Update on Mortgage Penalty Standardization

In March, the government promised to “bring forward regulations” to standardize the calculation and disclosure of mortgage pre-payment penalties. This was a welcome gift for consumers who are fed up with large and confusing IRD penalties.

Department-of-Finance As we speak, the Department of Finance (DoF) says it is “working on new regulations.” Those regulations are “aimed at bringing greater clarity to the calculation of mortgage pre-payment penalties.”

Details are sketchy at this point, and the DoF says it cannot “speculate on specific measures at this time.”

It says, “The next step in the regulatory process will be the publication of the draft regulations for public consultation.”

Those draft regulations are expected to be published “before the end of the year.”

The changes would only apply to federally-regulated lenders. However, it’s possible that other lenders will conform to federal guidelines to remain competitive.

  1. IRD…why is it that only RBC calculates Present value dollars when it comes to interest penalty? Really if you do not do this calculation you are paying a higher penalty.
    when I ask, the lender/underwriters or bank clerks – they don’t even know what I am talking about.

  2. As a former TD employee that closed approximately 1 mortage a month for years I can honestly say the calculation was IMPOSSIBLE for me calculate. When I asked the branch service centre for a detailed explanation (or even the formula) NOBODY could assist me. I could only tell clients the BOTTOM line penalty and whether IRD or 3 MOS penalty was used.
    TO make matters worse The actual documentation in the mortgage contract was over-simplified and did not give enough information for a consumer to calculate their penalty. It just explained the penalty in general terms. Clients only realized this when the looks at the contract they signed at closing that they signed something that really didn’t give them the information that they needed.
    I am no longer a financial advisor (my personal ethics would not allow me to continue working for TD) I am must happier now. This legistlation is NEEDED. Consumers have NO idea what they have signed until it it too late. Amagine being told about a 15k penalty and not being provided an actual calculation showing how this PENALTY was derrived.
    While at the bank we were told to tell clients it is NOT a penalty. It is to compensate the bank for the obligation we had to an investor, that the bank was still responsible to pay the provider of funds the interest they were promised. Penalty or not the bank must be able to provide the calculation formula.
    This legislation is Greatly needed.

  3. This is great news and a great write up, it will be interesting to see how often the calculations will change and be updated.
    example… say the discounted rate being used for the penalty is 3.89%. But then a number of rate increases take place over the next month or 2, say to 4.79%….much like 4 months ago.
    Well in this case the clients penalty @ 3.89% was $8700….. but the lowest rate that the client was offered was 4.79%, so why did the penalty not decrease?…why was 3.89% still used to create the differential?
    TD claims…. the IRD adjusts every 30 days
    Hmmmmmmm?…… Thanks Robert and Mel, for keeping us updated on this.
    Michael Mullis

  4. The banks will find another way to stick it to consumers to ensure their quarterly profits don’t slip beyond the Billion dollar quarterly profit expectations.

  5. I was a lender once too…I think it’s important to note that years ago, before banks needed to make billions of dollars, banks would provide payouts up to 3 months in advance AND they would provide the payouts within 3 days. Now they won’t give consumers a payout in a timely manner – I asked for a payout on February 10th and I received it on February 23.
    Banks will not provide a payout for longer than 30 days (ATB Financial) but the real stickler is they use the lowest possbile interest rate to calculate the penalties. I have 35 months left on my mortgage and they are using a 30 month posted rate which is considerably lower than the 36 month posted rates. If I was trying to early renew and do a blend they wouldn’t allow me to take a rate below my existing term it would be rounded up to the next highest term so how is it that nothing seems to work for the consumer?
    I’m not so old that I don’t recall the days when mortgage payout penalties INCLUDED the 20% lump sum penalty-free principle payment when the interest rates were sky-high but now that the rates are so low the banks are not allowing this to be included in the mortgage payouts. They changed those rules.

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