Monday, March 12, 2012

Demystifying mortgage prepayment penalties

When signing a new mortgage, it's easy to get caught up with things like rate and monthly payments, and overlook the features we may need down the road - like prepayment privileges. It doesn't help that, up until recently, financial institutions have been allowed to glaze over the details regarding prepayments - and their penalties.

Thanks to a new Code of Conduct created by the federal government and the Canadian Bankers' Association, however, the details of prepayments must now be front and centre on any mortgage document. In addition, should you decide to go ahead with a prepayment - or close or refinance your mortgage before your term is up - your financial institution has to clearly explain how much it's going to cost you, and show you their calculations for coming up with that number.

In a nutshell, here are some of the details of the new code - which must be adopted by all federally regulated financial institutions within the next six to twelve months:

Part 1: Information Provided Annually
This section of the code basically requires financial institutions to offer you regular updates on your loan. Every year, your bank must:
- outline what prepayment privileges are available to you, as well as the dollar amount you can safely prepay on your mortgage in the given year.
- outline how it will calculate your prepayment penalty, should you opt to go over your allotted amount.
- offer a customized portion of the annual update that will outline information on your particular loan (such as amount left on it, the mortgage interest rate, the remaining term, how the bank calculates the Interest Rate Differential, and where you can find the comparison rate) that will allow you to estimate the costs of paying it off early.

Part 2: Prepayment charge information
Should you opt to go ahead with a prepayment that is more than your annual allotted amount, your bank must:
- clearly outline the prepayment charge
- explain its calculations for coming up with that prepayment charge
- any other charges that may accompany the prepayment charge

Part 3: Enhancing borrower awareness
Financial institutions must also clearly explain - either on their websites or elsewhere - details about your mortgage, including:
- the difference between fixed versus variable
- the difference between open versus closed
- how to pay off your mortgage faster
- how to avoid prepayment penalties

The new code also requires banks to have a toll-free number that mortgage borrowers can call should they have questions about their prepayment penalties. If you would like to learn more about the new Code, feel free to view it on the Canadian Bankers' Association website, or give me a call!

For more information on the announcement click HERE!

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