In this low interest rate environment of the past few years, many have wanted to break their current higher rate mortgage in favour of lower interest rates, and were SURPRISINGLY shocked by the size of their penalty.
The fact that banks must now disclose the way they calcualte penalties, may force them to change the way they calculate it. Imagine having to NOW explain to your customer that it's going to cost you a zillion dollars if you break your mortgage.
Code of Conduct for Federally Regulated Financial Institutions Mortgage Prepayment Information
Purpose The purpose of the Code is to ensure that federally regulated financial institutions (-œlenders-) provide enhanced information in respect of credit agreements secured by mortgages where a prepayment charge could apply (-œmortgages-) to assist borrowers in making decisions about prepayment of their mortgage.
Lenders currently provide substantial amounts of information relevant to mortgage prepayments to consumers in accordance with the requirements in the applicable federal regulations, including but not limited to federal cost of borrowing disclosure regulations and credit business practices regulations. The information that will be provided under this Code is in addition to existing information provided by lenders to borrowers.
Application and Implementation
Lenders will implement the policy elements of the Code with respect to new mortgages no later than six (6) months from date of adoption of the Code for Element 3 and Element 4; and no later than twelve (12) months from adoption of the Code for Element 1, Element 2 and Element 5. Lenders will apply the Code to existing mortgages where it is feasible to do so. The Code does not apply to mortgages that are entered into for business purposes or to mortgages entered into by borrowers who are not natural persons.
Compliance with the Code
The Financial Consumer Agency of Canada will monitor and report on compliance with the Code.
Manner of Presenting Information
Lenders will provide the information in language, and present it in a manner, that is clear, simple and not misleading.
1. Information Provided Annually
Lenders will provide the following mortgage prepayment information to borrowers annually:
? Prepayment privileges that the borrower can use to pay off their mortgage faster without having to pay a prepayment charge. Examples include making lump-sum prepayments, increasing the regular payment amount, and increasing the frequency of the payment to weekly or bi-weekly. If you are interested, take a look at Mortgage penalty calculator.
? The dollar amount of the prepayment that the borrower can make on a yearly basis under the terms of their mortgage without having to pay a prepayment charge.
? Explanation of how the lender calculates the prepayment charge for the borrower's mortgage (for example, a certain number of months' interest or the Interest Rate Differential (IRD).
? Description of the factors that could cause prepayment charges to change over time. ? Customized information about the mortgage, valid as of the date the information is produced, for the purposes of the borrower estimating the prepayment charge. The customized information will include, depending on the type of mortgage product held by the borrower:
o The amount of the loan that the borrower has not yet repaid
o The interest rate of the mortgage and other factors (for example, rate discount or posted interest rate) that the lender uses to calculate the prepayment charge
o The remaining term or maturity date of the borrower's mortgage For mortgages where the prepayment charge may be based on the IRD:
o How the lender determines the comparison rate to use to calculate the IRD
o Where the borrower can find the comparison rate (for example, on the lender's website)
Where the borrower can find the lender's financial calculators that the borrower can use, along with the information above, to estimate the prepayment charge. Any other amounts the borrower must pay to the lender if the borrower prepays their mortgage and how the amounts are calculated. For more info, visit this link.