Painful Breakage Costs

Personal Finance Columnist Rob Carrick deserves a tip of the hat for bringing TD’s inordinate mortgage breakage fees to light. More here.

Yet, while Carrick’s article focuses on TD’s excessive fees, TD is far from the only lender that exacts extra pounds of flesh for breaking a mortgage contract.

Others lenders do things like:

  • Charge 3-month interest penalties based on posted rates instead of your actual rate like most lenders (See: 3-Month Penalties Aren’t Always Clearcut)
  • Charge $300-$1,000 “reinvestment fees” on top of your penalty and discharge fees
  • Charge interest rate differential based on posted rates (common among the Big 6 banks) instead of cheaper discount rates
  • Impose IRD charges based on bond yields (which can sometimes be more expensive than even posted rate penalties)
  • Apply IRD penalties to variable-rate mortgages
  • Charge 6-12 month interest penalties, instead of three months
  • Prevent early termination altogether.

Before choosing your next mortgage, ask your lender or broker for a written list of early termination charges, as well as the lender’s penalty formula.

fairThe fairest lenders impose only a discounted penalty and a simple discharge fee. If you’re going to deal with a lender that charges you through the nose to break early, you better be confident that you won’t need to. And, your interest rate better be well below all other comparable lenders. (This assumes you’re well qualified because your options may be limited if you’re not.)

When accepting harsher termination charges in exchange for a low rate, remember that it’s not always possible to know where life will lead you 3-4 years down the road (that’s when most folks break a 5-year mortgage).

People terminate their mortgage before maturity for numerous reasons, including:

  • equity take outs (People use these for debt consolidation, buying other properties, investing, educational borrowing, renovations, business start-up, etc. Many lenders let you tack on extra money to your mortgage without a penalty. Some don’t. Others charge no penalty but bend you over on the interest rate.)
  • job change
  • new marriage (e.g., consolidating residences)
  • separation/divorce
  • upsizing or downsizing (if a port isn’t advisable)
  • rate improvement
  • amortization extension
  • adding a readvanceable line of credit
  • health issues
  • unemployment
  • relocation.

Related:  Mortgage Penalty Calculators

Rob McLister, CMT

  1. All great points and what brokers should be selling instead of rates. If a prospective client is educated on mortgage fine print the focus quickly shifts away from rate. Be aware of the pitfalls of posted rates and you won’t have to buy down rates to win business.

  2. Should also be noted that individuals who have locked in recently during the low rate period should pay particular attention to the fees vs. just the IRD/Penalties as they might be a bigger sticking point. Breaking a term in 4 years might yield a very small IRD if rates move up – but the fees could still be a stinger.

  3. Yeah we got taken to the cleaners by TD for over $20,000 in IRD penalites. Made it back by the much cheaper rate I got elsewhere but it still was an awful experience. There aught to be a law.

  4. I was just relocated, and CIBC tried to get aggressive and actually matched Street Capital on a five year fixed at 2.89.
    I pressed however, to find that Street calculates IRD on their low posted rate, but CIBC against an asinine 5.24 rate.
    The CIBC rep essentially stuck his tail between his legs when i brought that up, as he had no real way to reply… the IRD difference if i was transferred again after two years would have been as much as $13,000 between the two.

  5. A brilliantly written article exposing the #1 true weakness of big bank mortgages.
    It should be required reading and yearly CAAMP certification testing for every broker in the country to accurately understand in detail the material differences between every competing mortgage product out there and have such information available in plain language to pass along to prospective clients.
    The “I’m a independent broker with access to over 100 lenders competing to get you the best rate” sales pitch is DEAD. Evolve or die brokers!

  6. Could someone please send this article to Jim Flaherty. Perhaps he might like to concentrate on the real problem, greedy banks, instead of policies that reduce demand and increase price. The problem isn’t debt load ratios – it is banks that are just too powerful and far to rich.

  7. Hey Craig,
    CIBC mortgages are portable and blendable and in 2 years you would get to take your great 2.89% rate with you to your next home and not even have a penalty let alone an IRD of posted to posted or contract to contract. If you need more funds CIBC can offer full discount on the new blended funds so if in 2 years you need a larger mortgage when you relocate you would get the lowest rate on the new funds which would have 3 years left blended with your current balance and rate with no penalty.
    Please note this is not the case with all of the big 5 lenders, some lenders (I know BMO for certain) do not give full pricing on blends and are capped on disconts on the new funds.

  8. hey craig, i’m in exactly the same position, and went with street b/c they offer 20/20/20 privileges to CIBC’s 10, and if you port and blend you don’t have to piss around negotiating or wondering if you’re getting the best rate. plus you can stick it to the bank for such a ridiculous IRD calculation policy by walking with your $. for me, that was the best part, and worth the refinance cost. (street only offers a 30 day port, but who’s going to need more than 30 days to move?). i’m happy to never deal with CIBC again for this BS–for anything. for life.

  9. That’s not at all true from what I was told. All of the elements you mention are only true if the new home is equal or less than the existing home. Add a single dollar and the IRD kicks in for breaking it.
    Even if it is true (neither of the two CIBC mortgage people I spoke with said any of this), the fact that its vague, unclear, and that stories differ based on who you talk to will have me avoiding CIBC until they clear things up…

  10. “If you need more funds CIBC can offer full discount”
    There is a big difference between “can” and “will.”
    What incentive does CIBC [or any bank] have to give it’s absolute best rate when it knows customers don’t want to leave and pay a penalty?
    Answer: none.

  11. Hey Vince,
    1 Word…
    Mortgages, especially in todays market is a pillar product not a profit driver. Banks want mortgages to persuade bank accounts, credit cards, and insurance the true money makers in todays economic environment. Profit margins on mortgages are one of the lowest on the banks shelf of products but it is a major driver of “Brand Loyalty”.
    Banks know that once the mortgage is in play clients convert after time and small incentives to move over their other “better Margin” products. Chequing account for example is a great pairing for the mortgage as online banking allows easy mortgage prepayment and up to date balance and payment breakdown (principal, interest, property tax, insurance).
    Banks were giving clients laptops and gift cards for a new chequing account… discount on the mortgage for abundled sale is no problem… same to retain a multi prduct cleint at renewal or refinance.
    Take your finance company mortgage and ask the same question.. with only one product to loose who will be more generous on the renewal or blended rate??
    Absolutely correct about the IRD penalty being lower with finance companies… But mid term when your broker will no longer get paid to keep you at your existing lender who will help you renegotiate with your exisitng lender rather than have you absorb the penanlty so they get paid again at a new lender??

  12. I guess I need to start subscribing to your advising services…
    I’ve never been given a laptop for opening a new chequing account, though, I think I stole a pen once.

  13. Shouldn’t we just re-name Island Advisor: “Bank Rep”.
    I mean, come on now: “finance company” is that what CIBC called Firstline when the bank operated that company? Seriously: “one word; loyalty” like a consumer should just be blindly loyal to one of the Big 5 banks who are the richest companies in our country. DUH.
    Why this site is important is because a lot of contributors (not all) give reasoned opinions and don’t just shamelessly shill for their employer.

  14. Seriously, banks never, ever reward loyalty. Banks spend millions every single week on IT programs that analyse their customers spending, asset and debt metrics. They do this with one goal in mind; Maximize profit from every customer over multiple business lines but not so much that they take their business elsewhere.
    That is banking 101 (actually business 101) and what executives in ivory towers do!

  15. Rob, we offer some relief for clients that get caught with a payout penalty.
    We haven’t re-invested the wheel but we do provide it as a service to both client and mortgage agents to help their clients.
    We’ll pay down the clients mortgage by the allowable pre-payment amount (say 20%) which then reduces their payout penalty. There is no cost to use the service, we simply split the savings with them 50/50.
    Obviously clients can do this themselves but not everyone has the available cash to make the 20% lump sum payment. if anyone is interested.

  16. Or you can get any lawyer worth their salt to do the same thing on closing for free…
    Great business plan though!

  17. thanx for that, banker in ivory tower….call me naiive but back in the day we thought banks did reward loyalty…its def old school thinking….

  18. How will any lawyer worth their salt do this for free? It requires capital which the borrowers obviously don’t have. Do you think the lawyers on closing out of their good faith will simply say “Sure mr client, here let me give you $50K so you save money, and forget about me!”. NO.
    However that said the idea is easy to copy and I’m sure many will sprout up doing so, but it requires a LOT of money and also some faith that – what if the deal doesn’t close? Suddenly the private lender has the mortgage o/s with the borrower, on an unclosed deal, with no exit strategy.
    Anyways, yeah, penalties suck. Thing is, PEOPLE care about RATES and think they are invincible and will never pay a penalty. It’s mind boggling actually how many people just don’t care about IRD.

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