Well, some interesting news from the Federal Government was released yesterday (if you can call a government release either interesting or news). Although nothing is being done about Canadian lenders ability to arbitrarily charge Interest Rate Differential Penalties (IRD) on fixed rate mortgages, the lenders now have to disclose how those penalties are calculated. According to the release, any lender that charges an IRD penalty will now have to disclose the outstanding mortgage balance, the mortgage holders current interest rate, the comparison rate used for calculation and the term that was used to compare.
This is a step in the right direction but does not go far enough. What most mortgage brokers are calling for is a standardization across the board of how all lending institutions in Canada calculate IRD penalties. Currently, lenders can use whatever figures they want to calculate the IRD and compare numbers that are more in their favour to create SkyHigh Penalties, they just have to explain it better.
Lets say you agree to a 5 yr fixed term at 5% but decide to sell your house 2 years later to take a job in Nova Scotia, over the last 2 years, rates have gone down a little. You will be responsible for an IRD penalty because the lender cannot relend that money for the same amount, so they charge a penalty. Makes sense. So lets say that after 2 years the 5 yr fixed rate was 4.5% and the 3 yr rate was 3.5% – well, the lender could choose to calculate your IRD penalty based on the 3 yr fixed term which would be 3x the penalty than comparing it to the 5 yr term. Basically the current structure for IRD penalties allows the lenders to choose whatever situation suits them the best and charge you the highest possible penalty. As a mortgage professional I believe this is wrong and needs to change, I am actively lobbying to see this happen.
If you have any questions about this or anything else mortgage related, please don’t hesitate to contact me anytime!