The hefty cost behind breaking a mortgage

The hefty cost behind breaking a mortgage

The COVID-19 pandemic has left a lot of people cash-strapped. Especially if there’s no income coming in.

The pandemic left real estate agent Kristina Barybina in a bind when she didn’t have any money coming in.

It forced her to sell her house.

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

Doing so would cost her up to $30,000 in penalties.

CBC reported Barybina’s mortgage had a fixed-rate of 3.71% with $591,000 still owning.

To break the mortgage, TD used the Interest Rate Differential (IRD) — a calculation that involves the difference between the interest rate on the mortgage, a financial institution’s posted fixed interest rate and the time remaining on the mortgage.

Using IRD, TD stated Barybina owed $29,530.

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

“I’m not selling this house because I love to move.”

So why are the penalties so high?

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

Lenders will have posted rates — the number people see when they walk in — and discounted rates, a number that’s negotiated when the institution is running a promotion.

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

“Most major banks’ interest rates are posted well above what we would call market rates.”

For example, some fixed rates for banks currently are 4.99 to 5.04% for a five-year term.

But some had promotions for 2.99%, which means would-be homeowners would get a 2% discount off posted rates, said Stoddart.

Interest rates may drop during COVID-19, and if a client needs to break a mortgage contract half-way in, the lender would have to look at the remaining term of the contract and the posted rate for the remaining time and apply the discount the client received.

The penalty resulting is the interest lost between the two for the remaining years left on the term.

“Which could add up into the thousands and thousands of dollars (in this case),” said Stoddart.

While individuals and businesses have been offered financial relief programs by provincial and federal levels of government during the pandemic, it’s tougher for lenders because a mortgage is considered a commodity that can be bought and sold, with investors and shareholders involved in some instances.

Stoddart said while the government had announced mortgages can be deferred to the consumer for up to six months, deferral periods were up to the lender.

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

“Lenders will assess each borrower’s situation individually,” said Stoddart.

“Every lender I know would jump in to help the consumer.”

In the CBC report, Barybina called TD Bank “heartless” believing the company was profiting off her mortgage penalty, because the posted interest rate by the Bank of Canada is low.

Stoddart doesn’t believe the lender was profiting, stating people do not fully understand the mortgage market and how it works.

As an example, Stoddart asked people to see themselves as an investor who purchased mortgages on behalf of a pension fund. If the interest isn’t paid on the mortgage, there would be an impact on the pensioner who relies on the funds to pay their bills.

“They may rely 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’s not fair to assume everyone is profiting during these difficult times.”

So what can homeowners do if they run into problems with financing their mortgage during these troubled times?

The Financial Consumer Agency of Canada — an independent federal government agency that enforces consumer protection legislation, regulations and industry commitments by federally regulated financial entities — said homeowners can consider looking at mortgage payment deferral programs; opt to renew a mortgage early (which allows consumers to extend the length of it which blends 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 outline mortgage penalties and provide descriptions on how its calculated, FCAC noted.

All this must be presented in an information box at the beginning of a mortgage agreement.

“Consumers who feel that they have been treated unfairly can make a complaint to their bank,” a FCAC spokesperson told the Sun.

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