The high cost of breaking a mortgage

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The COVID-19 pandemic has left many people strapped for cash. Especially if there is no income.The pandemic left real estate agent Kristina Barybina at a dead end when she had no money.

It forced her to sell her house.

The problem was that she had 19 months on a five-year mortgage with TD Bank, and she had to get out of it.

It would cost him up to $ 30,000 in penalties.

CBC said the Barybina mortgage had a fixed rate of 3.71% with $ 591,000 still in possession.

To break the mortgage down, TD used the interest rate differential (IRD) – a calculation that involves the difference between the interest rate on the mortgage, the fixed interest rate posted by a financial institution, and the remaining time on the mortgage.

Using IRD, TD declared that Barybina owed $ 29,530.

“They are perfectly within their rights under the agreement, but we are in a pandemic,” Barybina told the CBC.

“I am not selling this house because I like to move. ”

So why are the penalties so high?

According to Don Stoddart, principal broker at Key Mortgage Partners, not all lenders (like banks) are equal when it comes to calculating penalties.

Lenders will have posted rates – the number of people who see when they enter – and reduced rates, a number that is negotiated when the institution runs a promotion.

“Now when calculating a penalty for breaking a mortgage, you will see the terms, three months of interest or the interest rate differential until the end of the term and the greater of the two penalties would apply “Said Stoddart to Sun.

“The interest rates of most major banks are posted well above what we would call market rates.”

For example, some fixed rates for banks are currently 4.99 to 5.04% for five years.

But some had promotions at 2.99%, which means potential owners would get a 2% discount off the advertised rates, said Stoddart.

Interest rates can go down during COVID-19, and if a client needs to break a mortgage contract halfway, the lender should review the remaining term of the contract and the rate posted for the remaining time and apply the client discount received.

The resulting penalty is the interest lost between the two for the remaining years to run.

“Which could be thousands and thousands of dollars (in this case),” said Stoddart.

Although individuals and businesses were offered financial assistance programs by the provincial and federal governments during the pandemic, it is more difficult for lenders, since a mortgage is considered a commodity that can be purchased. and sold, with investors and shareholders involved in some cases.

Stoddart said that if the government had announced that mortgage loans could be deferred to the consumer for up to six months, deferrals were the responsibility of the lender.

Even with a deferral, lenders still have to pay interest on loans to investors, he said.

“Lenders will assess the situation of each borrower individually,” said Stoddart.

“All the lenders I know would step in to help the consumer. ”

In the CBC report, Barybina called TD Bank “cruel” believing that the company was taking advantage of its mortgage penalty because the interest rate posted by the Bank of Canada is low.

Stoddart does not believe that the lender has made a profit, claiming that people do not fully understand the mortgage market and how it works.

For example, Stoddart asked people to think of themselves as an investor who bought mortgages on behalf of a pension fund. If interest is not paid on the mortgage, it would have an impact on the retiree who relies on the funds to pay his bills.

“They can count on this income to survive,” he said. “In some cases, the lender may be a little more profitable, but certainly not in all cases, and it is not fair to assume that everyone benefits from these difficult times. ”

So what can homeowners do if they have problems financing their mortgage in these difficult times?

The Financial Consumer Agency of Canada – an independent federal government agency that administers industry laws, regulations and commitments to protect consumers from federally regulated financial entities – said the owners may consider looking into mortgage deferral programs; opt for the early renewal of a mortgage (which allows consumers to extend its term by associating its mortgage rate with current rates); or use savings, investments or funds from government benefits to contribute to mortgage payments.

Financial institutions must also clearly describe mortgage penalties and provide descriptions of how they are calculated, the FCAC noted.

All of this must be presented in an information box at the start of a mortgage contract.

“Consumers who feel they have been treated unfairly can file a complaint with their bank,” said a FCAC spokesperson. Sun.

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