Yesterday, the federal government published a ‘Mortgage Prepayment Code‘ which basically guides all (federally regulated) lenders how they communicate the IRD (Interest Rate Differential) to borrowers.
Yay! This has been a long time coming. For years, banks and lenders have been obscuring penalty descriptions with vague, complicated formulas for calculating prepayment charges.
A link to the full ‘Mortgage Prepayment Code‘ can be found here http://www.fin.gc.ca/n12/data/12-025_3-eng.asp, but here’s a list of what lenders must now disclose to borrowers:
- The formula for calculating the exact prepayment change (it has to be simple and not misleading), and an easy way to estimate penalties if there are numerous variables involved
- A full description of all inputs/variables used in the formula (i.e. no more vague talk)
- Information how how to obtain each of the inputs/variables
- An example and/or worksheet to help consumers figure out their own prepayment penalty
On top of that, lenders also must annualy provide a description of the borrower’s available prepayment privileges, the exact dollar amount of their prepayment options, any explanations of why their penalties could change, fees associated with each prepayment option, and contact information for staff at the lending institution that are knowledgable about penalty calculations. The lending institution will also have to supply, upon request, a written statement with the prepayment penalty, a full description of the formula used and when the prepayment penalty quote expires. The lenders will even have to post calculators on their public websites to help determine “reasonable” (i.e. not thousands of dollars off) estimates of prepayment penalties.
Overall, a huge win for borrowers. Even as a mortgage specialist, it can be difficult to figure out prepayment penalties – when these changes come into place on November 5th, 2012, it will be a lot easier for the Canadian public to figure out the costs associated with prepaying their mortgage (or breaking their mortgage).
