Still waiting for rules on mortgage penalties

July 10 2010 by Ellen Roseman

In its last budget, the federal government promised to standardize the calculation and disclosure of mortgage prepayment penalties. Ursula Menke, head of the Financial Consumer Agency of Canada, says she expects something this fall.

If you want to know why greater clarity is needed, check out Nadeen’s story below. She’s being charged over $30,000 to break a $360,000 mortgage at BMO, when the penalty should be $8,000 under the interest rate differential formula.

The key issue: Even though her actual mortgage rate is 5.05 per cent, BMO is using the posted rate in effect when she took out the mortgage — about 6.45 per cent.

This posted rate, and the process for determining her penalty, was not disclosed in her mortgage contract. Her financial adviser, Ted Rechtshaffen, says it’s not right.

I am appalled that a major Canadian bank can charge this fee – essentially by making up the process along the way to suit their interests.

How many Canadians simply accept the fee and pay the bank an astronomical amount, or decide to keep their business at the bank because the fee is too high?

Mortgage rates are moving up. Economists speculated yesterday, after a healthy jobs report, that the central bank plans another quarter-point rate increase.

Still, the gaps between older and newer mortgage rates will continue, especially when banks insist on using fictitious posted rates that almost no one ever pays.

Let’s make sure Ottawa brings in tough new rules soon. Banks shouldn’t be allowed to play these games any longer.

19 comments

  1. Nadeen

    Jul 10 2010

    My letter to the BMO Ombudsman:

    I would like to make a formal complaint about BMO mortgage services, specifically the method used to calculate the penalty charged to terminate the mortgage agreement early.

    I wanted to refinance my mortgage after finding another ‘big bank’ institution at a much lower rate. BMO was unwilling to match this rate.

    In order to do this, I knew that I would have to pay a penalty to get out of my agreement with BMO – 3 months interest or the Interest Rate Differential (IRD).

    This clause is in my mortgage agreement. My lawyer clearly explained the consequence of my actions.

    I assumed that I would pay the penalty using the IRD calculation based on my existing interest rate and the current rate for the remainder of my existing mortgage term.

    The interest rate for my existing mortgage is the only interest rate that is present in my agreement.

    Based on the information in my agreement, my financial advisor and I calculated approximately what the penalty would be.

    I told BMO of my intentions, and asked what exactly my penalty would be for an early discharge.

    BMO proceeded to tell me that my penalty was approximately $30,000. This was much higher than I had anticipated.

    BMO said the posted rate at the time my mortgage agreement was established is also considered in their IRD penalty calculation – whereas I only considered my existing mortgage rate and the current rate.

    I completely disagree with the rate BMO is using to calculate my penalty, a rate that I was unaware of.

    If it was always BMO’s intent to use the posted rate in the IRD calculation, then it was BMO’s responsibility to ensure that this posted rate was present in my agreement.

    I am not being unreasonable. I do expect to pay a discharge penalty – but I expect to pay a penalty based on the information presented in my agreement. I expect to pay a penalty that is fair.

    Furthermore, getting to this point has been an extremely time-consuming process. I began disputing my penalty in March 2010. I have had to speak with numerous individuals, only to hear the same comments over and over.

    I am asking that you please resolve this issue in a timely manner because my approval with the other institution expires on July 19, 2010.

    I have one last comment to make about the IRD Penalty Calculation: It was extremely difficult to access any information on BMO’s website. The call centre reps would comment on the penalty, but in my case always provided incorrect information.

    For such a large organization, I thought that BMO would be more thorough and precise. And if not, that BMO would admit their mistake and correct their actions accordingly.

    Proposed Resolution:

    A breakage fee of $7,729, based on the IRD calculation that uses my existing mortgage rate of 5.05 per cent and the current posted rate of 3.95 per cent for a 2 year closed mortgage, on a mortgage balance of $324,281.

    (I intend to use my BMO secured line of credit to take advantage of the annual 20 per cent prepayment option to reduce my current mortgage balance of $405,350.72, which will be paid in full when my new mortgage agreement closes at the end of July 2010.)

    Given my understanding of the IRD calculation and the information in my mortgage agreement, this is the amount that BMO should agree to.

    However, the option of waiving the breakage fee entirely to cover my time and frustration should strongly be considered.

  2. Steve Garganis, mortgage broker

    Jul 10 2010

    Hi Ellen,

    A familiar story that we’ve heard dozens of times.

    I have three comments.

    1) The Government said they would standardize prepayment penalties…. when? Nothing’s been said about it since it was announced in February.

    2) I have only found one bank that posts their IRD penalty calculation, TD. And here’s a link to an article that I wrote about this,

    http://canadamortgagenews.ca/2010/04/20/good-news-about-higher-rates-it-means-lower-prepayment-penalties/

    3) The IRD penalty calculation is something that has really rubbed me the wrong the way ever since they made the changes in 1999 or 2000.

    Prior to the changes, banks would use the formula that your reader gave. It made sense. But the banks must have decided there wasn’t enough money and they could make more….

    The banks are actually making a borrower pay for a benefit that was never received. They are factoring in the benefit of a so-called ‘discount’ and making the client pay for this unreceived benefit for the remainder of the term.

    Furthermore, the entire premise of a prepayment penalty has always been that the bank cannot lend out that mortgage money at the same rate or better, that they could only lend the monies out at a lower rate of interest.

    The problem with this argument is that they use a blanket discount for all mortgage terms. If they gave a 1.50% discount on a 5 year fixed, will they give a 1.50% discount on a 2 year fixed? NO WAY, that just doesn’t work.

    So for example: BMO’s posted 2 yr fixed rate is 3.85%. Does that mean they are lending out 2 year money at 2.35%? I don’t think so.

    I have not seen any lender offer a 2 yr rate anywhere near that. The best 2 year rate I’ve seen is 3.05% and that’s my Mortgage Broker rates.

    I’m waiting for a lawyer who has a mortgage and has to pay an outrageous penalty who will challenge this penalty calculation formula.

    I don’t believe it would hold up in court. It’s certainly not proper. There is a bias and I question how ethical it is.

  3. Rakesh

    Jul 10 2010

    Hi Ellen,

    I am also stuck with a 5.75% 5-year fixed mortgage with one of the big 5 banks.

    The IRD forumula that the bank is using to calculate the penalty includes subtracting the discount of 1.85% that I received on my mortgage from the term that is closest to the remaining term of my existing mortgage. As a result, the penalty is just too high, so I am going to have to wait until renewal and then take my business to another lender. I have learnt my lesson (this was my first mortgage ever and absolutely my mistake to lock into a 5-year rate) and I will never lock into a rate term this long again. I just wish that the Government will introduce mortgage penalty laws that offer more clarity and protection for consumers in future.

  4. Cynthia

    Jul 10 2010

    This good information for me. I have yet to buy my 1st home. So I will be on the lookout for this. I retained a lot of information from my short stint in a real estate office. I asked a lot of questions, and got a lot of good info and knowledge.

  5. youngandthrifty

    Jul 11 2010

    That’s a good idea that the government is deciding to step in and standardize the mortgage penalties. Banks get away with so much.

  6. Leon

    Jul 12 2010

    The posted TD IRD calculator is wrong. I’ve plugged in my numbers, and compared it to what the bank actually told me the amount is (when I spoke to them about this subject three days ago).

    The online calculator shows $24,000, but the bank computer shows $31,000. I wonder how they really calculate the amount?

    Another subject I think Ellen should look into is property tax deduction for first time buyers. For the first few years, the bank automatically deducts property tax together with your mortgage payments. They place these funds into a “pool” (interest free of course!) which they then use to pay your property tax.

    They always withdraw more than needed, in case your property tax goes up.

    In my case, TD was withdrawing so much that, after speaking to friends and family about it, I discovered that it was almost double my current property tax amount. I’ve asked TD to stop the practice, and had the remaining funds returned to me.

    In two years’ time, the amount that TD put back into my regular account was enough to pay a year and a half of property taxes after they paid off this year’s amount! The “pool” had a surplus of over $5,000!

    Talk about uncontrolled, bank enforced, greed!

  7. SHP

    Jul 12 2010

    About the property taxes deducted by the banks: I always refused to do that (if you have over 20% downpayment, you can opt to pay taxes yourself, even on your first mortgage).

    It was a hassle to get it out of the contract, but so worth it!

    I had the same problem with the penalty calculations that others described when selling my condo to buy a house last year. The most frustrating thing was that each time I asked a TD representative to calculate the penalty, I got a different answer!

    It looked like even inside the bank, they didn’t know how to make the calculation. The formula was clearly disclosed on the papers I signed, but the rate to be used for the calculation was not indicated so clearly…

    Anyway, for us, it was better to pay the penalty and go somewhere else — but only because the mortgage amount was quite low, and the conditions they offered to transfer the mortgage to our new home were ridiculous.

    They only started to offer something sensible when we told them we were for sure moving to another bank, and at that point we were too fed up with them to want to discuss it any more.

  8. Steve Garganis

    Jul 13 2010

    To Leon…

    Sounds like you are having issues with a TD penalty.. it could be that the rates have fluctuated recently.. every decrease in the bank posted rate will increase your penalty..

    I’d be happy to discuss this with you… feel free to contact me anytime…

    Thank you.. Steve

  9. the uglytruth

    Jul 15 2010

    Most banks IRD calculation – legalized heist! No one seems to fight for the consumer. How does one file a class action suit?

  10. Mortgage Penalty

    Aug 9 2010

    Our federal government made a promise to intervene but WHEN will they do this. I heard of a family who had a mortgage with Equitable Trust and the penalty to get out was $40,000, that’s FORTY THOUSAND dollars. Banks are sinking families. Please Wake up Minister of Finance, and stop this gouging of the helpless consumer….create ONE STANDARD calculation for penalties – 3 months interest and that is all. Government MUST PROHIBIT the charging of excessive mortgage penalties.

  11. Sandra Labelle

    Nov 7 2010

    I too got caught on this IRD penalty. I co-signed for my daughter 17 years ago with CIBC. We renewed in 2008.

    We used their in-house lawyer because it only was a renewal. We actually shopped for this one and CIBC matched our lowest rate of 5.35% with either President’s Choice or ING Direct.

    Anyway, on the renewal it showed them trying to match it. First the rate was 7.1%; then 6.85% and finally the match of 5.35%. We went with CIBC because of our history and also we would not have to get an appraisal. More money, right?

    Never did they say this was a discounted mortgage and we would pay dearly to get out of it early. My daughter has continued to have money problems and had to get out. CIBC made me go through three levels of Customer Care before I could even talk to their Ombudsman.

    On their recorded tapes, they actually lied to me on a couple of occasions. The first person said he would give me my 10% prepayment if I didn’t pursue the investigation. I told him to forget it.

    The second level person gave it to me when I said I wanted what was due to me immediately. My lawyer called the next day with my new payment schedule minus the 10% prepayment. When he had called the day before. a chap from the mortgage department told him he knew nothing of a 10% prepayment and that they didn’t do that any more.

    I believe most people working in the bank are not told anything. That way, they can claim ignorance when you say they didn’t disclose same.

    I am now dealing with the Ombudsman at CIBC. They say before they can investigate, I have to sign a letter they sent me allowing them to talk to the world about my problems.

    That is how I deciphered their second paragraph. I told them I wouldn’t have signed such an open document. Part of the paragraph says they can talk to any company associated with CIBC. What is their name, I said, but no name given.

    I said I wouldn’t sign such a letter unless I knew exactly who they want to talk to. They have all the information at their fingertips, I told them.

    Now they say I should read the documents before signing. I said I need a high priced lawyer to read their documents.

    My renewal was signed by an account manager who no longer works at that bank. I have been a long term client at CIBC. I have since cancelled my line of credit and my Visa card, which I had used in abundance over the years. They have lost a very good customer. They obviously do not care.

    Your column is super. I hope a class action suit comes about. It would be great if The Star headed it up. Think of the readership every day while you were in court. It would make for superb reading.

    I bet there are thousands out there with the same dilemma. Thanks, Ellen, for all the support.

    By the way, you can go to the Ombudsman for Banking Services and Investments after a 90-day period if your own bank does not satisfy you. For those people who wrote in to you, all is not lost even though their properties have closed and the money has been paid. I have yet to see one of your readers mention this fact but perhaps I am falsely hoping to receive any of this money back.

  12. Rick LeClair

    Nov 20 2010

    I have experienced the same thing with BMO. I recently paid out my mortgage and didn’t realize the excessive penalty until I signed the documents at the lawyer’s office.

    By this time, it was too late to get out of the transaction so I am stuck with this high penalty.

    The interest rate on my mortgage clearly states in every document I have seen or signed of 5.51%. I calculated a penalty of $5,506 using IRD standard formulas and even the one that the bank sent me.

    The bank charged me a penalty of $9,188.27. They stated that my original rate was 6.85% with a discount of 1.34%. This is the first time I have ever seen this rate.

    The manager of the BMO branch in Barrie wants to wash his hands of it and says I should talk to the Ombudsman. I will probably do this but I have been dealing with BMO for more than 25 years and feel I am getting poor customer service.

    It is fine to say you will just go to another bank but after 25 years, you have credit established including a Line of Credit and it is probably not smart to just sever ties, although I may use this threat for leverage if they really care.

    I am really tired of banks, their high fees and their sleazy practices. At one time, Canadian banks were very reputable. What happened to this institution in Canada?

  13. Wei

    Jan 27 2011

    Did anyone solve your problem?

    I started trying to renew my mortgage in January 2009 and now I am still struggling with it. I have a $240,000 mortgage.

    In February 2009, I contacted my mortgage specialist and he told me the penalty is around $10,000. I asked to reduce the penalty by 20% because I have “20% prepayment privilege”, but BMO said no.

    The mortgage specialist suggested I wait until the end of year and borrow some money and pay the 20% off this year and even the next year’s 20%. Then, the penalty would be small enough.

    Later, they told me the penalty amount became $18,000. They can reduce the penalty by 20% but nothing else.

    I don’t believe this is fair, but there is nothing I can do. OBSI did not support me. I contacted OBSI again and now still waiting their reply. I hate it, but what can I do?

  14. Brad

    Feb 3 2011

    Canadian banks and credit unions are reaping huge profits in “Constructive Fraud”. Simply put, they are taking funds out of agreements that they are clearly not entitled to.

    The legal definition of Constructive Fraud is one who takes something from the contract to which they are not entitled, whether it be innocent or negligent.

    The law is very clear that any form of fraud to a contract voids the agreement and the courts should put both parties back to their original positions as if the agreement never existed.

    In litigation, financial institutions will usually defend any action of wrongdoing against them by claiming it was an “honest mistake” or “computer error” and the mistake will be corrected before they enter the courtroom.

    The courts are usually satisfied with most of the banks’ defenses and allows them to escape without any form of financial penalty or consequence.

    Let’s face it, the management in these institutions are paid a bonus based on profit and spend a good portion of their time looking at ways to increase profits at the expense of the unsuspecting consumer.

    And why not, when the only consequence if caught is to return the funds?

    I recently challenged the North Shore Credit Union on a mortgage penalty fee charged several years ago in the amount of $7,000. At the time of payment, we asked them to check their calculations, as it seemed very high for such a small mortgage. They said the amount charged was correct.

    This bothered us for a long time. I went back to the credit union and asked for a copy of the mortgage agreement so I could read the interest penalty clause.

    Upon my return to pick up the copy, I was directed to the manager’s office where I was offered an apology for a computer error in the amount of $5,500, complete with a refund cheque.

    I can’t help but wonder how many more members of this credit union have been subjected to similar computer errors.

    The bottom line? The days of trusting your local banker are gone.

    The laws protecting consumers against financial fraud are difficult to enforce, because the banks are armed with a team of expert lawyers designed to destroy you from both a financial and mental point of view.

    This writer has lost his home, business and 30 years of earnings to our very corrupt financial system, which is insulated by deep pockets, unsavory lawyers, politics and a questionable court system.

  15. JO

    Feb 8 2011

    Well, I’m in the same boat as everyone else. Our lender was First National and they screwed us just the same.

    With less than a year and a half left on our 5-year term, we were told our break fee was roughly $10,000 + some other hodge-podge of fees for who knows what.

    Like most here, I was fully aware that a penalty would be forthcoming. I have no problem paying a fair and justifiable amount of compensation for their loss of revenue.

    So our numbers worked out to having an opening balance of $211,000 and now will cost us just over $216,000 to offset. I thanked them kindly for the privilege of getting loan-sharked and left it at that.

    I can’t fathom how the regulatory agencies could be seeing these calculations and not be extremely alarmed!! Thanks again, big government…

    I haven’t done any research yet but does anyone know if sellers in the US are subject to this type of usury? i would assume not at the present time due to the shaky housing market in certain areas but prior to the meltdown, I would be curious to know if it was similar.

  16. Helen Cohen

    Nov 17 2013

    I refinanced my closed 5 year mortgage of $480,000 with CIBC one year before renewal. For this, I paid a $20,000 penalty. My interest rate was 5.75%.

    I was in shock since I was a customer of CIBC for 30 years, same branch, and left them to go to Maple Trust. They lured me back under false pretenses without ever explaining the new rules of break up fees.

    I definitely would join a class action suit against CIBC. Our banks have horrible practices. First, entice consumers with lower interest rates, then kill them with break up fees. It is unheard of that banks have such power of monopoly in a democratic country.

  17. Lisa

    Jul 19 2016

    Before taking out our loan with BMO, I did shop around, and went with BMO because they offered the lowest rate.

    I don’t think they misrepresented the loan, but we didn’t understand what questions to ask either. When we went to sell our home, we were shocked that we had a $20k prepayment penalty and asked BMO to work with us to lower the amount. BMO refused, saying this is the paperwork we signed.

    So my husband looked over the paperwork in detail, and found that BMO had actually PRINTED THE IRD FORMULA INCORRECTLY and forgot (or misused) a parenthesis in the formula. Because of how the formula was actually written, the resulting number was below 0.

    In the end, we were able to pay the 3-month penalty instead of the $20k. I am posting this with the hope that it might help someone else who did not understand the loan process of some banks.

    GO OVER THE FORMULA IN DETAIL on the paperwork you signed – it might save you some money.

    I agree that there needs to be change to the way banks do business.

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