Lower interest rates help you save money but bad terms can cost you more in the long run.
Research shows most mortgage borrowers search for the best interest rate but hardly ever read through the terms of their mortgage contract which can end up costing them more money down the road.
In the last few years prepayment penalties have received a lot of attention.
For example, in 2014, the CBC released an article exposing a penalty a couple had to pay in the amount of $17,000 when they decided to sell their home and move abroad. TD eventually softened the blow but it’s wasn’t until after the couple went public.
A class action law suit was also launched against CIBC in 2011 by Siskinds LLP after a number of borrowers claimed “that CIBC applied terms and conditions to certain mortgage contracts to allow it unfettered discretion for calculation of mortgage prepayment penalties.” Some people were forced to pay over $50,000 in penalties.
Royal Bank was also in the spotlight in 2011 when Brian Hyytiainen went public about his penalty that cost him $13,000. He later appealed the penalty to the RBC ombudsman and Chambers Banking Ombuds Office. According to the article published by the Toronto Star, his request for a reduction of this amount was declined.
If you’ve noticed a pattern of higher penalties amongst big banks, you’re on to something.
Big banks have the highest and most expensive penalties due to their calculation method. In a fixed rate mortgage, which is the most popular type of mortgage borrowers obtain, big banks use the Bank of Canada’s benchmark rate to calculate penalties. These rates are often highly inflated and can give the impression borrowers received a bigger discount off of their interest rate than they really did. In turn, this triggers a larger penalty.
Is it any wonder that big banks make millions, if not billions of dollars from pre-payment penalties? It shouldn’t be. Mortgage contacts are designed to make lenders money and big banks will use every avenue they can to generate a profit.
In conclusion, if borrowers don’t understand what they are reading and most importantly, signing, they won’t be able to protect themselves from bad terms which can be costly.
As an experienced mortgage agent who prides herself on facilitating clients with the right mortgage for their lifestyle, I don’t like to focus on interest rates as much as I do mortgage terms.
I occasionally come across borrowers looking for the best pricing only but the bulk of my clients come to me for advise and the best mortgage which means more than just the interest rate.
If borrowers rate shop they may get the lowest rate but may also be stuck in a punitive mortgage contract, one that has “no frills.” Prepayment privileges, penalty calculations and more may be all skewed to be astronomically more expensive in exchange for a better rate. Not many borrowers want this type of mortgage if it’s explained to them in detail.
To learn more, you can always contact me at (647) 773-4849. I am always willing to either advise on a particular mortgage or even help borrowers read the fine print of their existing mortgage contracts.
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By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929