How To Avoid Huge Mortgage Penalties

You bought an investment property with the plan to hold it for 5 years.  The cheapest rate you found was on a closed mortgage, so you selected a 5-year term.

Three years later, you need to sell.  You call your bank and ask them “How much?”

That’s when your jaw hits the floor

Early payment or pre-payment penalties charged by banks can be huge — thousands of dollars, or even TENS of thousands.  Basically, with a closed mortgage, you have agreed to be bound by the terms and conditions of your mortgage until the mortgage term is complete.  And that includes paying the bank a lot of interest.

Banks are not happy about losing all those interest payments just because you found a cheaper rate somewhere else.  So most mortgages include specific language that restricts what you can and can’t do, as well as any penalties they charge to let you out of the contract (if they allow you to at all!).

 

Do You Know What You’re Signing?

Some of you may have heard me talk or write before about how everyone should learn to read legal agreements.  Although most people want to defer that task completely to their lawyer, I highly recommend everyone make the effort.  Why?  Not so that you can replace your lawyer, but because they may not realize that a small detail is important to you.

You should always know EXACTLY what you’re signing and agreeing to…

Especially it comes to banks and other lenders

 

How Penalties Are Calculated?

Now a few of you may be thinking… aren’t mortgage pre-payment penalties standardized for all mortgages?  No they are not.  In fact, over the past few years, some lenders have become more ‘liberal’ with the interpretation of their vague penalty clauses in their contracts.

Traditionally, there is a very common method used to calculate any penalties you will owe if you decide to break your mortgage.  You will pay the GREATER of the following:

1) 3 Months Interest – Basically you take your next 3 mortgage payments, break out the interest portion, add them up, and that is your mortgage penalty,    OR

2) The Interest Rate Differential (IRD) – This one sounds complicated, but it’s actually quite easy (or should be).  If you have 2 years left on a 5 year mortgage, find out what the lender’s current posted 2-year rate is, subtract that from your original rate, and multiply that by your mortgage balance.

 

Banks Get Greedy and Play Games

The problem is that over the last few years, mortgage lenders have begun playing a few tricks with the IRD calculation to increase their profits:

  • Some use posted rates for IRD calculations, while others use discounted rates (which increases the penalty)
  • Some round up to the next longest mortgage term when determining how much time is left, others round down (which increases the rate difference and thereby the penalty).
  • Some have very vague penalty calculation language, which leaves it open to abuse
  • I’ve even seen one lender base the penalty a complicated formula involving bond rates!

Here is one example I posted to my social media accounts awhile back:

Customer fee to payout mortgage doubles

And here’s an article on a lawyer that is launching a class action lawsuit against CIBC because of unfair penalty calculation practices.

Lawyer files prepayment class action against CIBC

(By the way, if you’re not following me on Facebook and Twitter, you’re missing out on all kinds of real estate news and other cool stuff)

 

The average person has little to no chance of calculating the penalty themselves because often the formulas are not clear or they are very cryptic.  Often times, even when you phone their call centre, their telephone agents won’t be able to explain it to you.  That’s because someone at the head office is calculating it, often times in their favour.

In other words, their calculation methods are not transparent

Now I’m not saying that all lenders do this.  Large banks are very customer-service oriented, and even if a penalty ends up being very large, they may reduce it to avoid ‘bad publicity’. But B and C level lenders are less likely to do this, as they do not advertise to the public (they are only available through brokers) and obviously it’s more profitable for them.

 

The Game Playing Gets Personal

Recently, my sister wanted some help with reducing her mortgage costs.  She was 4 years into a 5 year mortgage, and after a bit of research, I discovered rates had dropped almost 3% from what her original mortgage was locked in for.

She called the mortgage lender and asked them what the penalty would be to break the mortgage. But for some reason the amount didn’t add up to my calculation — it was over $1,000 more than what either 3 months interest, or the IRD would be.

We’re currently following up with the lender and will press them for exactly how they calculated it.  The mortgage contract language is in plain English and fairly clear, but it doesn’t specify certain things (like posted vs. discounted rates).  Even the call centre rep couldn’t explain the formula.

Fortunately, her mortgage has a 20% pre-payment clause in it, so there is some leeway to reduce the penalty through some creative timing of payments.  I’ll explain how below…

 

How do you protect yourself?

If you’ve already got a mortgage, it’s not too late to reduce the penalties you have to pay. Here are a few tips to follow whether you are finding a new mortgage, or are trying to get out of your current one…

Read your mortgage contract – Find out how much you can pre-pay every year, and how much you can increase your mortgage payments. Find out EXACTLY how the penalty is calculated if you have to break your mortgage. Don’t accept vague language or you’ll end up paying for it.

Determine when you can break your mortgage – Some mortgage lenders do not allow you to break the mortgage at all, unless you are selling the property.  In other words, you are stuck making payments until the end of the mortgage term and you can’t refinance… even if you offer to pay a penalty!  This happened to me a few years ago, but fortunately I didn’t have much time left on the original mortgage term.

Calculate what your penalty should be – You can use the simple formula I gave above to calculate what your penalty should be.  But if you want to calculate it while playing the banks’ games, you can use this online calculator instead.

Online IRD Calculator

Take advantage of any pre-payment clauses – Many mortgages include a clause that allows you to pre-pay your mortgage balance up to 20% per calendar year, without a penalty.  If you are facing a huge penalty, you may want to consider pulling funds temporarily from another source (e.g. family members or friends), paying down your mortgage by 20%, and THEN refinancing your property and paying the now reduced penalty.

It’s even better if you are close to a calendar year end because you can do it TWICE within a very short period of time. This is exactly what I will be helping my sister to do — pre-pay 20% before December 31, and then pre-pay another 20% in the New Year.  Then she’ll proceed with the refinance and save hundreds if not thousands. Yes, there may be interest costs on the temporarily borrowed funds, but those will likely be much less than the savings on the penalty.

I learned this trick years ago when I went to my TD Bank branch and wanted to refinance.  The teller was kind enough to show me how to do this. Unfortunately, many lenders will not because they receive a higher penalty. In fact, my sister’s current mortgage lender has said nothing about how to do this…

Check if your mortgage is CMHC insured – There’s a little known rule I discovered that states if you have a CMHC insured mortgage that has a term of longer than 5 years, you can pay off your mortgage, at any time after 5 years has passed, with only a 3-months interest penalty — no IRD!

Ask to speak to the bank manager – It’s amazing what can be accomplished when you go above somebody’s head.  Even if the bank manager can’t help you, go above them, and so on.  Many banks have complaint departments and you can contact them.  If none of these work, consider the next step…

Contact the Ombudsman for Banking Services and Investments – I didn’t even know this organization existed until I was researching this article.  What a great resource!  This organization works for FREE for consumers, and they help mediate complaints.  I found more than one blog post where the person went to the OBSI and was able to successfully negotiate reimbursement of a portion of their mortgage penalties, even after dealing with the bank directly had failed.  Visit the OBSI website

Go public – Most big lenders spend a fortune on advertising, but nothing spreads faster by worth of mouth than a bad experience.  If you go public (or threaten to), they may re-consider and adjust your final penalty. Many local newspapers across the country have ‘consumer advocate’ type columns that fight battles for consumers on a variety of topics.  Ellen Roseman, mentioned in the links below, is one based in Toronto.

 

More Reading

While writing this blog post, I also did some research and discovered this problem has existed for over a decade, and the federal government has been very slow with enacting any sort of change.  If you’re like to read more about the problem, here are a few of the websites I found with some very good information:

Mortgage Penalties exposed
Mortgage Penalty Can Be A ShockerPart 1 and Part 2
Still waiting for rules on mortgage penalties
Fight unfair mortgage penalties now

Conclusion

As with anything in the financial world, if you want to protect yourself , your best defense is to educate yourself and know what you’re signing. And don’t forget to read your mortgage documents!

Have YOU been burned by large, unfair mortgage penalties?

Have you used the OBSI to recover some of those costs?

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Paul Blacquiere

Founder and Editor at Spirepoint Wealth
Paul is an entrepreneur, investor, speaker, educator and publisher. He is founder and editor at Spirepoint Wealth, a financial education company dedicated to helping people improve their finances, create more cash flow and build long-term wealth.
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Latest posts by Paul Blacquiere (see all)

  • Three years ago we sold our country home only to learn days before the closing; the penalty for breaking the mortage was $18,000 – no discussion – no reduction even though the Investors Group (Quebec) had helped us secure the mortage on our country home and the new city property and we had all of our investments with them.

    My advice – read your contract, know what the penalties are – I definitely will for our next purchase!

    D. Boucher

    • Paul Blacquiere says:

      That’s quite the penalty! If it were me, I would have pushed back hard, and now that I know about the OBSI, I would definitely approach them for help too.

      Imagine getting back 30-50% of that? I read a blog post where one guy was successfully able to get a sizeable refund.

  • Kevin says:

    Hey Paul, I could blog for hours on this topic, partly because I am a Financial Advisor at one of the “big five” and I am not overly particular on generalizations that lump ‘a’ lenders with ‘b’ or private lenders but I will refrain from that for the time being. I will say, though I generally believe it goes without saying that people need to read AND understand any contract they are signing.

    I want you to double check on your sister’s lump sum pre-payment options. Most of the big five, that I am aware of, the prepayment option is based on the mortgage Anniversary year NOT the calendar year.

    Look into that, we can talk about penalties when I have more time to type 🙂

    Cheers

    Kevin

    • Paul Blacquiere says:

      Hi Kevin,

      Yeah, most people I think are on auto-pilot when they are getting a mortgage, and they will pretty much sign anything put in front of them to get rid of the ‘unpleasantness’ of legal paperwork.

      My sister’s mortgage is not a big 5 or 6 lender, and I have already confirmed in the contract it’s “calendar year”. 🙂

      Paul

  • Kevin says:

    I found some more time Paul. 🙂

    I have been in banking for 12 years. I have seen so many clients with similar concerns or issues. I continue to ask the questions, make the recommendations, but people seem to be fixed on the 5 year fixed rate and I just don’t get it.

    Oh, as a legal requirement I must disclose that this is my personal opinion and does not in any way reflect the opinion of my employer.

    Especially if you are buying an investment property, why are you taking a 5 year fixed mortgage. Why does anyone take a 5 year fixed mortgage, I can only justify this thought process somewhat for a first time home buyer that is tight on cash. According to CMHC, statistically, the average Canadian refinances or sells their home every 34 months. That’s less than every 3 years. But every time they go to the bank “rate shopping” they ask “What’s your best 5 year rate”.

    If you Really want to lock in to a 5 year commitment, (5 years is a really long time) go variable. The rate is better than fixed and the penalty is always 3 months interest, no interest differential calculations. Period.

    But better advice is why not explore the 1 year rate. “But rates might go up”. Yes they might, and your renewal rate might be higher. But the penalty to get out of a 1 year rate is usually really small. I like flexibility. I like options. The risk of the potential of increasing rates; to me; is offset by the freedom to make a change without a big penalty. 2 and 3 year rates are often very attractive also. Or split your odds. Take your 300,000 mortgage and have 150,000 variable, 150,000 three year fixed. Or split it even further into 3 components. Banks have options like this. And it can be done as one registration on title so that you can make changes in the future without the legal cost of making changes to the title.

    Finally, for investment properties at this time based on changes to the regulations in 2011 you have to have 20% down for a rental property. When you have 20% down you do not have to have a mortgage component. You could have the entire balance for the property on a secured line of credit. You can pay off a line of credit when ever you want, without penalty. Naturally, when you sell a property the “discharge fee” will always apply because the lender has to take their lien off of the property because you no longer own the property.

    There are so many options to customize your home ownership that the only reason you are paying a hefty penalty is if you didn’t have a strategy going into the purchase. You can shop rates all you like, but without proper planning and a strategy you probably won’t end up ahead of the game.

    Since we can’t predict the future, we must prepare and plan for it. That includes planning for the unexpected.

    But that’s just my two cents worth.

    Kevin.

    • Paul Blacquiere says:

      Thanks for your insights.

      I think that the average buyer is afraid of one thing… interest rates going up. It’s programmed into us by the media, and so it’s the first thing they’re fearful about. They ‘lock in’ their rates so they know their payments — kind of how they know their payments for the big screen TV, the new car, etc. I think most people are living paycheque to paycheque and a change in their mortgage payment scares the daylights out of them!

      Sure you mention the statistics about the average Canadian moving every 3 years, but they don’t think it will happen to them. You also mention how they save by going with variable, but they are still focused on their rate going up and squeezing them for cash they don’t have.

      Some investors think differently, and will consider VRM or interest-only, but again, most are still programmed by the media to lock in rates (except my students of course 🙂

      Paul

  • Hi Paul,

    Great post. While I have not been burned by unfair mortgage penalties, I just wanted to add to your suggestion to talk to your rep or the bank manager when faced with fees or penalties. I have had countless fees reversed and/or waived simply because I asked and took it up a level on one occasion. I think the bank felt that it was easier to agree rather than to object to my request when it was clear that I was determined.

    You won’t get anything unless you ask, so ask! And persist.

    Doris

    • Paul Blacquiere says:

      That’s a great idea Doris — always question any fees, related to real estate or not.

      Knowing personally how head-strong you are, I can definitely picture that bank manager backing down from a fight with you! 🙂

      Paul

  • Moe says:

    Wow, $18,000! That’s absolutely insane.

    Great article, as usual, Paul – and very timely, given all the “it’s time to get a fixed mortgage” articles floating around the web these days.

    I’ve used the advice in this article to conclude that breaking the mortgages for my current rental properties doesn’t make financial sense.

    Keep up the good work!

    Moe

    • Paul Blacquiere says:

      Thanks Moe!

      Hopefully this article sheds some light on the problem, give some solutions, and get the word out to more people.

      There seem to be alot of articles out there discussing it, but since the unfair penalties have existed for over 10 years now, obviously not enough people know about it, and nobody is putting enough pressure on the banks and the government.

      Paul

  • My “investor” client and I were looking to buy an 8 plex. We noticed that it was about $50K over market value. I asked about that and the chances of negotiating the price lower and the agent who was also the seller told me that the price was firm. They had to recoup the $55K bank penalty of breaking their mortgage.

    I’m noticing that some vendors of the bigger buildings are requesting that the buyers bank at their institution. They have a deal where they won’t be penalised if the new buyer acquires a new mortgage.

    • Paul Blacquiere says:

      Larger buildings definitely carry with them larger penalties. $55k… that’s a whopper!

      Interesting approach about getting a new mortgage with the same lender to eliminate fees… I’ll keep that in mind for future deals.

      Thanks for the tip!

      Paul

  • Randy says:

    People don’t do any planning ( no plan “B” or “C” ) when they walk into their bank. They mistakenly think that the great rate on VRM changes with the bank rate. Missing out on the best deal at any bank. If you want the lowest interest rate, pick the lowest interest rate.

  • john hayes says:

    Great article Paul! Based on personal experience, I agree that education is really important to understand these issues. Your blogs and site do a good job in educating and giving the tools and references to dig deeper. Thanks!

    • Paul Blacquiere says:

      Thanks John – I appreciate the kind words. 🙂

  • Joanna says:

    Hello,
    We have just bought an acreage. The family we bought it from will incur a $15,000 mort payout as a result of their mort agreement. They can not afford to pay the mort payout.
    Is it worth hiring a lawyer to reduce the payout.

    Signed,
    Most sincerely want to help the Seller family

    • Paul Blacquiere says:

      Hi Joanna,

      If the mortgage contract states there is a mortgage penalty, there is little chance a lawyer will be able to get that reduced or eliminated.

      The seller’s best bet is to approach the lender and try to negotiate it down. This might work well if they plan to buy a new home and get a new a mortgage from the same lender.

      One thing to look for is if the existing mortgage is longer than 5 years and it was originally CMHC insured, the sellers can pay it off with only 3 months interest penalty (not alot of people know that tip).

      If they don’t have the cash to pay the $15k penalty, and you really want the property, the only way the mortgage will be discharged is if you pay it yourself — not ideal, but if you really want the property, it’s an option.

      Anyways, I know it’s not the answers you were looking for, but I hope this helps…

      Paul

  • Great post Paul. I wished I had read this in 1991. At that time, interest rates were dropping fast from 14%. 6% over a 2-year period alone! We were living in Victoria BC and I was working in the navy. We were buying our first house and completely naive about purchase financing. Surprisingly, neither the realtor nor banker would offer any advise on what type of product to buy. Mortgage brokers came at a price to the consumer and were avoided like the plague. The bank options were nowhere near what they are today, just 1,2,3,5, year terms with similar rates. Variable rate, or open mortgage were not available at the time.

    We chose a 5-year term, (closed), at 12.5% for a $163,000 mortgage. $1,740 was the payment. This was entered into with assusarnce from my employer that we would remain in Victoria for four more years. 1-year later we were transferred to the UK. We had to sell the house, but the realtor expences and bank penalty would be paid for. The maximum penalty refund was set at 3-months bonus interest. At the week of closing the sale, the bank disclosed that the IRD penalty was going to be $26,000 since the posted 5-year rate was now 8%. My employer wouldn’t refund more than the $6,800 penalty for 3-months interest, and since that option was not levied by the bank, they refused to refund any portion. After much discussion, in the end we paid $20,000. We sold the home for $20,000 more than we paid for it, so the profit covered the penalty loss.

    it was a very expensive way to “rent” our new home.

    20-tears later, we have owned many properties and have rental properties in Barrie, ON, Tampa FL, and flips in Atlanta GA. Our finaincing takes a very different view of producta available today and only a portion of what banks say is met with some degree of doubt. We intently read the contracts, sveral times ove, looking for clauses which may cause us grieve later. Banks won’t change or delete a clause, but that’s ok because we just go elsewhere. Brokers are great in 2012!

    • Paul Blacquiere says:

      Wow, 12.5% for a mortgage! Home owners today are certainly a bit ‘spoiled’ when it comes to current ultra-low rates and the variety of financing options (and mortgage brokers) available.

      Glad to hear you’re reading your mortgage contracts before signing. That’s something I encourage everyone to do, but unfortunately, few people do it.

      Having a good mortgage broker on your side can certainly help for someone who doesn’t understand all the legalese. With the example of my sister in the article, my mortgage broker was able to recommend a new lender that was “a plain vanilla mortgage” with no weird IRD calculations. I should note that this was not a big 5 bank, but a lender I had never heard of.

      Paul

  • Mike says:

    Thanks for the info, currently in a position I am having a hard time dealing with. Refinancing my mortgage, currently paying 5.5% interest rate on an original mortgage of $332,000. Paid for 3-1/2 years at $1781/month which equals to $74,800 paid to the lender, to refinanace with the penalty because of the IRD my orginal mortgage increased by $3000. I cannot comprehend this as we paid almost $75k over 3.5 yrs and I owe more than what I started with. It seems like legalized loan sharking, $13k in penaltys is unjust when we already paid $62,000 in interest charges over the last 3.5 yrs. Does this seem right or am I really being ripped off? How can your mortgage amount increase to more than what you started with, something doesnt add up, I am feeling very abused by the banks and I am now trying to learn the ins and outs, but I have no capital to pay down to help reduce the penalty. I guess this is why the economie is the way it is we are all paying way too much and can never get ahead hence the saying keeping the poor, poor. I wish there was help out there, someone please let me know if thats even legal to charge someone with fees that ends up with more than they started out with.

    • Paul Blacquiere says:

      Hi Mike,

      Unfortunately if your mortgage agreement states you owe the penalty, then you most likely owe it, even if it increases your total mortgage balance.

      Sometimes the banks play ‘games’ with how they calculate the IRD, especially the big banks. It will likely take government legislation to force them to disclose exactly how these are calculated, or better yet, standardize the calculation for everyone.

      Mortgages are designed so that the bulk of the interest is paid in the early years — that’s why you don’t see much of a balance reduction before the penalty.

      If you feel the penalty is injust, try talking to the bank manager, and then going up the chain of command. If you still don’t get it resolved, go to the OBSI listed above.

      If you ever need to finance or refinance your property in the future, I recommend contacting my Investor Mortgage Broker for help.

      He also deals with homeowners, and he’s an expert at identifying the good mortgages, and the bad ones. He can help you decide whether it’s the right time to refinance or not, and help you find a regular mortgage without the high hidden penalties.

      Click Here to contact my Mortgage Broker

      Paul

  • elizabeth says:

    So is there a way to get out of the discounted rate being used when calculating a penalty if you have already signed the mortgage?

    • Paul Blacquiere says:

      Hi Elizabeth,

      Once you’ve signed the mortgage document, the only way to change the penalty is by speaking to your bank rep.

      They may or may not adjust it for you, and your chances might be higher if you’ve been a long standing customer with sizeable existing bank accounts, investment accounts, etc.

      If they don’t change it, there’s not much you can do other than go to the OBSI if you think you have a case.

      Good luck

      Paul

      • Elizabeth says:

        Thank you. Is it best to do this now having just signed the mortgage/equity line or better to wait until I buy/sell to address the matter? She reviewed the discounted rate with me so I doubt I have a case. The term ‘discount’ made me think it was a positive..clearly not. Thank you again.

        • Paul Blacquiere says:

          I recommend you address the issue now if possible.

          Having a discount on your interest rate is not necessarily a bad thing… in fact, you usually want to pay the lowest rate possible.

          Where it becomes a problem is when they calculate any penalties for breaking the mortgage. They may be using the current (non discounted rate) and your discounted rate to calculate the penalty, instead of the non-discounted rate when you signed the mortgage. That results in a higher penalty to you if you have to break it later on.

          The solution is not to eliminate the discount, but to change the formula used to calculate the penalty. That’s contained in the mortgage contract, but you may not have much luck getting them to change that calculation.

          That’s why I recommend dealing with a mortgage broker who knows which lenders to stay away from, and steer you towards a lender with a normal penalty calculation.

          Hope this helps

          Paul

  • Karen Maxwell says:

    Hello. We puchased a property and mortgaged with TD Canada Trust. I have since become ill and cannot manage the property anymore as I am becoming progressively worse – disability. In fact, I can barely keep up the house or yard and simply MUST relocate to a smaller location.

    We are just one year into a 5-year mortage, which we re-wrote with the same lender when we realized they had not provided the lowest rate. When we re-mortgaged we were not given the year-to-year option for some reason, or would have gone that route. I am not a mortgage whiz, so trusted them and shouldn’t have.

    I contaced my mortgage rep just now at the bank to relay all this medical issue, saying I would like to sell, pay them off completely, and go buy a condo, which by the way, I would need a mortgage for.

    Our mortgage is $99K.

    The bank rep just emailed me and I literally jumped onto my feet. She claims the penalty would be $30,000. to $35,000. !!! She says because the condo I mentioned is only around $59K, since it is “much less,” my penalties would be this high??? This is 1/3 of my mortgage!

    What gives here. This is for medical reasons beyond my control and I would be happy (I did say ‘would’) to have mortgaged the little condo with them.

    IS THIS LEGAL?? Is there any clause or legality when it comes to being a medical issue? Some fine print in the court system somewhere?

    I did not say I would leave TD. although if this is what I am up against, I surely will at the first opportunity.

    My blessings and thanks to you.

    Karen

    • Paul Blacquiere says:

      Hi Karen,

      Unfortunately, medical reasons or not, once you sign the mortgage contract, it becomes legal and binding. That’s why I recommend working with a good mortgage broker vs. going direct to banks. Most people are not mortgage experts and do not understand all the fine print they are signing.

      Looking at your numbers, something doesn’t seem right. If you are downsizing your mortgage from $99k to $59k, that’s a reduction of $40k. The bank would still have a mortgage of $59k, so your interest penalty should not be almost equal to the reduction.

      I recommend you ask your bank rep for a detailed breakdown on exactly how the penalty was calculated. Often times they will give you the runaround, but keep pushing until you get someone to do it. Sometimes they have to contact a head office in Toronto or another city to do it.

      If you can’t get it solved at the branch level, your next step is the OSBI (see link in the article above). If that doesn’t resolve anything, I recommend going to the media and tell your bank you will do so. I’ve heard similar stories to yours where the bank waived a substantial portion of the interest to avoid looking bad in the media.

      Good luck

      Paul

  • Lindsay says:

    I found myself in a financial and health crisis where I could no longer afford my mortgage after being in a 5yr closed mortgage and still having 2.5 years left on it. The bank informed me that I had a $26,000 penalty that I would have to pay back and all I could do was cry! I had my house on the market for 8 months but could not sell due to the amount I had to ask for (25k for the real estate fees and 26k for the penalty). I just couldn’t sell and since then am still stuck in this mortgage and am looking at bankruptcy options as I have nothing left to sell and already work 2 jobs with no time for another one.

    I just wanted to share this ridiculous figure as I have been reading stories about people dealing with what I would call reasonable penalties compared to the ridiculous one I am dealing with.

    These banks are crooks and it is so unfortunate that they will not budge on these numbers knowing full well that there is nothing that you can do about it but worry and work yourself to death.

    • Paul Blacquiere says:

      Hi Lindsay,

      I’m sorry to hear about your situation. Yes, the rules are setup to favour the banks and they have been that way for a long time.

      I recommend following the steps above listed under “How do I protect myself?”, especially the last three. You’d be surprised how sometimes just talking with a branch manager can get things resolved or at least your penalty reduced.

      If you have trouble keeping a cool head while talking to the bank staff, I recommend bringing in someone to help you out — someone who can keep calm under pressure. Same thing when contacting the OBSI.

      I hope this helps

      Paul

  • Ken says:

    looks like I’ve just joined the ‘got stung’ club. Moved to BC 2 years ago from Ontario taking a 5 year closed mortgage…now having to move back to Ontario. TD Canada Trust wants to serve me up a nice $29k penalty. May reduce to half if I port and stay with TD on the new purchase.
    Been dealing with TD our whole lives…mortgage, car, loc, student loc, credit card, everything.
    I never said I wanted to leave TD..just had to sell and move and they advised a nice kick to the groin.
    at this point I may just take the full penalty and move all my business out of principal.

    • Paul Blacquiere says:

      Hi Ken,

      I don’t know how TD is calculating your penalty, but getting it reduced by 50% sounds like a good deal, especially if it’s a closed mortgage.

      I recommend finding out exactly how the penalty was calculated, and see if there’s any funny business going on with the calculations. Keep in mind that no matter how the penalty is calculated, you did sign a closed mortgage contract, so you will have some sort of penalty. Remember – interest rates on closed mortgages are lower than open mortgages, so you got the benefit of lower interest while you held the mortgage.

      As for being a long-standing customer, I learned years ago that doesn’t mean anything, except maybe at the branch level when you’re dealing with staff that you know. Even then, they might not have the authority to waive fees, reduce penalties, etc. Often times, you need to go above their head to get anything done.

      Anyways, I wish you the best of luck getting those fees waived or reduced.

      Paul Blacquiere

  • Rajesh Patel says:

    Hi Paul,
    Great article and an eye opener. All this time I was thinking that there was only one kind of penalty, which is three month interest payment. Atleast that’s what I paid when I sold my first home in 2012 and I was in a variable term. When I moved into the new home in 2012, I went with the bank that was recommended by my builder. Unfortunately I locked my mortgage for a 5 year term at 3.09%. After living in the new house, our needs changed and we bought a bigger home with an extra bedroom. Unfortunately my house didn’t sell in time and we had to move in the new house. So for last two and half month I was carrying 2 mortgages. All this time I was under the impression that I will have to pay three month interest in penalty for breaking the contract. When my house was sold I called my bank and they informed me about the penalty. I was in deep shock when I heard that I will have to pay $10200 in penalty. I managed to reduce the penalty by 1200 by paying 10% prepayment before the closing date. The current house that we are living in has a larger mortgage, and I plan to take the proceeds from the other home and apply towards current home. The current home is coming up for renewal in next 90 days. Having said that, I went to the bank to speak with the mortgage specialist today and thinking that I would have my current home that is coming up for renewal as a leverage and barging to either waive / reduce the penalty or get a better mortgage rate. The person would not budge. She simply told me on my face that she can’t do any thing about the penalty. When I told her that I will have to reconsider my option of renewing my mortgage with RBC, she basically told me that I have to do what best for me. She couldn’t care less if I take my business some where else. Any way, is there any hope in my case. What would you suggest? IF there is no way out, I would pay off the penalty and simply take my mortgage to some where else. What do you suggest? You can also email me with your suggestion. You also mentioned in post that you have someone as mortgage broker to help. Thanks
    Raj

    • Paul Blacquiere says:

      Thanks Raj. If your bank rep says she can’t do anything, I recommend going above her head. Talk to the manager if necessary. Also follow the steps listed above if you think the penalty is excessive.

      If you decide to move your mortgage elsewhere, you can contact my mortgage broker at the link below. However, he probably won’t be able to do anything about your penalty.

      Click Here to contact my Mortgage Broker

      Good luck

      Paul

  • Hi Paul, thanks for the info. I bought a condo with my girlfriend over a year ago. I couldn’t get approved at the time, so the mortgage went in her name. She would not qualify alone with her smaller salary. CIBC even tho knowing I wouldn’t get credit approved still used my income to boost my girlfriends income somehow to get us in a 5 year fixed plan? We were told it was a 1 year mortgage and I could be added to the mortgage a year later, my girlfiend at the time obviously didn’t read what she was signing and got hosed on the contract. we sold the home yesterday, and of course the bank reluctantly fired off a 19k penalty alert!! What a gong show, I had a home in the US and sold with no penalties about 9 years ago, wow have times have changed. Is OBSI the way to go here? Do we get a lawyer? did CIBC pull a fast one with my salary being in the mix, I realize they did that because my credit had slipped a bit when I lost my job at the time, and pushed to get the mortgage at 3.69 when everyone else was getting 2.75% , thanks Paul, have a great day, PS Canadian banks Suck! lol

    • Paul Blacquiere says:

      Hi Kyle,

      I wouldn’t recommend contacting a lawyer at this stage – remember, you’re up against a bank with deep pockets and not knowing what you’re signing is typically not a good defense in court (especially when the other party is a bank).

      I recommend contacting the OBSI to see if they can help. And to make sure this doesn’t happen again, work with a mortgage broker who represents your best interests, and will find you the best deal (both interest rate AND terms, as well as standard penalties if you break it).

      Also, I highly recommend you learn how to read legal contracts. Here’s an article I wrote that talks about it

      https://www.spirepoint.com/learn-how-to-read-legal-agreements/

      Hope this helps

      Paul

  • Tim McGriskin says:

    Thanks Paul. I’m glad I’m not alone in this battle. CIBC has caught me on this. I am very versed in borrowing money and we discussed the buy out as this house is a flip. She assured me o go 5 years the penalty would only be 3 months and with the rate I calculated it out to be worth it.

    Now that the house is going to sell she states a totally different scenario. The iRD that you have mentioned. So 2400 has turned into 8500. I have contacted the complaints department so far at this point. We will see where this leads.

  • Gail says:

    Hi Paul! this is a very insightful post and thank you for educating all of us in this matter.

    my parent is in a situation that maybe you could shed some light.

    they only have 8yrs left for their mortgage. however, considering their age working for another years just to pay off the mortgage is going to be very challenging for them (physically speaking). So they have agreed to the idea of downsizing and just renting a small place. With much thought this will indeed help them a lot and will make them stress free.

    The concern is, they are under 4years fixed term and have some 2.5yrs left on the agreement. we want to speed up the process of selling the house so they could just relax a little bit from all the mortgage stress. Is there any way we could find out the penalty OR lessen the penalty? Cause even working for another 2 years I can see it to be challenging for them.

    • Paul Blacquiere says:

      Hi Gail,

      You could try approaching your bank to see if they would reduce the penalty (I recommend re-reading this article and following its advice).

      But if they aren’t willing and you don’t want to go to the OBSI and deal with all of that, there is another option.

      If your parents’ mortgage has an attractive interest rate and terms, you can list the property for sale with the condition that the buyer take over the remaining mortgage.

      The buyer will have to qualify just like any other mortgage. However, the plus side is that there is no penalty because the mortgage is not being broken early.

      A good realtor can help you with this option. Be sure to make it clear you want the new buyer to take over the existing mortgage, so they can add that to the listing agreement.

      Other than that, the only other option I can see is the break the mortgage and pay the penalty.

      Hope this helps

      Paul


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