A couple of years ago our government decided to delve deeper in to the world of mortgage prepayment penalties and review the possibility of standardizing the penalty calculation.
Due to an overwhelming response from Canadians misunderstanding or even unable to find out how to calculate their mortgage penalties, consumers demanded a review as Interest Rate Differential payouts became extremely and most would say exceedingly high.
The review from the Department of Finance (DOF) found that with so many different mortgage products offered by many institutions standardizing the calculation of the mortgage charges could result in changes to lenders’ product selections.
This could eventually turn out to be of negative consequence to the consumer whom may have otherwise could have been offered a better rate but the standardizing payout penalty meant that the particulate lender couldn’t be as competitive for fear of losing that mortgage.
There are consumer groups on both sides of the standardization even though the government did actually legislate that lenders be upfront with their penalties.
Many people are upset at the thought of banks profiting from payout penalties are advocating change to standardize the calculation, providing a maximum cap and also disclosing penalties up front.
Those against standardization state that the mortgage market would be less competitive as rates would creep up because when a mortgage is paid out the penalty is there to keep the mortgage ‘whole’- meaning to keep the mortgage from being a losing proposition.
To add to this, they argue that a rate premium would need to be added to cover the standardized payout penalties. This would essentially penalize those that kept their mortgages to term as they’d be charged a premium that wouldn’t be there otherwise.
Whichever side of the camp you are on likely depends on if you’ve had to pay out a mortgage in the past couple of years. We’ve all heard of those stories of someone’s payout penalty to be in the tens of thousands, which likely meant they stayed put. On the other side if the government does standardize payout penalties then it might mean paying a premium on your rate even if you do complete your mortgage term.
Jean-Guy Turcotte is an Accredited Mortgage Professional with Dominion Lending Centres-Regional Mortgage Group and can be contacted for appointments at 403-343-1125 or emailed to jturcotte@regionalmortgage.ca.
