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Mortgage Penalties Make News…Again

The Mortgage Report – June 1

  • Penalty Boxed: Despite a horrid mortgage market in Q2, banks still booked $5 billion in profits. But they aren’t cutting people much slack on mortgage penalties, even folks who break their mortgage early due to COVID-related income loss—as this CBC story chronicles. Banks have some great mortgage products (e.g., BMO’s Cash Account, Scotiabank’s STEP, HSBC’s open-ended variable, National Bank’s All-in-One, etc.). Moreover, penalties over $1,000 applied to just 1-in-4 of the 47% of people who broke or renegotiated a 5-year fixed early, according to a survey this year. That said, most large banks are almost villains when it comes to fixed-rate IRD penalties. CBC cited one report suggesting IRDs are “often higher than 200% of the actual loss incurred by the lender.” When hit with such charges, borrowers often claim ignorance, despite having sign mortgage contracts agreeing to such penalties. But pleading ignorance won’t get you out of paying. With all the media coverage over penalties, bank disclosures and online warnings, it’s time borrowers hold themselves accountable for ignoring prepayment risk and flocking to the largest lenders with the worst penalties. There are more than enough fair penalty lenders out there. Given we can’t rely on the government to regulate penalties, it’s got to be “buyer beware” for now.
  • Tiff’s Debut: There’s a new sheriff in BoC town. Incoming Governor Tiff Macklem will preside over Wednesday’s Bank of Canada rate meeting, where the Bank will:
    1. Likely do nothing with rates
    2. Continue to buy bonds and support lending
    3. Probably reassure markets with optimism about the recovery
    4. Remind everyone how it’s ready to take any measures reasonably necessary to keep the economy afloat
    5. Potentially provide extraordinary forward guidance like it did during the financial crisis in April 2009. At the time, Canada’s policy rate was the same as today (0.25%), but more stimulus was needed. What the BoC did was promise to keep the policy rate at 0.25% for over a year, so long as inflation risk didn’t jump significantly. That low-rate pledge gave consumers and businesses confidence to borrow and spend. And it worked; 14 months later the economy had rebounded and the BoC started hiking rates.
  • Upgrades and Your Mortgage: Here’s a look at how builder upgrades can boost your mortgage payment — and occasionally require more income on your mortgage application: story
  • New Non-Prime Marketplace: Roughly 15% of mortgages are non-prime, says DLC Group, one of the largest mortgage firms in the country. AltHub, which DLC owns, officially launched Monday. It’s a new system whereby non-prime lenders bid on customer applications. It promises to reduce costs for harder-to-place financing. It’s available through brokers only.

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  • Marc H. says:

    How often do people pay a penalty of $30,000? I imagine and hope it is not a common occurrence.

    • The Spy says:

      Hi Marc H., It happens almost every day but statistically only 1% of borrowers who broke their mortgage paid a penalty over $10,000 according to a survey this February.

  • Besides TD, do any of the big-5 have rules that can mitigate prepayment penalties? TD’s mortgage replacement policy will waive up to $1000 in penalties when early renewing into a new mortgage at least $20k greater than the old mortgage.

    I locked in a couple mortgages at BMO and Scotia almost a year ago at 2.74/5yr and 2.79/4yr. I’d love to early renew into 5yr variables, but the penalties exceed the interest savings. I can save a bit on interest cost by maxing out a HELOC that’s sub-2%, and making a prepayment of <20% on the BMO mortgage.

    Any tips from the old pros?

    • The Spy says:

      Hi Ralph, Apart from making a prepayment before discharging the mortgage, it never hurts to ask your lender for a penalty break — which they might consider if you’re refinancing with them and extending your term.

      Some lenders, like Scotiabank with its STEP product, let you add more money without refinancing the whole mortgage and paying a penalty.

      And one quick tip regarding making a prepayment before breaking the mortgage: Be sure to do it well enough in advance because some lenders don’t allow prepayments within 30 days of discharge, for example.

  • bias says:

    How come they always pick on TD about its penalties. There are 5 other major banks you know, CBC.

  • Joe says:

    Are you a TD Shareholder or one of the VP?

  • Margarita says:

    Hi, I need to renew my mortgage (maturity date July 15), what would you advice me to get? Variable or fixed interest rate ? I might be looking to upsize my house in a year, do you think prime rate will raise these 2 years if I go with variable ?
    Thank you

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