Government won’t standardize mortgage penalties

March 5 2012 by Ellen Roseman

The Harper government promised to do something about the penalties charged to borrowers when they left a mortgage before maturity. It took two years to get the new rules, announced last Sunday afternoon. Peculiar timing.

I’d hoped to see changes in the way banks calculate the interest rate differential (IRD). They often pull a fictitious rate out of the air — a posted rate the customer never paid — to make the penalty larger. Alas, that sleight of hand wasn’t addressed.

The government will get mortgage lenders to adopt a code of conduct that requires more disclosure. This means they will tell you more about penalties and how to avoid them. But they won’t have to standardize the penalty calculations.

I call it protecting the lenders. They can continue their unfair practices, as long as they give you more information about what they’re doing.

Ideally, disclosure helps you shop around for lenders that calculate IRD charges fairly. But what choice do you have if they all play fast and loose?

There are still a few lenders that don’t use the Big Six banks’ formula for calculating penalties, says mortgage broker Steve Garganis.

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?

The Financial Consumer Agency of Canada will work with lenders to monitor how they’re complying with the code. That could be more effective than passing a law that is never enforced.

It’s a win for consumers, says the Canadian Mortgage Trends blog:

And lastly (and here’s the best part in our view), lenders must post calculators on their public websites to help determine “reasonable” estimates of penalties. No more guestimators that spit out ballpark penalty quotes that are thousands of dollars off.

We don’t make a habit of celebrating government regulation, but this set of guidelines has been badly needed. Despite the lengthy implementation, the Finance Department and FCAC deserve a salute on this one.

To me, this is an improvement over the complete lack of regulation we had before. But I expect more than beefed up disclosure from a government that says it will protect consumers from abuse.


  1. Ron White

    Mar 8 2012

    I’m not surprised by the government’s refusal to act on this very important issue. Several weeks ago, I e-mailed Mr. Flaherty’s office about the need for mortgage penalty reform, but his office didn’t even have the courtesy to send me back a response.

  2. Elizabeth Blair

    Mar 13 2012

    Yes, I sent a letter to my local MP as well….the answer from Flaherty’s office was fluff.

  3. Sandy Pearson

    Mar 18 2012

    Flaherty’s answer to consumer protection is the federal protection agency, the Financial Consumer Agency of Canada who is mandated with ensuring that banks properly disclose mortgage penalty charges to Canadians through proper disclosure. The consumer agency’s response has been to develop educational material for consumers. It’s focus right now is financial literacy. The consumer agency is to focussed on developing education material and not focussing on its regulatory responsibilities. For years, I’ve worked in a non-profit organisation, trying to help low income Canadians gain some protection from unfair bank practices and the government’s answer is education material. Well I’m here to say that the educational material developed my a government agency does not meet the needs of our clients. They need real protection, real regulations that aim to truly help Canadians not educational material. One just has to google financial literacy materials and they would find pages upon pages of good reputable organisations, like the Investor Education Fund and Credit Canada.

    The consumer agency, should consider how it does business. Right now it’s too focus competing with the non-profit sector in develloping and promoting its own publications.

    Let’s stop duplication and wastful government spending and focus on the true issues.