Canadian Minister of Finance Jim Flaherty, in the recent
federal budget, promised to impose a standardization of mortgage penalties. According
to a report,
this is an issue that needs to be tackled immediately as most Canadians are
unaware of how the prepayment penalties are calculated, and are shocked upon
discovering that they owe thousands of dollars to the mortgage lender
for getting out of the mortgage contract early.
While pre-payment penalties allow lenders to recover lost
profitability, the method of penalty calculation is neither standardized nor
clearly explained to borrowers. Some lenders use generic terms to explain the
prepayment penalty calculation method and the descriptions given are not
succinct enough for lenders to comprehend or compare penalty policies among different
lenders.
Some lenders use the posted rate and not the actual rate of
interest for the pre-payment penalty calculations. Posted rates are about 1.5%
more than discounted interest rates, resulting in an increase in penalty.
An accurate disclosure of the pre-payment penalty the
borrower can expect needs to be provided by the lender. This way the borrower can
be sure about what he/she is agreeing to when signing the mortgage. A
comprehensible table showing the breakdown of the mortgage after the conclusion
of each year of the loan term taking into account present interest rates as
benchmark and simple calculations will also help borrowers better understand
the penalties they are liable to pay.
