Cancellation Fees

mortgage-cancellation-fees We heard from a bank rep today that one or more lenders are considering charging cancellation fees when a client cancels an approval.  (We’re not sure if the fee would be charged to the broker or the borrower.)

Hearing this was both surprising, and unsurprising, at the same time.

It was surprising because some might consider cancellation fees a gutsy move for a lender. 

It wasn’t surprising because this is arguably a logical progression in the trend towards lender efficiency. 

The idea behind a cancellation fee is to recoup underwriting costs and discourage frivolous applications.  Lenders we’ve talked to say it costs them at least $150 to $200 to underwrite a mortgage application. Moreover, cancellations add delays to the system, which disadvantages other customers.

From our own perspective, cancellation fees would be a tough pill to swallow unless the lender’s offerings were clearly superior to the competition.  For example, suppose today’s best 5-year fixed rate was 4.15%.  Then suppose a lender comes along and offers the option of 4.09% (the best rate in the market), on two conditions:

  1. If the customer cancels before closing, there is a $250 fee to the customer
  2. If the file is declined for obvious reasons (that were clearly stated in the lenders’ guidelines before submission), there is a $150 fee to the broker.

These are just random numbers but the point is this.  Lenders will get creative to gain efficiencies.  Some will likely implement a derivation of the above in the months or years to come.  As long as the client/broker is given the option of saving money, in exchange for helping the lender improve efficiency, the model could be viable.

    If my bank were to ever charge me cancellation fees because I turned down their offer due to any reason I choose, they would loose much more than a mortgage; they’d loose my bank account, Visa, RRSP, line of credit, insurance. Everything

  2. Agreed, I’d walk away too. There are a number of legitimate reasons why I would cancel a mortgage application. In fact, it just happened to me. My spouse was unexpectedly laid off recently, after we had an approval for an early renewal, but before it closed.
    I understand the point of this post, and the real costs that a lender incurs in underwriting an application, but this is a slippery slop. If they start making exceptions to waive the fee (as in my situation above) then it becomes a nightmare to administer.
    This would be a bad PR move for a lender IMHO.

  3. Normally I would consider applying to several lenders to get the best rate. In this type of situation I would skip the lenders that have too wide a range and go straight to ING Direct. I know lenders have costs but in sales the first step is to get customers talking to you.
    I was under the impression that most underwriting was automated (or at least followed strict rules) now – maybe it’s just inflexibility that causes the cost to remain above $10 for some lenders.

  4. Again,
    Unless the banks find some way to let the borrower know the terms, rate, etc. that they *will* qualify for *before* the application process, then I don’t have a problem with this.
    But, as currently structured, most banks require you to actually apply before they let you know whether you qualify, etc. In this case, it is ridiculous to essentially treat an *application* as if it were a contract — particularly if the consumer doesn’t know the terms of the contract until *after* the application has gone through.

  5. Rob, unless you are going to mention the name of the company that is going to start this then it’s all just hearsay, surprising you would even post, aren’t you the one that says do not mention company’s rates unless advertised? How about do not post idle gossip either.

  6. They need to cut their costs on improvements to the application and underwriting processes, not with frivolous fees. First thing we do is drop all lenders in the list with cancellation fees and go with anyone else.

  7. Cam,
    Thanks for the bait. We won’t bite. :-)
    We don’t single out lenders on stuff like this unless the information has already been disseminated. That’s why lenders trust us and speak freely to us.
    When we come across unconfirmed information that we feel is accurate and of interest to our readership, we post it.
    All the best,

  8. Thanks to everyone for the comments above.
    Fees are never popular. No doubt about it. Yet, if you get something in return (e.g., a lower rate), it’s possible the model could work. We’ve come across hundreds of people that would sell their next child to save a basis point on their mortgage. It’s usually a case of overlooking the forest for the trees, but the fact stands.
    If you give these customers the opportunity to save 0.05% then, assuming they have no plans to cancel, many would take the offer. I think the key to remember is that borrowers would know the fee at the outset and have the choice.
    Rob does make a good point about slippery slope though…

  9. “If my bank were to ever charge me cancellation fees because I turned down their offer due to any reason I choose, they would loose much more than a mortgage; they’d loose my bank account, Visa, RRSP, line of credit, insurance. Everything” – Quoted from GT
    Who cares GT? If you don’t like cancellation fees then you would not be that lender’s target market.
    Lenders will definitely charge cancellation fees at some point, and probably other fees too. Lenders are sick and tired of getting stuck with the costs of cancelled deals. I don’t blame them one bit.
    If Joe Blow’s cancellations cost me 0.05% more on my mortgage then Joe Blow can pay fees out his @ss for all I care. LOL

  10. Lenders are sick and tired of getting stuck with the costs of cancelled deals. I don’t blame them one bit.
    How many times do we need to state this: the only reason a mortgage *application* is a *deal* (i.e., contract, agreement, etc.) is because that is the way the Lenders, themselves, have wanted it!
    Otherwise, they could easily split off the “approval” stage from the “rate hold” stage, so that an *application* is not a contract.

  11. It would make more sense for Lenders to charge a Pre-Approval Fee for submitting an application for underwriting that has a very good chance of never being funded. This would make the borrower decide if he or she wishes to roll the dice on Interest Rates.
    It seems to me that charging such a fee would be good for everyone in the business reducing frivolous Pre-approvals that waste everyone’s time.

  12. Here is one way a lender could implement a de facto application charge. Lender underwrites the file for free but charges a $500 “rate-hold fee” that is non-refundable if the customer walks. That gives people a choice – take a chance on rates (and live with the outcome) or pay for rate protection.
    While this change would be unpopular, is it really realistic to expect that a borrower should get a free 120 day interest rate option in a volatile rate market where hedging is a significant cost? And if no fee is charged, don’t you think lenders will ultimately raise their rates for all borrowers to defray that cost? Isn’t it fairer to attribute cancellation costs directly to those borrowers who cause the lender to incur them?
    Having said all that, the biggest hindrance to this happening is that one lender has to go first, and for that reason, I think this evolution will be a long time coming.

  13. What is this hangup about a “contract?” What in Gods good earth are you talking about?
    I’m talking about the notion — supported by you, apparently — that consumers should be charged a fee for “breaking” an *application*. You claim that lenders are “sick and tired of getting stuck with the costs of cancelled deals.” But consumers aren’t breaking any “deals” at all — except to the extent that they are forced into deals by the lenders bundling the “approval” and “rate holds”.
    If you are charged a fee for breaking a “deal”, then that, my friend, is a “contract” or “agreement” or whatever else you want to call it.
    But the fact is, currently consumers have *no choice* because in order to find out what terms they would qualify for (term, rate, etc.), they *must* apply.
    As Dave L and many others have noted, this would be fine if the “approval” stage was split from the “rate hold” stage, but currently they are not.

  14. Bob you don’t seem to understand how the system works. People don’t have to apply to get a rate quote. Where are you getting that from?
    As for Dan, why would someone other than the consumer pay a fee when a mortgage application was cancelled? That makes no sense.

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