Mortgage prepayment.

Voluntary code of conduct for mortgage prepayment.

daryl-article

It’s clear that borrowers haven’t always been getting information about mortgage prepayment that is easy to understand. As a result, many home owners have found themselves caught out by unexpectedly high mortgage penalties when they’ve decided to refinance their mortgage or transfer it to another lender.

Recognizing the problem, the Government of Canada recently decided to take action. In August 2012 a voluntary code of conduct for mortgage prepayment information came into effect. This code of conduct applies to federally regulated financial institutions, such as banks. It encourages lenders to provide information that will better assist borrowers in making decisions about mortgage prepayment. The code has already been adopted by banks that are members of the Canadian Bankers Association.

Federally regulated financial institutions are already required to outline prepayment charges in an information box at the beginning of your mortgage agreement. The mortgage agreement must also tell you how the prepayment charge will be calculated, including the components used in the calculation. However, the new voluntary code of conduct for mortgage prepayment information goes way beyond these basic requirements.

The starting point is that information on mortgage prepayment should be presented in a manner and written in language that is “clear, simple and not misleading”. Additionally, lenders following the code agree to provide the following specific information.

  • An annual statement that includes:
    • Your prepayment privileges (e.g., lump-sum prepayments) that won’t trigger penalty charges
    • An explanation of the prepayment charge calculation
    • Factors that could cause the prepayment charge to change
    • Customer-specific information that allows you to estimate the prepayment charge – the outstanding balance, your remaining term, the interest rate
    • If IRD calculations are involved, an explanation of how the comparison rate is determined and where it can be found (e.g., on the lender’s website)
    • Where to find a financial calculator to estimate the prepayment charge
    • Other charges and how they are calculated if you prepay your mortgage
    • How to speak with a staff member who knows about mortgage prepayments
    • Online financial calculators. These are posted on the lender’s website and come with guidance on how they can be used to estimate your prepayment charge.
    • Toll-free telephone support. This provides access to staff members who are knowledgeable about mortgage prepayments. They are able to provide an oral or written estimate of the prepayment charge as requested.
    • Information on factors relating to prepayment charges. This is on the lender’s website and also available upon request. The topics covered include:
      • Fixed-rate vs. variable-rate mortgages, open vs. closed mortgages, and long-term vs. short-term mortgages
      • How to pay off a mortgage faster (e.g., by increasing the amount or frequency of regular payments)
      • Ways to avoid prepayment charges
      • How prepayment charges are calculated, with specific examples
      • Actions that could trigger a prepayment charge
      • A written statement. This must be provided if you are making a prepayment that results in a prepayment charge. The statement includes:
        • the charge amount
        • how it was calculated (if the IRD is used, specific components such as the comparison rate must also be provided)
        • the time period for which the charge is valid
        • factors that could cause the prepayment charge to change
        • any other amounts payable and how they are calculated

The above is a brief summary of the code of conduct, and full details are available here. It’s important to point out that some of the information above, such as the written statement, has to be provided only AFTER you sign your mortgage agreement. So don’t be afraid to ask lots of questions when you’re shopping around for a mortgage, and make sure your read the agreement carefully before signing.

Finally, where should you look for help if you feel that your lender has taken you for a ride? Just contact the Financial Consumer Agency of Canada, which is responsible for monitoring compliance.