# Penalty Fee tactic



## dcaron (Jul 23, 2009)

Coming up to 60 months on my 84 month term March 8th, 2013. My bank advisor is basing his penalty fee (3 month interest) on non-negotiated rate. Fees I expected to pay just increased by $2k (now $5.1k). My negotiated rate in 2008 was 5.22%. If I look at my bank mortgage statement, 3 month interest from March 8th onwards, should cost me about $3.1K.

I feel this is wrong, and a nasty tactic to force me to stay with them (prevent switching to another lender). NBC told me they would offer one of two things to encourage me to stay with them. 
#1 - a blended rate in the range of (3.1% or 3.2% - cant remember exactly)
#2 - charge me the penalty, and offer me a "competing" 5y fixed rate of about 2.99%.

My current broker (DLC) is offering 2.89% fixed 5 year, but penalty and notary fees to leave current lender (NBC) may not make switching lenders appealing anymore.

Any thoughts?


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## OptsyEagle (Nov 29, 2009)

I am not an expert in this but I think the penalty fee is not just the 3 month interest. That is there profit for administering the mortgage break. I believe it is usually an amount (3 month interest is about right) plus any cost to re-issue the funds. So if you are paying 5.22% and they can only get 4.5% on a 2 year mortgage today, they will make you pay 2yrs x (5.22-4.5%) x outstanding balance.

You have to keep in mind that the GIC they issued in 2008, to get the money to lend you, is not renegotiable. If the rates on that are higher then today (and they undoubtedly would be), they have to ensure they don't lose money. This is how they do it.


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## dcaron (Jul 23, 2009)

OptsyEagle said:


> I am not an expert in this but I think the penalty fee is not just the 3 month interest. That is there profit for administering the mortgage break. I believe it is usually an amount (3 month interest is about right) plus any cost to re-issue the funds. So if you are paying 5.22% and they can only get 4.5% on a 2 year mortgage today, they will make you pay 2yrs x (5.22-4.5%) x outstanding balance.
> 
> You have to keep in mind that the GIC they issued in 2008, to get the money to lend you, is not renegotiable. If the rates on that are higher then today (and they undoubtedly would be), they have to ensure they don't lose money. This is how they do it.


Thanks for your quick response! 
Sounds like a pseuso-IRD calculation to me, and not an actual "3-month interest penalty" fee.


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## Cal (Jun 17, 2009)

Banks are using lots of tricks to prevent us from changing lenders:

http://www.greaterfool.ca/2013/01/29/what-a-deal/


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## dougboswell (Oct 25, 2010)

To clarify one point. By law if a mortgage is longer than a 5 year term (6,7,10) the penalty is 3 months interest (the IRD does not come into play). You should have been given an amortization schedule when you signed all the papers. This would show the interest amout for each month. I would ask the person on how the $5k is being calculated.

My question is why are you looking at breaking the mortgage right now? Is it to refinance? If so if you stay with the present lender and take their blended rate there should be minimal cost. Because the term is not up you cannot transfer it. If you go to a different lender you are taking out a new mortgage. You will have the cost of the breakout fee plus your lawyer's fees. You may have to get a larger mortgage to incorporate all the fees. 

If you are trying to get a lower rate I would ask for all the numbers, your cost and your new payment amounts from both your current lender and your potential new lender. Ask if the 2.89% quoted applies to you as it is not a purchase. Some of the low rates you see advertized have 30 or 60 day limits on them or are only for new purchases. Also you may have to go with a conventional mortgage which some lenders add a premiunm to compared to an insured mortgage.

Before you decide ask questions and ask for numbers so you can compare offers and see which is the best for you financially.


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## dcaron (Jul 23, 2009)

dougboswell said:


> To clarify one point. By law if a mortgage is longer than a 5 year term (6,7,10) the penalty is 3 months interest (the IRD does not come into play). You should have been given an amortization schedule when you signed all the papers. This would show the interest amout for each month. I would ask the person on how the $5k is being calculated..


As stated in my OP, "My bank advisor is basing his penalty fee (3 month interest) on non-negotiated rate."
Of course I was given an amortization table, and this is how I came up with 3month interest costs, at the 60-month mark. HAving said this, my NBC advisor told me that this is not how they calculate the 3-month interest penalty.



dougboswell said:


> My question is why are you looking at breaking the mortgage right now? Is it to refinance?


That is a strange question. Who would not want to break their mortgage with a rate of 5.22% in today's environment, as soon as the IRD is no longer used to calculate the penalty (5 years into 7 year term in my case).



dougboswell said:


> If so if you stay with the present lender and take their blended rate there should be minimal cost. Because the term is not up you cannot transfer it. If you go to a different lender you are taking out a new mortgage. You will have the cost of the breakout fee plus your lawyer's fees. You may have to get a larger mortgage to incorporate all the fees.


I will obviously include all the fees when I do my comparison of the broker's offer versus my current lender's offer (NBC). 



dougboswell said:


> If you are trying to get a lower rate I would ask for all the numbers, your cost and your new payment amounts from both your current lender and your potential new lender. Ask if the 2.89% quoted applies to you as it is not a purchase. Some of the low rates you see advertized have 30 or 60 day limits on them or are only for new purchases. Also you may have to go with a conventional mortgage which some lenders add a premiunm to compared to an insured mortgage.


I have a frozen 5y fixed rate of 2.89% for a refinance with my broker. It may still not be advantageous to jump ship to his proposed lender due to penaly + fees with my current lender. So blend and extend with current lender is likely scenario.



dougboswell said:


> Before you decide ask questions and ask for numbers so you can compare offers and see which is the best for you financially.


You betcha ...


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## jamesbe (May 8, 2010)

I was just explained this by my broker the other day. He said:

Last time it was either variable or the rates at the time were higher than you were paying, otherwise, it’s the IRD. 

Their IRD calculates are based on a ridiculous formula that RBC, BMO and TD have started, quietly. Posted rate today is 5.24%. you’re getting a discount off that of 2.35%. In 2 years, if rates are the same, they will take their 3-yr posted rate (because you’d have 3 years left on your term) and subtract 2.35%. 3-yr posted is 3.65% today. 3.65% - 2.35% = 1.3%. your break penalty will be the mortgage amount at that time (say $200k) X 1.3% X 3 years = $7800

Other lenders will say... the best 3 year rate we have right now is 2.7%. you’re paying 2.89%, so the difference is 0.19% X $200k X 3 years = $1140.


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