless you had a penalty to deal with.   And only when discounts became larger and interest rates reached record lows in 2004 and 2009, did we see a public uprising.  (penalties as high at 20 months worth of interest will do that).

Message to the Feds…. more disclosure is always good.. we welcome this…. how about working on standardizing the penalty calculation formula?   There are still several good Lenders that DO NOT use the BIG SIX bank formula for calculating penalties…. They don’t make you pay for the ‘supposed’ original discount obtained…. If these smaller lenders can do it, while still offering a competitive rate (in most cases lower than what the banks offer) why can’t the BIG SIX banks do it?