Getting a quote for the cost of breaking your mortgage early – and understanding it – hasn't always been easy. That was supposed to change last year when the Finance Department compelled banks to put penalty calculators and guidelines online.
That made estimating penalties convenient, but it hasn't made it foolproof. Unfortunately for consumers, online penalty calculators can be unreliable and discrepancies between penalty quotes from online calculators and lender phone reps are common.
The five-year fixed mortgage is the most popular term in Canada, and most who choose it alter their mortgage before the five years is up. Historically, almost one-half of those who refinance or renew a mortgage early have paid a "prepayment charge" – otherwise called a penalty, according to the Canadian Association of Accredited Mortgage Professionals (CAAMP).
Anyone contemplating a mortgage change will want to know their mortgage breakage costs in advance. Why? Because a penalty that's too high can make refinancing pointless.
Many Canadians are shocked to find out how much breaking their fixed mortgage will cost them. That's largely because the formulas behind certain penalties have long been a mystery. But in September, 2012, the Financial Consumer Agency of Canada (FCAC) came to the rescue. It pushed banks to display penalty calculators and formula descriptions on their websites.
Penalty calculators immediately put some power back in the borrower's hands. No longer was it necessary to call a bank, listen to a customer service representative fumble over how penalties are calculated, be interrogated about why you wanted a penalty quote and endure a sales pitch about staying with that lender.
Now Canadian home owners could just type numbers into a website and voilà, an instant penalty estimate. But it hasn't turned out to be that simple.
I recently heard from a National Bank customer. He wanted to know his penalty, so his broker entered all the right data into National Bank's mortgage calculator. The calculator provided a penalty quote that was $1,044 more than the penalty National Bank quoted him in writing. That's despite the exact same assumptions in each case.
(The foregoing could also apply to various other lenders. National Bank is just one example.)
When I asked National Bank about it, the response was this: "Regarding the (National Bank Indemnity) calculator, we used a method of calculation that makes sure our clients avoid unpleasant surprises, and that also ensures compliance with the Commissioners Guidance (CG-8 Mortgage Prepayment Penalty Disclosure), which stipulates that the estimate should be an amount higher than the actual penalty."
Well, they certainly satisfied the "higher than…actual" requirement. But how high is too high? And do large discrepancies run counter to FCAC's requirement to presenting mortgage prepayment information in a way that is "clear, simple and not misleading?" National Bank wouldn't comment on why the penalty amounts were so different.
Discrepancies between penalty quotes from online calculators and lender phone reps are not rare. In most cases the differences are small, but not always. FCAC spokesperson Julie Hauser says, "There are no guidelines on how close the online calculator estimate must be to the actual prepayment charge."
Good Output Requires Good Inputs
If you type the wrong numbers into a mortgage prepayment calculator, you can't expect accuracy. But some calculators request such obscure information that you don't know what to type in. It's almost like some lenders go out of their way to confuse people, hoping they'll just give up or call the lender's sales team.
Certain banks do an exceptional job at making their mortgage calculators tedious. They do that by:
- Making you look up comparison rates on another page of the lender’s website – instead of automatically entering those rates for you (A comparison rate is supposed to reflect the lender’s then-current rate for your remaining term. Lenders compare this rate with your actual rate. The difference is used to determine how much interest you should have paid the lender, had you not broken your mortgage early. That’s the basis for interest rate differential [IRD] charges on fixed-rate mortgages.)
- Racking your brain over which “comparison rates” to enter, once you find them
- Asking you to enter the posted rate (or your discount from posted rate) on the day you got your mortgage. How many people remember that?
- Asking for your exact maturity date
- Asking for your original loan amount
- Making you look up whether you were offered a “promotion” at the time you got your mortgage
It's all too easy for laypeople to populate such fields with incorrect information. But one wrong assumption can result in an estimated penalty that's off by thousands.
The Best and Worst Calculators
Here's a list of mortgage penalty calculators for the top 10 banks:
- Bank of Montreal
- ING Direct
- Laurentian Bank
- National Bank of Canada
- Manulife Bank
- Royal Bank
- TD Canada Trust
Of them all, ING Direct gets honours for providing the most user-friendly calculator. It asks very simple questions and spits out a prepayment estimate with no confusion.
The worst calculator, by far, is HSBC's. It forces you to look up more information than any other of the calculators. You're left asking yourself what to enter for things like "Start Date," "Posted Rate" and "Discount Rate."
While we're on the topic of ING, it's interesting to compare ING's penalty calculator to Scotiabank's. If you enter sample assumptions that are similar for both (e.g., a 3.99 per cent rate, two years remaining on your term, etc.), you'll often discover that Scotiabank's penalties are conspicuously higher than ING's, even though they're related companies by ownership.
The reason is simple. Scotia, like all big banks, uses a penalty formula based on posted rates. Smaller lenders, like ING, often use a less expensive discounted-rate formula. ( More on this from the FCAC )
If you have to break your mortgage before maturity, discount penalties can save you thousands. Choosing a mortgage with a discounted penalty can sometimes be equivalent to a 0.1 to 0.2 per cent interest rate discount up front – or more.
Penalty calculators are meant to provide estimates that err on the high side, other things equal. But if you don't input precise figures, you could be unpleasantly surprised by a much higher penalty when you try to pay off the mortgage.
Lenders suggest you call them for an accurate quote if you're thinking about breaking your mortgage. That plays right into their hands because they want to persuade you from leaving, if that's your intention.
"Sometimes lenders flat out delay issuing a payout statement until they speak with the customer," says Dominion Lending Centres mortgage broker Angela Calla. "I've even had clients incur extra interest charges because of it."
Ms. Calla pro-actively refers all of her customers back to the lender for a written penalty quote. That way, there are fewer surprises and delays at closing. "Penalty calculators aren't yet reliable," she says.