Mortgage Penalties exposed… an in-depth study, part 2…the update.

Two years ago I published, what would become, my most widely read article.   Mortgage Penalties exposed…. an in-depth study reveals unjust penalties was written to show just how unfair penalties had become.   The surprising results showed that the BIG SIX BANKS were the leaders when it came to charging the highest penalties in Canada.   If you had a Fixed rate mortgage and thought your mortgage penalty could only be a 3 month interest charge, you were in for a huge shock.

Consumers were experiencing $10k, $15k, $20k and even $30k in prepayment penalties and more! Ridiculous amounts.   Put another way, these penalties equaled 12, 16, 20 months worth of interest and sometimes more!   But we also discovered some good news..   There are better alternatives to the BIG SIX BANKS.!  There are several other Lenders that don’t use the same inflated and unfair prepayment penalty calculation as the BIG SIX BANKS.   There are other Lenders with competitive, and often better, interest rates, and with much lower penalties.  That original study opened the eyes of Canadian borrowers. (another eye-opening stat…the BIG SIX BANKS reported a record $30billion in combined profits for 2012.)

Two years later, with more consumers being forced into Fixed Rate products, we thought it was time to revisit Mortgage Penalties and see what changes had been made, if any…

QUICK HISTORY

In the late ’90s, CMHC insured mortgages had a 3 month interest penalty attached to them… but then CMHC removed this cap… And Banks decided to make some further changes to how your penalties were calculated.   They decided you needed to pay for the original discount your received at the time of your mortgage…. It’s like buying a gym membership on sale… you got it for 30% off regular price… and you agreed to a 5 year term.. but after 1 year, you decided to cancel… but the gym wants you to pay for that 30% discount for the remaining 4 years … Does that make sense?  Of course not… You would probably be happy to pay a reasonable penalty but that’s no longer your choice…   And yet, the BIG SIX BANK penalty calculation works the same way….  They are charging you for the benefit of the discount…  Where’s the logic in that?

WHY SHOULD YOU CARE ABOUT PENALTIES IF YOU DON’T PLAN ON PAYING YOUR MORTGAGE EARLY?

This is, perhaps, the most common question I get asked.. the answer is simple… We don’t plan on a lot of things happening in our lives… so what if there is a job transfer, a death in the family, a personal matter, a loss of job, a better opportunity to move, or a better mortgage rate or mortgage special is offered elsewhere… or some other reason that you need to open your mortgage up for negotiation or prepayment?   Now you must deal with that penalty calculation… If the penalty is too high, your options are limited.. you might just have to stick with that Bank.. or not move or not change….These limitations have real consequences.

In other words, YOU LOSE YOUR LEVERAGE WHEN YOU HAVE TO DEAL WITH AN INFLATED PENALTY.

MOST RECENT GOVT INTERVENTION

As I was writing this update, our Federal govt was at it again…(you just can’t make this stuff up)….  This past week, we saw some unprecedented steps taken by our Federal Minister of Finance…  In short, the govt doesn’t want you to pay the lowest interest rate as we’ve recently seen them ask Manulife Bank and BMO to stop advertising low rates… It’s true!!

And while BMO and Manulife may not have the best interest rates or products, at least they were trying to compete for your business…  And we all know that competition is good for the consumer…but our Federal govt thinks we can’t control our spending and borrowing so it’s best if we pay higher interest rates… (does anyone else think this is a bunch of bull?)

MAKING IT HARDER TO QUALIFY FOR A MORTGAGE SEEMED MORE IMPORTANT TO OUR GOVT.

After the U.S. sub-prime mortgage crisis in October 2008, our Federal govt jumped in and decided to they had to make it harder to qualify for a mortgage….they had to make it MUCH more difficult… The govt introduced several new mortgage rule changes to make sure that happened..  4 major changes in each of the last 4 years.  But still no changes to these unfair penalty calculations.  Still no changes to how our BIG SIX BANKS calculate their mortgage penalties.  Most of us have forgotten the Federal Govt’s broken promise to standardize mortgage penalties.   This is a topic that doesn’t seem to be covered very well by the major media outlets… and yet I get calls and emails almost daily from Canadian borrowers that have been hit with these enormous penalties…   This is a real problem that I refuse to ignore.

FINALLY, MORTGAGE PENALTY CALCULATORS ARE ONLINE.

Perhaps the only good piece of govt legislation came in 2012.   The govt announced that all Federally regulated Financial institutions must post an online mortgage penalty calculator.   The calculator will allow you and I to calculate what your penalty could be….I’m sure the Bankers aren’t loving this.   They must also post a toll-free # where a borrower can call to get their penalty quoted…   Hey, it doesn’t change the unfair formula but at least we can get a straight answer.. and that’s a welcome surprise!

Before choosing your next mortgage, you should visit these sites and compare the penalties with the smaller, lesser known Lenders…  At the risk of repeating myself,  there are several other Lenders that use a much fairer penalty formula that results in a much lower penalty than our BIG SIX BANKS… This helps the consumer make a more informed choice….   Here’s a small list of Banks and their prepayment penalty calculators… (I’ve left out the preferred Lenders.. those Lenders with the ‘FAIR’ penalty formulas and competitive rates… after all, I am a mortgage broker and I want you to call me…  not afraid to admit that… If you want to know which Lenders are on my preferred list, just give me a call or drop me a line…I’d be happy to share that info with you..).

• National Bank of Canada
• Bank of Montreal
• CIBC
• Scotiabank
• Manulife Bank
• Laurentian Bank
• TD Canada Trust
• Royal Bank

CONCLUSION AND A LITTLE TEST

If I told you there were two mortgages available… mortgage A and mortgage B… you could get the same rate, same prepayment privileges, same payment frequency options, etc… everything was identical… BUT the penalty calculation would cost you $12,000 for mortgage A and $4,000 mortgage B, which mortgage would you choose?

Sure most of us probably said B….  But guess what?   Most of aren’t choosing B…  we’re still choosing A…  That’s right…  the majority of borrowers are still choosing their local Bank branch… that familiar branch on the corner.. or where your mom and dad banked all their lives…   Hard to believe but it’s true…  We are slow to change…  But it’s also more than that… the BIG SIX have deep pockets when it comes to advertising… you can’t turn a corner without hearing or seeing a BIG SIX BANK ad.   The smaller Lenders may have better products but they can’t afford to spend the same $$s in advertising…   But hey, the past doesn’t have to equal the future…  next time, think about your options…  speak with a Mortgage Broker and get access to 50 Lenders… get professional unbiased advice.. It could save you $thousands.

Looking out for your best interest.

As always, feel free to contact me with your comments or questions.

Steve Garganis 416 224 0114 steve@mortgagenow.ca