Prepayment-ChargeIn March 2012, the Financial Consumer Agency of Canada (FCAC) announced improvements to the disclosure of mortgage prepayment charges.

Those improvements were designed to make life easier for people needing to assess the cost of an early refinance or mortgage termination.

The first set of enhancements arrived by last September. Among other things, they required banks to develop online educational material about IRD charges and online prepayment charge calculators.

The final measures came into force just this month. As a result, banks will now be providing:

  • Annual statements outlining each mortgagor’s mortgage prepayment options, info to help the borrower calculate a prepayment charge, advice on where the borrower will find his or her IRD comparison rate, etc.
  • Prepayment charge quotes upon the borrower’s request, showing his/her actual prepayment charge, the lender’s calculation method, the time period the quote is good for and other amounts the borrower must pay to discharge the mortgage (like reinvestment fees, discharge fees, etc.)
  • Toll-free phone support from knowledgeable bank staff. These trained phone reps must quote the exact prepayment charges that apply to one’s mortgage. That’s a welcome improvement given that most customer service reps have traditionally been semi-useless for detailed questions about mortgage penalty calculations.

All of the above improvements are documented in a new federal Code of Conduct. Banks that are members of the Canadian Bankers Association (CBA) have agreed to adopt this Code.

“This Code, which will be monitored by FCAC, will go a long way in helping consumers manage one of the biggest financial decisions of their lives,” said Ted Menzies, Minister of State (Finance) in a press release.

It certainly will, and hats off to the Department of Finance for pushing it through. This initiative—especially the written penalty quotes and online calculators—has significantly eased the frustration level of those evaluating a mortgage change before maturity. One can only wish it applied to credit unions and other non-federally-regulated lenders.


Rob McLister, CMT

  1. The new penalty disclosure rules are still very weak.
    I have no problem with mortgage penalties and fees. I just think penalties should be fully disclosed, simple and understood “BEFORE” the contract is signed.

  2. Hi Banker,
    Thanks for commenting. The disclosures aren’t perfect and maybe never will be. But we’ve seen a dramatic improvement in the amount and quality of information banks put out on penalties.
    I’m curious about people’s practical experiences with the new disclosure rules. What specific examples have you seen that suggests the disclosures are “still very weak?” This is a worthwhile dialog to have.
    Cheers…

  3. Contrary to Banker’s post, the new Code of Conduct has teeth and is a tremendous benefit to Canadian mortgage holders. I’m frankly surprised that banks agreed to this much disclosure on a voluntary basis. There is no longer any reason why someone should have unanswered questions about their penalty.

  4. It’s nice that there is disclosure, but don’t forget there is a definite cost to calculate and supply this information year after year, and the banks are not paying the cost!
    Just sayin!

  5. Timely article Rob – you’re right on top of things!! We noticed that announcement as well and have already added it to our Mortgage Mentor compliance module. As per your advice several years ago, we strive for accuracy in our forms and data. We also have a way to address Rebecca’s query.

  6. The Mortgage Mentor “Signature” tool has some links for doing that. Side-by-side is tough. We recently spent 12 hours running a set scenario through many lenders calculations and had results from $4,400 to over $14,000. (For exactly the same mortgage balance/term data)

  7. Thanks Rob! Your comment “One can only wish it applied to credit unions and other non-federally-regulated lenders” is a subject worthy of additional public scrutiny. FCAC guidelines like these enhance consumer protection, but only to federally-regulated institutions. So they do not level the playing field nor provide the same standards of consumer protection among all financial institutions. Add to this the recent intervention by government in 5yr mortgage rates charged by BANKS, but not the same degree of “oversight” applied to non-chartered or provincially-regulated lenders, and the weakness of this two-tiered system becomes apparent.

  8. Hi Rob & Co,
    Very useful all the information you provide on your website…I want to refinance my mortgage with scotia bank, I still have 16 months to pay(maturity date is July 2014). My mortgage is $112,000 and the rate is 3.85% fix on 5 years term.
    scotia bank gave me last week 2.99% fix rate for 4 years and the penalty will be around $1000-1200 (same if I stay with them or move)…I talked to two different people in the same day and they gave me 2 different numbers…Why ???
    Bank of Montreal gave me 2.94% fix for 5 years….I don’t know what to do now…should I stay(with Scotia) or should I go(with BMO)… ????
    Thanks for your time and consideration
    Tobias

  9. You got two different numbers because bankers at the same bank sell different rates. Banks pay them more for selling higher rates and some are willing to work for less.
    As for your quotes, which term is better for you? A four year or a five year?

  10. Who is going to police this? I know of a bank employee who just this week convinced a client to go with her even tho rate was 5bps higher than broker rate, but didnt mention the limitations with a collateral charge or any add back of discount at penalty time. Client thought he was only comparing a rate. These “improvements” look great on paper but in reality, what will change?

  11. Hi Barb,
    It’s FCAC’s job to police the new penalty code. But they mainly police penalty disclosures, not salesperson dialog with consumers (unless such dialog violates regulations and they get a complaint).
    Some of the new penalty disclosures are a clear benefit, like online calculators, statements and calculations upon request and educational material. But we will continue to hear anecdotal examples of banks getting it wrong.
    Consumers with penalty disclosure complaints should try to work them out with their bank and failing that, send them here:
    http://www.fcac-acfc.gc.ca/eng/contactus/contact_form-eng.asp?s=1

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