How brokers can help home owners slapped with mortgage penalties

by Ephraim Vecina27 Jul 2016
Mortgage borrowers who are unable to fulfill their payments in their declared periods say, two or five years) are slapped with a penalty to ensure that the lender makes up for the lost revenue—a situation where the specific skill set of brokers would be able to help out, according to an analyst.
Writing for MoneySense, industry observer Romana King said that brokers are uniquely placed to enlighten consumers on how penalty is calculated (i.e., the larger value between three months’ interest and the Interest Rate Differential), as well as to assist borrowers in getting the best results.
Discounted rates are treated differently compared to variable rate mortgages, where penalties are three calendar months’ worth of interest.
“Apparently, some lenders will include the money you saved by going with a discounted rate and add it back into the formula when calculating the penalty. So, if you may have negotiated a five-year fixed-rate mortgage at 2.99%, but the penalty for breaking that mortgage may actually be based on the posted rate, which currently sits at 4.64%,” King explained. “It’s the equivalent of having to pay back your discount because you broke your contract.”
For brokers with clients who are considering breaking their mortgages, it’s best to double- and triple-check the math involved and look around to get the best possible deals.
“Call your lender and ask them to calculate the penalty to break the mortgage today (most can’t do future projections, but you can get a good ballpark if you ask them to calculate the penalty as if you were breaking the mortgage contract today),” King wrote.
“Whether you opt for variable or fixed, consider shopping around. When comparison shopping don’t just focus on rate, but consider how penalties are calculated and if you have prepayment benefits,” she added.


  • by Chris 7/27/2016 10:48:34 AM

    In speaking with my bank in renewing mortgage, this was one item to consider when choosing. The representative at BMO skirted the issue when I asked, what would penalty amount to if I chose the 5 year locked in term rather that the variable and I paid it out early. She said she could not since I did not have the locked in mortgage. Frankly, I felt that was an unethical approach to working with a client who is asking legitimate questions regarding penalties etc.. believe that it is the Banks or the brokers responsibility to inform their client of all costs.

  • by David O'Gorman 7/27/2016 11:37:22 AM

    There is currently a class action lawsuit against one of the big banks because of the inconsistent way they were calculating the Interest Differential Penalty ( IRD), so calling the bank may or may not work.
    In Ontario real estate brokers/ reps have a duty to discover "material facts" & prepayment penalties are "material".
    Had a former student call me in tears. There was a $9,000 prepayment penalty, that was discovered after the transaction was firm & prior to closing. Rep had not had a mortgage verification done, & didn't tell the client, in writing,the importance of knowing the balance owing & the penalty.Lawyer threatened to sue rep for the penalty....Penalty $9,000. Commission $8,000. Rep paid E&O deductible $2500. Insurance company took the hit for the balance.
    Get your client to complete a " mortgage verification" ( standard OREA form) & have them take it to their lender. Follow up with an email, to ensure it is done & giving them a time frame to have it completed, stressing the importance of info. If they won't cooperate in having the form completed, CYA by sending the same email. You told hem to get the numbers in writing, they didn't, not your liability.
    Don't forget to do this on 2nd mortgages & lines of credit too! From a purely selfish perspective you should always do a mortgage verification to see if a) there is sufficient equity in the deal to close b) there is sufficient equity to pay your commission!

  • by Najib Shams 7/27/2016 12:04:41 PM

    Awesome! I always ask my clients to do a Mortgage verification form. They do appreciate my honesty that is my duty toward the client unfortunately, some would not buy it and thinks it is their confidential information and they like to keep it confidential. It is simply because not all realtors request their clients to fill out one.

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