Mortgage penalty can be a shocker

If you have a closed mortgage at a fixed rate, and you want to get out early, be prepared to pay a high penalty. The cost may be many thousands of dollars.

Most mortgages have a clause that says premature cancellation requires paying three months’ interest or an interest rate differential (IRD), whichever is greater.

The IRD is greater, now that mortgage rates are falling. I talked about it in my column and got lots of interest from readers (and two requests for radio interviews, as well).

It used to be the case that if you had a mortgage insured by CMHC that was past the three-year mark, you could pay three months’ interest to get out. But in 1999, CMHC pulled the plug on the long-standing prepayment privilege and made it a “non-mandatory requirement.”

Lenders are now free to either honour the old CMHC position or impose their normal prepayment penalty policy on CMHC-insured mortgages.

Real estate lawyer and consumer advocate Alan Silverstein was shocked to hear about the new rules in March 2000. Here’s what he said in the Toronto Star.

Who are the big winners? Banks, trust companies and other CMHC-approved lenders, empowered to siphon larger prepayment penalties from Canadians.

I’m not aware of any public consultation on these new rules, or any dialogue with consumers or consumer advocates. Why not?

I’m not sure what irritates me more: CMHC’s regressive new policy, or the clandestine way it was introduced.

The banks are not consistent in the way they calculate the IRD penalty. So, how do borrowers know what is fair?

Robert McLister, a mortgage broker, has put a calculator at his website so you can see what the IRD penalty may be in your case.

I heard from mortgage brokers about how banks use these penalties to penalize borrowers. The $20,000 example I used is not uncommon.

The Financial Consumer Agency of Canada has information on mortgage penalties here.
I’d like to see a bit more advocacy on behalf of consumers who can’t get a straight story on how the penalty is calculated.

Here’s what McLister says about these penalties:

Some lenders use posted rates for their IRD calculation and some use discounted rates.

Some lenders round up to the next longest term when determining comparable IRD interest rates. Some round down.

A small number of lenders prohibit breaking a mortgage early — regardless of the penalty —unless in the case of an approved bona fide sale.

The moral: Always contact your lender directly for an exact penalty quote.

Author: Ellen Roseman

Consumer advocate and personal finance author and instructor.

84 thoughts on “Mortgage penalty can be a shocker”

  1. We have recently tried to refinance to keep from going bankrupt. We were prepared for the penalty we were quoted of $12,000.

    Then, when it was time to pay out with an approved refinance, we were told $27,000 and only if we sold our house.

    Now the amount is astronomical, based on what the supervisor at Home Trust says. We are about to lose everything and they won’t do a thing for us.

  2. Ellen

    Our last mortgage payment is coming up this October. We’ve been told we have to pay a $300 discharge fee. Is there any way an individual can take care of the discharge themself and by so doing avoid this outrageous charge? Thanks.

  3. Hi, I have a fixed variable rate with TD and it’s at 3.05%. I have 47 months left in a 5 year term.

    Is it a good idea to change it to Open Variable, which is at 1.95%? What penalities would I be paying?

    Leo, does your work around help me in this case?

    Thanks all for great replies and I learned a lot.

  4. Guys,

    My cousin and me are sharing a mortgage at fixed rate. He is now moving to USA so I want to take over the 100% share of the house.

    As per my credit history, I am eligible to do this, but I wonder if I have to pay the CMHC again or not? If yes, then how much % do I have to pay as we have already paid the CMHC on this house when we bought it. Can anyone guide me for this issue?

  5. Leo:
    Great idea on reducing your penalty. I hadn’t thought of this before. I am checking to see if this will work for anyone other than ING as it seems some will use the original discount given on the mortgage regardless of whether a blend was done (seems like you weren’t the only one who thought of this.)

    With a variable rate mortgage you likely only have a 3 month interest penalty but you would need to check with your lender.

    Wagar: CMHC insurance is assumable so as long as you are eligible to assume your mortgage and your lender allows this you will not need to pay any CMHC premiums provided you are not increasing the mortgage balance or the amortization of the mortgage.
    Ellen posted this link to calculate the penalty but you still need to contact your lender to see how the calculation is actually done but it is a good starting point:

  6. Friday and Leo, Do you know if we can do the same tricks with banks other than ING? Do we sign another contract with a blend?

    I am with TD right now and I have 2 years left on my 5 years fixed mortgage with a rate of 5.69%.

    They charged me a penalty of $10,300 instead of $6,800 because they apparently gave me a 1.5% discount when I signed (so mad about that extra rate).

    If we don’t sign a new contract for a blend, I suppose that they will add 1.5% + the rate difference in the IRD calculation.

    For sure, my next mortgage will be with ING. In fact, we should used ING for every account!

  7. We just found out our penalty will be about $4,000 to pay out an $85,000 mortgage 18 months early. A 3 months interest penalty is just over $1,200.

    How are our politicians allowing the banks to do this to the average wage earning Canadian? The bank told us it was good management on their part and that is why they are profitable.

    Hard to believe they can get away with this.

  8. Hi guys,

    Thanks for the helpful info – much appreciated.

    I’m currently in the process of leaving my $270,000 mortgage 3 years before my term is up and have been quoted an IRD charge in the region of $8,000.

    I see from various sources that if you have more than 5 years remaining on your mortgage, then the IRD does not apply.

    I was therefore wondering if I blended and extended my mortgage for another 3 years (taking my remaining term to 6 years) whether this would get me out of the charge.

    I have no qualms about paying the 3 month interest penalty but feel aggrieved at the banks charging the IRD, especially when they use the non discounted rate to calculate my interest rate and the discounted rate to calculate current rates.

    If anyone could let me know if this is legal and possible I’d greatly appreciate it. Thanks.

  9. This is plain exploitation in an oligopoly that is the Canadian market.

    We need laws, not advocacy, to stop lenders enforcing clauses like these to force interest payment.

    It should be illegal for lenders not to accept payments early.

  10. Thank you very much for this article. I am in the process of signing my first mortgage with Royal Bank of Canada (RBC) and was curious to what penalties there could be if I wanted to “break my mortgage” since the Mortgage Specialist never mentioned it.

    I am thinking of going for a 2-year closed instead of a 5-year closed, since I have the intention of selling in less than 5 years.

    I will also read the fine print carefully when I receive the full length contract. I’m not sure why they aren’t up front about this.

    Mortgage specialists are not on our side, that’s for sure. They seem to be too focused on their commission because I told them I had the intention of selling earlier, with no mention of penalties.

  11. Wow! The Banks are sure profiting

    What about ATB. They solicited me . They called my home number. The invited me to come in to the bank and stated they could lower my interest rates. Having a new baby and a lower payment was the best news. Until a year and half later I realize I have a $12,000 dollar penalty. If I had not answered the telephone that day I would not have this problem. When I came into the bank I mentioned that we were having a child and that we would be looking for aexchanging a condo for a home in the future.I thought ATB was an ALberta Bank and customers were their top priority. I also thought their was a regulation of \know your customer\ . The mortgage broker knew I would not require the mortgage for a full term. She was more interested in her branches quota and her bonus check! I have asked for a break and also mentioned that I would be require another new mortgage for a property that would accomodate a new baby. Don’t answer your phones as they are soliciting for CEO bonus increases! Shame on ATB.

  12. Martin Cayouette – go with a Variable rate and you will only suffer the 3 months interest penalty. Confirm it with the mortgage specialist.

    DO NOT be confused about the mortgage specialist being a broker. They are only representatives of the bank, unlike a broker that represents you and has your best interest first.

  13. Mortgage Penalty shocker is right. TD bank wants to charge us a $15K penalty despite our plans to remortgage with them and on the bona fide sale of our home. Wow. We have followed the bank of Canada resolution process and it has been an awful run around. TD touts customer service and they have failed. They refuse to discuss the math and how it is calculated as nobody knows. We are going to approach the ombudsman. Incidently they are charging a 150 bpts premium premium above the contracted mortgage rate which makes it worse. I will report the results of our chase.

  14. This is essentially usury and the Supreme Court found that fees applying to debt are most likely against usury laws and should all be investigated. (This came out of the payday loan problem).

    Charging a fee instead of actual interest was the way these guys got around the Canadian usury limit of 60% a year, but found that charging $10 on $100 over 7 days is 14,000% annually.

    Charging or recovering funds attached to a loan on a demand basis over a much shorter period of time is plain loansharking and probably against the same laws put in place for the payday loan robbers.

    This should really be put before Queen’s Park very soon and get it settled.

    People’s lives are being affected, if not ruined.

  15. Regarding MCAP, buyer beware! This company is the rottenest of the entire bunch!

    There is, as someone mentioned earlier, no customer service worth speaking of. Should a problem arise, look out. You will be spending days to get any answers.

    God forbid you should lose your job or circumstances should change, they will call in your mortgage faster than fast, no mediation, no negotiations, just GREED!

    They paid our municipal land taxes, without contacting us, then demanded the full amount within 10 days. This is disgusting and worse than any bank we have ever dealt with.

    Even upon escalating the issue to a manager after disgusting treatment from an employee, nothing was rectified. They are only interested in trying to steal homes from hard working individuals.

  16. If you haven’t figured it out yet, the CMHC i.e., the Cdn Govt, didn’t bank a $100 Billion by looking after the interests of Cdns.

    Yes, the CMHC salaries and benefits are the best in the country and yes, their banking partners who no longer have to ferret out potential defaults on mortgages are pretty happy.

    The victims are usually crime related, except in this case or the Canadians who pay these ridiculous fees and thereafter sell the home, losing all of the money retained by CMHC for mortgage protection on a loan that no longer exists.

    If I was in the CMHC, I would protect this with even more arroganc than the current dictators within their group.

    I just paid penalties and taxes of $40,000 on a house I owned for just over 1 year. I was told by some lame duck CMHC bureaucrat that this was in the interest of Cdns, and not just the CMHC.

    That $40K loss now means I will never be able to even consider buying a home. Thanks, CMHC, for looking after me.

  17. Be careful of the discount the bank gives you from the posted rate. When they calulate the IRD penalty, they subtract the discount they gave you & screw you big time.

    Say you initially took your mortgage when the posted rate was 5%, but you got it for 4% (the bank gave you a discount). If you now want to break your mortgage & the current rate is 3%, guess what ?

    Your IRD won’t be based on 4% (your existing rate) – 3 %, but 5 % – 3 %.

    So although you are only paying 4% right now, they will say the posted rate was 5% when you first took the mortgage & they will use that for the IRD calculation!!!

  18. We are currently selling a house in Toronto to move to another city.

    The penalty is assessed as the differential between the mortgage rate of 5.59% and the current Canadian bond rate of 1.77% plus 9 points, or three months interest, whichever is higher.

    Guess which one is higher? The difference for us is a whopping total of $16,000 additional payment for the higher calculation.

    The company is Industrial Alliance, which will now lose all my RRSP investments as a result of this.

  19. We are are having a very frustrating time with a mortgage specialist – (so his card says) regarding our construction mortgage.

    I will not go into details regarding all of the upsets. However, our house is complete and we are in. At this Canadian bank, we have had 2 previous house mortgages and never a problem.

    When we sold our previous house and closed the mortgage, we were penalized $8,600. We were told by the specialist that we would get that back in a draft form (so, cash back to us) when the construction mortgage was complete.

    At completion, he still assured us that we would receive the penalty back in a draft. For over two weeks, he has been stalling and saying they are working on it at head office.

    Now he tells us that we will not receive the penalty in cash from the institution – they are unable to make that happen. Instead, it is somehow deducted through interest or something (not clear on this).

    My point is we were promised we would see that money, which I have been using to budget with during construction – it is needed to finish paying our trades people.

    My question to you is: What can I do? This is very unfair and we want to fight this.

    If we were not going to see that money, which was actually earnings from the sale of our previous house, then we should have been informed long ago. Do you have any advice for us?

  20. Well, I feel completely taken advantage of.

    I have signed standard mortgage agreements many times before. I knew of the standard penalties levied and did not think that there was a difference between lenders.

    Recently, I went to prepay a mortgage from the CIBC, a five-year fixed that had 40 months left with a 3.75% interest rate.

    A standard 4 year term is posted at 4.05%. The CIBC is claiming that I owe the IRD on the interest rate for a 5 year based on 5.25%, not based on the ‘discounted’ rate that I have received.

    Why not just make it 100% or some other arbitrary number? Is there no justice in this world?

  21. Here’s my scenario… My wife and I are leaving the country. We can’t rent our home for an amount that will cover mortgage/property tax/services etc., so we are left with no alternative but to sell.

    Bridgewater Bank want to charge me $12,200 to pay out my mortgage 36 months early. However, they did say I could port my mortgage.

    I attempted to purchase an apartment that we could rent out while overseas, but discovered I cannot have a rental under my mortgage. Hmmm, so porting is out.

    Oh, but a potential buyer can assume my mortgage… so I try to sell with this in mind, but now find out the buyer must have a down payment equal to the difference between what I owe and what it sells for, likely $40,000. They CANNOT take out a 2nd mortgage on the difference either.

    That pretty much eliminates that option, as our home is definitely a first time buyer type place. So I’m stuck with having to pay this outrageous penalty, which equals the interest I would have paid if I had carried the mortgage full term.

    My problem lies with the fact that the bank now has access to these funds to lend out again 3 years early and they have already made 3.87%! So potentially they could double their money, while I pay the price.

    It’s no wonder why the Occupy movement is happening.

  22. I have a letter from TD telling us how to calculate the IRD, which is based on the difference between the posted rate today of term similar to term remaining and the mortgage rate.

    But they added the 1.6% discount received at inception, which is not documented anywhere, and we ended up paying $3,000 more.

    We have contacted all levels of customer care and escalation and are now at the Ombudsman level. We are going to take them to small claims court.

    Will keep you posted, but if we win, I want Ellen to communicate this with through her newspaper writing and blog activities.

    This needs to be addressed as an unfair consumer practice.

  23. To Steve from March 30, 2012:

    They are required to disclose the amount of discretion given to you when you either did your mortgage or renewed your mortgage.

    TD only recently started to put the actual amount of discretion into their mortgage documents.

    If the discretion is not in yours, THEY ARE NOT ALLOWED to charge you the IRD based on the amount of discretion.

    I used to work for TD and received numerous complaints about this. We escalated it up to the Customer Care level and EVERYONE got their money back.

    FCAC rules clearly state disclosure was not met. TD is aware of this, but if you don’t ask, they will not give.

    Good luck, this is a no brainer. I can also put you in touch with someone who got their money back.

  24. Long story, but I will not go into details and keep it short.

    Our interest rate is 4.1 per cent. Our house is sold and we have to port our mortgage. Very short closing for both our buyer and us at the end of July!

    The mortgage broker at the bank is telling me, since we have three more years left (as I renewed), that I am best off paying off the $7,000 penalty and and he can offer me a better interest rate. He has not advised what this better interest rate is.

    I do not see the advantage, especially when in three years we are going to go with someone else because of all their broken retractable promises they have made.

  25. I had a mortgage with TD Canada Trust back in about 2000-2001. When I was selling the property, I looked at the options. One was the IRD and the other was the 3 months.

    I asked what the payout penalty would be and based on the 3 months it was $1,700 (the IRD was significantly more, about $3,000).

    When I sold the place and went to pay it out, they used the IRD and I said no. I am going with the 3 months penalty, which you said was $1,700. The Mortgage Officer said “do you have that in writing?”.

    I have never done any business with TD Bank since. I know that they don’t really care about not getting one person’s business, but I have a large secured line of credit and two mortgages plus a car loan and a Visa credit card that I use steadily throughout the year.

    The point is that they treated me terribly and for just $1,500, which they would have made 15 times from me since.

    I have never missed a payment (nor did I when I had a mortgage with them) and have a very high credit score.

  26. I am not understanding why everyone is so upset. We are all adults and we take accountability for our actions.

    Read the fine print when going into any legal contracts. Ask the right questions. The IRD and 3 months interest is pretty standard within most institutions.

    You need to see if as if this was your busines. If you were the investor and serviced these mortgages and you had clients exiting out the mortgage early. you as the investor and lender need to make your money back.

    This is no different from a cell bill or any other legal contracts you go with that have these conditions. Why are the banks to blame and not the consumer, we as the consumers are to blame for the recession as well.

    Buying a home is a longer term investment, if you gonna buy for short term or potenially use the home as rental why would you go into a long fixed term.

    Open term mortgages are always available or go with a variable rate mortgage where you more then likely to occur 1-3 months interest.

    If you all decide to go to a lawyer do you think you would actually win. I dont beleive any mortgage lender would put themselves at risk to have lawsuits against them if they weren’t able charge these penalties.

    Also penalties are always subject to change. IRD are never firm as this will always fluctuate. Some lender will calculate this based on how many months and days you have outstanding.

    If you really do your calculations correctly you will see what you get out of the estimated calculation is usually higher then what the bank is actually charging you.

    You all need to really do your homework before bashing the banks and lenders as they are just providing you the service. If you don’t do your due diligence in reading documents and asking the right questions, take accountability for your actions.

  27. I currently have 3 years left on my mortgage. My husband and I have the opportunity to move to the U.S. for a job. Our current penalty to break the mortgage is $26,000 with CIBC.

    I was wondering if anyone knows if there is any way around paying this penalty. We can’t transfer our mortgage because they don’t offer U.S. financing.

  28. We applied for a mortgage through our broker and they were setting us up with MCAP Mortgage. Everything had gone through the approvals and we were 10 days from our possession date when MCAP decided they didn’t like the area we were buying in, so they simply changed their monds.

    I had already released conditions in the purchase agreement based on their worthless “word.” Now I stand to lose the $5,000 deposit I made, $2,000 legal fees and $500 for an appraisal on the property.

    My advice — DO NOT BEGIN TO DEAL WITH THEM. MCAP is the most unprofessional group of morons in the mortgage world. MCAP needs to be investigated. DO NOT DEAL WITH MCAP.

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