Royal Bank of Canada is correcting errors that caused some clients to pay down their mortgages more slowly than they had intended, leaving them facing higher interest costs over the long run.
An internal review of documents discovered an issue with the bank’s process for calculating and issuing mortgage renewals. The problem produced mortgage renewals that were mistakenly labelled as having “accelerated” payment terms, when in fact they did not.
Accelerated payments are popular with some cost-conscious borrowers, but only about 8 per cent of Canadian homeowners choose them, according to Mortgage Professionals Canada. By paying slightly more on a regular basis, customers effectively make an extra payment each year on their mortgages, reducing the term of the loan and the total interest owing. But some customers who asked for accelerated payments at renewal say they were unwittingly presented with contracts that contained less aggressive terms, which deprived them of savings they hoped to reap. The impact varied from mortgage to mortgage, but RBC has spent months trying to assuage customers' concerns.
A letter from the bank tells clients that “it has come to our attention that some language in the agreement you signed when you renewed your mortgage may have been unclear,” maintaining that the payment terms customers agreed to never changed. But three clients contacted by The Globe and Mail said that because they weren’t quoted the correct accelerated payment amounts, they paid less than they wanted to without knowing it. As a result, they had agreed to relatively longer amortization periods and higher interest costs.
When they complained, the bank gave them a choice: keep their existing terms, or pay a lump sum from their own pockets to catch up to the accelerated payment schedule. It is not clear whether RBC, which is treating the issue on a case-by-case basis, plans to compensate any clients for the error.
An RBC spokesperson declined to say how many clients were affected, or how long the problem went undetected. Yet, at least one client’s renewal was signed nearly three years ago, and two clients said that RBC employees told them thousands of customers received the bank’s letter – a comparatively small segment of RBC’s mortgage clientele. RBC is Canada’s largest residential mortgage lender, with $243-billion in loans outstanding, as of Oct. 31.
“Through one of our regular business reviews, we discovered that a limited number of clients’ mortgage payments were incorrectly labelled at the time of renewal. We contacted clients to explain the discrepancy to them, assure them that the payments, terms and amortization periods remain the ones they selected at the time of renewal and that principal and interest payments were correctly applied,” RBC spokesperson AJ Goodman said in a statement, adding that RBC regrets “any client inconvenience.”
Some RBC customers dispute the bank’s characterization of the problem. Nearly two years ago, Marco Taccarelli renewed the mortgage on his two-bedroom apartment in Victoria. He asked to continue with the accelerated bi-weekly payments he had already been making, but something about the terms presented to him seemed wrong, so he asked staff at his bank branch to double-check the numbers. He was assured they were correct, and signed the contract.
In October, 2018, he received the bank’s letter informing him his mortgage was not truly accelerated, as the contract stated. “You can imagine how mad I was at that point,” said Mr. Taccarelli, 42, a father of two who works in construction.
After some back-and-forth with the bank, including a “more than passionate call” with his branch manager, he says he was told that if he wanted to catch up to the accelerated payment schedule, he could pay a lump sum of upward of $1,800. He declined, arguing that it should be RBC’s responsibility to make up the difference in payments.
“You have prolonged my mortgage term,” he said. “Also, I’m paying to you additional interest that originally I didn’t want to pay to you.”
For the past dozen years, Mohinder Singh, 52, had always chosen accelerated payments on his RBC mortgage, and requested them again at his most recent renewal, accepting the terms the bank offered. When the Scarborough, Ont.-based immigration consultant received the bank’s letter in October, he wondered: “Who is going to pay that extra interest amount?” But he had only renewed his mortgage five months earlier, and the lump sum to catch up to the accelerated schedule was modest, so he paid it. “I was looking for an amicable solution,” he said.
After discovering the problem, RBC reported it to the Financial Consumer Agency of Canada (FCAC), which enforces consumer-protection measures on financial institutions. An FCAC spokesman, Michael Toope, declined to answer questions on the matter, citing the agency’s “obligation to maintain confidentiality over certain aspects of our supervision process, and of some commercial and private consumer information.”
The letter sent by RBC outlines the potential benefits of making accelerated payments. For a $150,000 fixed-rate mortgage with a 5.5-per-cent interest rate, choosing accelerated bi-weekly or weekly payments, instead of monthly payments, would save a client more than $22,000 in interest costs and shave more than 3.5 years from the life of the loan.
For most clients affected by RBC’s processing errors, the financial impact would likely have been less severe as the terms were calculated only since their last renewal.