Of Prime Interest: Understanding the three-month interest penalty
While we see that interest rates are still low, how do you take advantage of the record-low rates if you are currently in a fixed-rate mortgage contract?
You’ve likely heard the horror stories of people being charged $10,000 to $15,000 in penalties to break that mortgage contract if you don’t have the good fortune to be buying a house at this moment or have your mortgage come up for renewal right now.
For those now paying over five per cent interest on their mortgage, to break that contract and renegotiate a lower rate can come at a significant cost.
Seeking out a mortgage broker is one avenue to help you determine if paying the IRD (Interest Rate Differential) is worthwhile by providing a refinance savings analysis.
During the early 1990s, mortgage penalties were capped at three months interest. In 1999, Canada Mortgage and Housing Corporation quietly removed the three-month interest cap from their policy and banks slowly changed their own policies to allow for IRD to be charged.
Today, we have banks using an unfair penalty calculation that does more than cover any potential loss. The formula for an IRD penalty is not uniform among all lenders or regulated by the Canada Bank Act. While recovering loss on a mortgage contract is a reasonable request, the problem is that banks have been left to calculate IRD penalties whichever way they want. This means that some lending institutions have been overcharging clients.
So, ask for a printed “information only” discharge statement for your existing mortgage. Check to see if the lending institution has applied the allowable pre-payment privilege to the discharge.
Check the comparable interest rate used to calculate the IRD.
You can also engage a third party firm to review your IRD penalty. There are companies which, for a percentage of the recovered penalty, will negotiate down an unfair IRD penalty on your behalf.
Lastly, write the government to evoke change. There is no ethical justification for a financial institution to maximize profits on the backs of average Canadians by playing games with early mortgage renewal penalties.
In February 2010, federal Finance Minister Jim Flaherty announced in the budget that he was bringing in legislation to make the early renewal penalties consistent among all Canadian financial institutions.
It is now years later and thousands of Canadians have been overpaying IRD penalties. Why is it taking the federal government so long to do the right thing?