By: Sunil Saini

Mortgage Pre-Payment Penalty

Tags: Home Sellers

For home sellers one of the cost that has to be kept in mind is the cost of breaking the mortgage if the completion date is not matching the end of the term for the mortgage. It is tecnically called - PrePayment Penalty.

For quite some time, I had been thinking about writing a blog about mortgage pre-payment penalty and the way it is calculated. Recent article about a consumer going public about his $17,000 penalty imposed by TD Bank and some bank employees going public about sales pressure making the clients interest secondary to them, encouraged me further to do it sooner than later.

Prepayment Penalty: Why banks want to charge you a pre-payment penalty? Whenever a borrower takes a loan/mortgage from a lender, it is closed for a specific term that can vary anywhere from 1 year to 10 years. In the event, the borrower ends up selling his/her home earlier and decides not to port the mortgage to the next property, the lender will end up charging a penalty to that borrower that is normally higher of -
3 months interest or
Interest rate differential, normally called IRD

Whereas 3 months interest is very easy to understand, the formula for calculating IRD is very complicated and no lender in my opinion gives a very clear picture about this calculation and this leads to huge surprises to borrowers at a later date.

Lenders normally use terms like posted rate, discounted rate, etc in such calculations. In my opinion a very clear and concise calculation of this way of calculating pre-payment penalty should be given to each borrower at the time of documentation signing and further the regulatory bodies should impose strict guidelines about such calculations and under any circumstances the lenders should not be allowed to use – (posted rate at the time of discharge – discounted rate at time of borrowing) to calculate IRD and there has to be some sort of max amount that should be imposed on lenders that they can charge.

I have seen a case recently wherein a client of mine from big 5 ported his mortgage to next property and still lost $1700 in the process despite the fact that his new mortgage was only about $7000 less than his previous mortgage. In another case, my client was charged mortgage penalty along with re-investment fee. Just like the first time home buyers have to educate themselves about all the intricacies of the process, I believe first time home sellers also have to educate themselves fully before learning the cost the hard way.

No wonder banks make a few billions as their quarterly profit. I hope and demand the government and our regulatory bodies to hold all lenders accountable to higher moral and ethical grounds. Not all home sellers make profit on their sales and not all sellers sell out of good reasons. I have seen clients selling homes due to sour marriages, death in family, loss of job, etc. Hope this blog reaches our politicians and regulatory bodies who are mandated to protect consumers in financial industry.
 
The writer is an MBA from Schulich School of Business with over 16 years of experience in the real estate industry. For anything real estate, he could be reached at 416 371 9252