According to a recent report by the Ombudsman for Banking Services & Investments complaints about mortgage penalties at Canadian Banks is within the top 5.
Since moving from a mortgage specialist at a bank to an independent mortgage broker I've learned many things, but one of the biggest is the difference in the way the banks calculate a penalty if you break your mortgage term early on a fixed rate, compared with many other reputable non bank lenders. The penalty calculation is called the IRD (Interest Rate Differential) On average, this penalty, is at least 3 to 4 times more than with most of the reputable non bank mortgage lenders in the market. We're talking 1000's of dollars with the smaller lenders instead of 10's of thousands.
I was speaking to someone the other day who is facing a $16,500. penalty on a 380K mortgage which is at one of the big banks. The fact is most people think they won't break their term early but up to 70% of people do. It's done to get a better rate, to refinance, to switch lenders and the most common one is to sell their property. Yes, there is something called portability option (for most mortgages) where you can port the rate & term over to a new property but there are many times when the portability option does not work. That's when you'll pay the penalty.
See the article below, from Mortgagebroker.ca, for more details on the Ombudsman's report:
"Prepayment penalties for mortgages are one the most complained about issues among Canadian banks, according to the Ombudsman for Banking Services and Investments.
“The banking products and issues consumers are complaining about mirror last year for the most part, dominated by credit and debit cards (chargebacks and fraud), mortgages (prepayment penalties), and chequing and savings accounts (account closures and collections),” Brigitte Boutin, deputy ombudsman, banking services, said in the Ombudsman annual report for 2015.
Prepayment penalties have long been a thorn in brokers and, indeed clients, sides.
Brokers complain about the different calculation methods used to charge clients these penalties. And banking clients are often unaware of their very existence.
And it isn’t just prepayment penalties that are earning complaints from mortgage clients.
“We are seeing a lot of complaints related to mortgages: penalty, pre-approved mortgages – and portability of a mortgage has become a bigger issue,” Boutin said. People sometimes take for granted that their mortgage is portable before selling their home.
“It’s interesting – we’ve seen cases where the bank refused portability because the borrower’s financial situation no longer met the bank’s lending criteria. However, the client was able to get approved somewhere else right away.”
In terms of preapprovals, the Ombudsman has seen an increased number of complaints.
In many cases, banks have failed to verify all application details before issuing a pre-approval. When it comes time to finalize the deal, the bank asks for further information.
“Sometimes that new information will lead the bank to change financing terms or refuse financing altogether,” Boutin said. People can then get caught, especially if they removed the condition for financing on their offer to purchase a home.”