March 13 2009 by Ellen Roseman
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 â€” regardless of the penalty â€”unless in the case of an approved bona fide sale.
The moral: Always contact your lender directly for an exact penalty quote.