A self-employed, single mother of a 12 year old boy, also taking care of her elderly mother, made CBC headlines for having to pay a $30,000 early termination penalty on her mortgage, when she was forced to sell her house in April, due to the COVID-19 pandemic.
By profession she’s a realtor. With the lockdown in full swing due to the pandemic, the Toronto Real Estate Market screeched to a halt and she saw her client base evaporate literally overnight. She used the mortgage deferral option for 1 month, but soon realized that if she continued down this path, she would only be delaying the inevitable. Her only option that she saw was to sell her home.
She was 19 months into her 5 year fixed mortgage, and the sale meant breaking early. Thus triggering the penalty.
The sentiment has not been very empathetic. The old adage of the borrower claiming ignorance when being hit with a penalty is not being widely accepted.
Over the last few years similar types of stories about penalties have been reported more frequently by the media. There has been enough media coverage and the public should be more widely aware that most of the big banks charge 200 points more on a penalty than the amount they actually lose when someone breaks their mortgage. The argument is that the awareness should be there, especially with someone being a professional in the industry.
Inside the industry, these stories are a reality everyday. Roughly 74% of Canadians take a 5 year fixed mortgage, and roughly 2/3rds of Canadians break their mortgage within the first 36 months.
I share these stats with every single client that I come across. But does everybody?
I used to think that people just didn’t care. A realtor for example, does not involve him or herself on the financing side of things. All they really want to know is if the mortgage has been approved.
After reading this article though, my stance has changed, somewhat. Maybe it’s not that they don’t care. Could it be that they don’t know? Why would a realtor put herself in this position, if she truly knew?
Yes, there has been a lot of media coverage surrounding penalties over the last few years, and yes the banks have had to improve their disclosures and pamphlets. But disclosures are one thing. How many banks will instruct their employees to tell their customers that their penalties can be 4 times larger than other lenders? Can this realistically even be expected of them?
Banks have one obligation and that is to their shareholders, that is what any of the upper management will tell you. You can definitely say that borrowers should know better, and should take accountability for flocking to the largest lenders with the worst penalties.
But why has the government not come in to clear up the ambiguities and regulate penalties. They were supposed to have a review back in the early 2010s, and since then we have heard nothing.
I had a client who signed with a lender 2 years ago, and that lender’s representative insisted that the penalty would be 3 months interest. I challenged this but the employee insisted, and the client took his word.
Flash forward to this last week, where the client wants to sell and checked in with the lender. The same representative informed the client that the penalty would be 4.5% of the remaining balance, which is roughly 4 times more than 3 months interest. When the client brought up the conversation, the employee responded by saying that he didn’t anticipate rates going down, and that he’s sorry….when the client asked for a run down of the calculations, the employee admitted that he did not know how to calculate it. Unfortunately, this is not an isolated incident. It is a concerning fact that most employees are not aware of the banks penalty policies and how they are calculated.
There are more than enough fair penalty lenders out there, and my thoughts are, should we not be doing more to ensure that our clients are clear on the potential ramifications. If we are aware of the probability that people will be making changes prior to the end of their term, isn’t it our responsibility to ensure they are set up for the most flexibility in the case they chose to do so.
The bottom line is the banks are profiting a great deal more (2% or more) than they are losing out when someone breaks their mortgage, and this has gone on far too long, with empty promises from the government. It is high time they step in and look at regulating. This is one area where I think they will garner support. They don’t seem to have any reservations stepping in to tighten qualification regulations for sake of the health of the real estate market, so why not here?
Make sure you understand the fine print before signing off on your mortgage approval. Failing to do so could be the most costly mistake you could make in your life.
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Mortgage Penalties In the Media Again
A self-employed, single mother of a 12 year old boy, also taking care of her elderly mother, made CBC headlines for having to pay a $30,000 early termination penalty on her mortgage, when she was forced to sell her house in April, due to the COVID-19 pandemic.
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If you would like more information or a free consultation contact Aleem below, and as a Certified Mortgage Specialist let me help you get the home of your dreams. Great Mortgages, Made Simple
