Three annoying things that banks do to customers are about to become history.
Following up on commitments made in the past two budgets, the federal government has announced measures that will stop banks from mailing unsolicited credit card convenience cheques to customers, and that will reduce the holding period on newly deposited cheques. The banks will also have to stop being so secretive about the penalties clients must pay when they want to get out of a mortgage early.
These measures represent some good work by a government that has been under pressure lately as a result of the robo-call affair. Strangely, the measures were announced on a Sunday and thus didn't get the initial attention they deserve.
The sharp decline we've seen in mortgage rates over the past few years has prompted many people to think about breaking their mortgages in order to lock in lower borrowing costs. A mortgage penalty must generally be paid in this situation, but it's exceedingly difficult to find out how much it is and how it's calculated.
The government said in its 2010 budget that it would standardize the calculation and disclosure of mortgage penalties. The measures just announced don't address the fact that mortgage lenders use different methods to calculate penalties, some of which hit borrowers harder than others. But they do require banks to:
- Annually show customers how they can pay off their mortgages faster without incurring prepayment charges.
- Provide online mortgage penalty calculators.
- Offer a toll-free phone line that customers can call to talk to bank staff about mortgage prepayment penalties and find out the actual charge that would apply.
- Disclose the details of how actual mortgage prepayment penalties are calculated (example: whether three months’ interest is being used, or a calculation called the interest rate differential that looks at how much interest a bank is losing out on if you break your mortgage).
These rules will be introduced over the next six to 12 months or so, and they apply specifically to new mortgages. The Department of Finance says the measures will be applied to existing mortgages "where it is feasible to do so." Business mortgages are not covered.
Improved disclosure of penalties will make life easier for borrowers who want to get out of a mortgage before the renewal date. "I can't tell you how many borrowers call us to say, 'How can I figure out my penalty?'" said Vancouver mortgage broker Robert McLister. "We generally have to tell them to call their lender, and then they have to endure a sales pitch from the lender – why are you leaving and things like that."
The new mortgage regulations will require banks to show how they arrive at a mortgage prepayment penalty. However, they don't standardize the calculation method. As it stands now, some lenders are more punitive than others with their penalties. For example, mortgage broker Jim Tourloukis said some lenders will calculate a penalty of three month's interest based on the actual interest rate a client has, while others will use the higher posted rate that almost nobody pays.
"Without a doubt, the calculations should be standardized," Mr. Tourloukis said. "It's a dog's breakfast right now."
The government's ban on the distribution of unsolicited credit card convenience cheques will come in proposed regulations to be published for consultation in the weeks ahead. Let's hope there's no slippage on this file because credit card convenience cheques exist to prey on people who can't handle credit ( .)
Some key negatives: These cheques allow you to draw on your credit card balance for things that you can't usually pay for with plastic, like rent or utility bills, and using them is like taking a cash advance on your card. That means you forgo the usual interest-free grace period credit cards offer.
The new rules for cheques take effect Aug. 1. They'll limit banks to a four-day hold on newly deposited cheques of less than $1,500, which is down from five to seven days right now in many cases. Also, banks will have to provide immediate access to the first $100 deposited in a branch; for cheques deposited by bank machine, access to the first $100 would come the next business day.
That's three annoying bank practices addressed by Ottawa. Suggestions for future government investigation: Aggressive marketing of bank mortgage life insurance, high dormant-account fees and branch staff who are called financial planners but only flog mutual funds.