Skip to content

Tagprepayment penalties

Does this ad make you laugh or get you mad?

In February, the Federal government announced many changes to tighten mortgage lending policies to ensure Canadians don’t get in over their head when it comes to mortgages.. they also promised to STANDARDIZE Mortgage Penalties…  well, we have not seen or heard anything about it… Come on Feds, make the change…   Canadians need your help..

Last week someone sent me this mobile pic from just outside a Scotiabank branch..  We couldn’t help but find the ad amusing…  In case you can’t read it.. “Penalty & fees have you  upset?  No respect? Get service and advice worth switching for”.

Well Scotiabank, speaking on behalf of all Canadian borrowers for just a minute, the answer is YES… we are upset.. so what are you going to do about it?

Pause… wait… I don’ t hear anything…  Just what I thought.. nothing..

We found the arrogance disturbing.  Scotiabank is no different than any of the other major bank when it comes to calculating their prepayment penalties…and in fact, I have more than a few clients that will get quite upset after seeing this.

You see, they are part of a long list of Mortgage Borrowers that found out, the hard way, that mortgage prepayment penalties can be extremely high… 6%, 7% and sometimes 10% of the outstanding mortgage balance…  Here’s a good example from a Bank of Montreal client… this article was written in Ellen Roseman’s Blog…   Her reader is quoting a $30,000 penalty on a $360,000 mortgage with 2 years remaining

Think you are immune?  Well, if you are in a fixed rate mortgage, then I’ve got news for you.. you are susceptible to the same outrageous penalties if you take any fixed rate mortgage.    The Banks are selling 5 year Fixed rate mortgages as getting ‘peace of mind’ and protection from potential rate increases….   And yet, study after study has proven that SHORT term and VARIABLE rate mortgages outperform any fixed rate..

Make an informed decision, stay alert and make sure you know what you are getting into when choosing a FIXED rate mortgage…  Feel free to contact me anytime for my advice or opinions.

How to reduce mortgage penalties

Interest rates are at records lows.. it’s popular water-cooler talk… You’ve heard your co-workers or friends who are lucky enough to renew their mortgage into these emergency, once in a lifetime rates..

But how you do you take advantage?  If you break your fixed rate mortgage then you face an enormous prepayment penalty…we’ve seen reports of $10k, $15k and $20k in penalties….Wow!

Well, here’s a few tips…

-first, if you are in a 10 year fixed rate mortgage, and your are at least 5 years into the term, then the maximum penalty is 3 months interest  (this is a little known fact… Section 10 of the Interest Act of Canada).

-One more way to reduce the penalty is to utilize the annual prepayment privilege that’s within the mortgage.  Most mortgages have between 15% and 25% prepayment privileges which equates to a 15% to 25% reduction in the penalty….

-negotiate the penalty in combination with an extension on your current term..this requires some discussion with your current lender and you should seek the help of a mortgage broker…if the lender wants your business they may be able to offer some incentive to stay.

Another situation where the lender cannot charge any penalty is if the mortgage goes into default and the lender issues a Notice of Sale (legal action to collect the mortgage)…. of course, I”m not suggesting that anyone default on their mortgage.

Our best piece of advice is this… don’t take the lender’s penalty calculation at face value… penalty calculations have changed and most bankers couldn’t tell you how the penalty is calculated if you asked them.  Always review the penalty with an unbiased party… speak with your mortgage broker or lawyer…enjoy the weekend!