Clients of mine have had their mortgage for sixteen months with Industrial Alliance. They have to sell their house. They looked into breaking their mortgage which is at $243K @ 5.66%, with 284 remaining months left to pay, becoming due Sept 2012. They got the news this week that it would cost them $11,000 to cancel their mortgage.What??? You might be thinking…they must have had a special mortgage or the bank made a mistake. Nope. They are regular folks with a three bedroom bungalow. After buying and selling a few homes, this was their third mortgage with Industrial Alliance.
When I posted this info on Facebook, a neighbour responded by saying “I know! I was trying to get a better rate and it would have cost me $7000 to break my mortgage only to get 1/4% better. No thanks!!!”
After talking with my client, he told me that he was told that this is a new bank policy and that a lot of other banks are now getting on board. Have you heard of this? I haven’t. Even after reading the fine print of his mortgage agreement, it still wasn’t clear why it was so high. There wasn’t a formula included in the agreement and when he called the bank and after speaking to 3 people, none of them could explain it to him properly. He said that they all acted really strange on the phone, like they knew that this was immorally unjustifiably incredibly high.
He was told that if he broke his mortgage three months ago, his fees would have only been about $3600. Apparently the formula includes the interest rate. Where you really get penalized is when the interest rate that you have locked into is lower then prime.
How could this happen? Why wasn’t this explained to him since he’s been doing so much business with them…and why wasn’t it grandfathered in? I don’t have the answers and so far, neither does he or anyone at the bank for that matter.
My job is to help facilitate buying/selling a home for my clients. It is suppose to be the most important money decision of our lives, so we are told. I find the product and facilitate the sale, making sure all legalities have been met. Legally I have to comb through the offer and make sure that my clients understand 100% of it. I have never, ever heard of a banker or mortgage broker doing that with any of my clients.
The banks have the most important job. They are the one’s lending the money. With what I do, if my clients aren’t satisfied, there are a lot of avenues to take for legal recourse; organizations in place to protect the buyer and seller. What do you have with a bank if you aren’t satisfied? What can my clients do? Not pay it? Take the bank to court? I’m not sure, however am interested in knowing.
This is part one of the story. As time goes on, and after much investigation part two will flourish. In the meantime, READ THE FINE PRINT. Have your mortgage broker and/or banker read through your whole agreement with you so you understand it 100%. Ask questions and know the formula if you need to cancel your mortgage before you sign, so you are well prepared for the unexpected.
PART II OF THE STORY
So after talking with a mortgage broker, nothing has changed. These supposedly new policies have been around for over 25 years and are part of our federal law. Why my client was told all this hooplah about new policies and why couldn’t anyone answer him properly, I don’t know. What I do know is that unless the rates go up in the next two months, he will be paying the $11,000.
To break a mortgage there are two formulas the banks use and whichever is higher, is the one you will have to pay.
#1. Three months interest
#2. Posted rate minus your rate times the number of days left on your term. Posted rate means without any discount. Walking into a bank and not negotiating the rate (apparently this is where the banks really make their money).
So because the interest rates are so low, just about everyone in the past 3-5 years who are looking at breaking their mortgage will probably be paying with formula #2, unless of course, you are getting near the end of your term. The people who have only had their mortgage for a short period of time are the ones who will be paying hefty fines. So I learned something new today. Hope you did too.
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