Transcript of Video Blog:
Hi, everybody. Rowan Smith with the Mortgage Centre. Today’s topic is going to be interest rate differential penalties and payout penalties. Now most mortgages in Canada, when you pay them out and break the term, there’s going to be a penalty.
If you’re in a variable-rate mortgage, chances are it’s only three months’ interest, but how penalties are calculated on fixed rates varies from institution to institution. It typically is the greater of three months’ interest or the interest rate differential.
Now they’re obligated to disclose this to you when you get the mortgage. What they’re not obligated to disclose to you upfront is exactly how that interest rate differential is calculated.
A lot of people are getting shocked when they see the new lower rates today, they want to take advantage of them, they want to pay out their existing mortgage for the new lower rates, and then they find out that by doing this they’re going to be facing an absolutely enormous penalty, because again, it’s the greater of three months’ interest or the interest rate differential.
The interest rate differential is a bit of a formula that looks at how many months are remaining in the term, the amount of interest you were paying now, what the bank could get on similar terms of money remaining that you have today, and they do some sort of a calculation.
It varies from institution to institution on what rate they compare they could get versus what you’re paying and all this type of thing, so it’s very important to ask your institution and go over this in advance.
Now a lot of people facing these penalties throw up their hands and say, “Well, I was never informed of this” and actually, they are. Most cases, in fact, all of them, they would have had to sign off on this at the lawyer’s office. There’s no way you could have gotten a mortgage without having being disclosed at some point that there was an interest rate differential calculation in there.
Now you may not remember it, and in fact, the person you were dealing with may not have explained it to you very well. This is where the onus is on the borrower to make sure they’re informed on what they’re doing, but also on the broker, if they’re dealing with a mortgage broker, to explain to them the situation and to explain to them how the penalties are calculated.
This became real clear to me, because I do most of my mortgage reading in the gym while I’m on the treadmill. I came across an article today which I’m going to actually bore you with by reading just a very, very brief snippet of it so that you can see exactly how this was ruled by a governing body.
“A borrower complained that they paid an interest rate differential penalty substantially higher than that projected by the mortgage agent. The ethics committee chair concluded that the borrowers were aware of the higher penalty for at least 24 hours before they went ahead with the new mortgage and paid out the old one using the interest rate differential.
The chair noted that the borrowers were not compelled to pay out the mortgage, but they chose to do so. As a result, he concluded that the payment of the higher IRD was a result of the borrower’s actions and not the members, not the broker and ruled that there was no violation of the code of ethics. The complaint was dismissed.”
So in this case, the chair felt that the borrower had been disclosed how the penalty would be calculated. Because the lender had not compelled them or forced them to take this payout, probably because they were trying to get the lower rates, which is understandable, they didn’t hold the broker or lender …they don’t make it clear if it was a broker or a big bank that was involved in this complaint was not held responsible.
So the bottom line for this blog post today is know what your penalty is before you sign those mortgage documents at the lawyer’s office. If you’re one of my clients, I always cover off how these penalties are going to be calculated and what you can face.
But please, ask the questions if you don’t know, because saying that you weren’t informed later won’t be possible given that it is contained in all mortgage documents you sign at the lawyer’s office.
For the Mortgage Centre, I’m Rowan Smith.