While Canada’s Finance department works to standardize and clarify much-hated mortgage pre-payment penalties, Australia is trying to outlaw them altogether.
Australia’s mortgage market parallels Canada’s in the sense that big banks dominate the industry.
Many argue Australia’s move is pointless, however. Consumers are cheering the potential departure of penalties (Aussies call them "exit fees"), but it’s a virtual given that banks will recoup their costs in other ways, including origination fees, higher interest rates, etc. Few in the know seem to believe that homeowners will come out ahead.
Australia also wants to prosecute banks and fine them $10 million AUD or more if they signal their rate changes in advance. This move also seems half-baked, say bank analysts, because banks will still follow each other’s pricing. Worse yet, consumers and investors will no longer receive guidance from banks on the path of future rates.
There’s no doubt that tremendous politics are behind these pieces of legislation. That's unfortunate because Australia’s bills, as drafted, will hurt consumers as much as they’re intended to help them.
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Rob McLister, CMT
Certainly some reform of the ridiculous fees we pay for breaking early needs to be addressed. Banks are consistently using the interest rate differential (IRD’s) and taking consumers to the cleaners with coercive penalties.
Australia’s move is in the right direction though maybe not perfect.
Banks are consistently using the interest rate differential (IRD’s) and taking consumers to the cleaners with coercive penalties.
Wow — they are *consistently* following the contract that they signed with the borrower. What a shocking development.
IRD is not something that just gets invented at the time the mortgage is broken — it is all there in black and white every time you sign a mortgage . . .
Agreed with Bob, Don’t want an IRD? THEN DON’T SIGN A MORTGAGE WITH ONE!!
Go open or at least VRM with 3 months interest. And as the artical stated, if they outlaw the IRD penalty, you will be the hedge fee up front instead, just look as the US style ‘closing costs’…
I don’t think this move will benefit consumers at all. Lenders provide a lower rate to borrowers who take a closed mortgage compared to the open option. In addition to providing a lower rate, lenders provide consumers with plenty of prepayment privileges to pay down their mortgage sooner and faster even if the term is closed and save thousands in interest in the long run. So, outlawing penalties altogether will surely lead the banks to either keep rates higher or look for other ways to re-coupe the lost revenue. It’s also not good for consumers because when they don’t have to worry about prepayment penalties, scrupulous brokers will just keep churning business.
I truly believe that lenders (including those here in Canada) should provide consumers with a thorough explanation of how the penalties are calculated so that consumers can make more informed decisions. Better disclosure should be a priority instead of banning these penalties altogether.
I think this undermines consumers ability to plan there home financing needs if their lenders can’t advise on impending changes.