Prepayment penalties: More clarity in the future

Government intervenes to force lenders to offer better disclosure

What does it take to make your government listen to you? It took a full-fledged class action lawsuit (against CIBC), lots of complains from burned mortgage holders, critical articles from mass media and blogs like this one to make the government finally pay attention to such an important issue.

This week the Ministry of finance announced a Code of Conduct for Federally Regulated Financial Institutions, which forces lenders to come clean about prepayment penalties. Lenders have a year (some of the requirements must be implemented six months from now) to comply with the new policy.

What should you expect? Once per year lenders must provide detailed information like:

  • The dollar amount of the prepayment that you can make on a yearly basis without risking to pay a prepayment charge.
  • Explanation of how the lender calculates the prepayment charge
  • Description of the factors that could cause prepayment charges to change over time.
  • Where the borrower can find the lender’s financial calculators that the borrower can use, along with the information above, to estimate the prepayment charge

Lenders must also provide a dedicated toll-free telephone line through which borrowers can speak to someone and get the actual prepayment charge or request a written statement.

This is good news to mortgage holders. In my opinion, though, the government missed a chance to make one step further – to unify prepayment penalties across the board and limit them to only 3-month interest for both fixed and variable rate mortgages. Some countries like Australia and India have already adopted such laws.

Next time you get your mortgage statement, expect a much thicker envelope – all these explanations and sample calculations will require several extra pages…

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