Clarifying Mortgage Penalties

Last month, the federal government published a Mortgage Prepayment Code to ensure borrowers are better informed by lenders (federally regulated institutions) when it comes to situations where mortgage prepayment penalties may be charged – namely, for the purpose of clarifying interest rate differential (IRD). This is a positive step, because IRD calculations and penalties have traditionally been very confusing to borrowers. IRD is a charge many borrowers face when paying off a mortgage prior to its maturity date, or by paying the mortgage principal down beyond the amount of annual allowable prepayment privilege limits. And IRD penalties can prove quite costly depending on the remaining mortgage term. IRD is based on: 1) The amount that is being prepaid; and, 2) An interest rate that equals the difference between the original mortgage interest rate and the interest rate that the lender can charge today when re-lending the funds for the remaining term of your mortgage. Most closed fixed-rate mortgages have a prepayment penalty that is the higher of three months’ worth of interest or IRD. The new code requires that lenders “provide the information in language, and present it in a manner, that is clear, simple and not misleading.” The Code requires lenders to provide, among other things: 1. Annual Prepayment Information. This includes such things as prepayment privileges that the borrower can use to pay off their mortgage faster without having to pay a prepayment charge. Examples include making lump-sum prepayments, increasing the regular payment amount and increasing the frequency of the payment to weekly or bi-weekly. Lenders

must also inform borrowers of the dollar amount of the prepayment that the borrower can make on a yearly basis under the terms of their mortgage without having to pay a prepayment charge. As well, an explanation must be provided on how the lender calculates the prepayment charge for the borrower’s mortgage (for example, a certain number of months’ interest or IRD). 2. Information Provided When Borrower Faces a Prepayment Charge. If a prepayment charge applies and the borrower confirms to the lender that the borrower is prepaying the full or a specified partial amount owing on their mortgage, the lender will provide, among other things, a written statement to the borrower including the applicable prepayment charge and a description of how the lender calculated the prepayment charge (for example, whether the lender used a certain number of months’ interest or IRD). If the lender used IRD to calculate the prepayment charge, the lender will inform the borrower of: the outstanding amount on the mortgage; the annual interest rate on the mortgage; the comparison rate that was used for the calculation; and the term remaining on the mortgage that was used for the calculation. 3. Enhancing Borrower Awareness. To assist borrowers in better understanding the consequences of prepaying a mortgage, lenders will make available to consumers information on the following topics: differences between various types of mortgages; ways in which a borrower can pay off a mortgage faster without having to pay a prepayment charge; ways to avoid prepayment charges (for example, by porting a mortgage); how prepayment charges are calculated, with examples of the prepayment charges that would apply in specific circumstances; and actions by a borrower that may result in the borrower having to pay a prepayment charge. Click here for full details of the code requirements from the federal finance department. As always, if you have questions about mortgage penalties, or other mortgage-related questions, I’m here to help!

Introducing EnRICHed Academy

Dominion Lending Centres is proud to announce the launch of EnRICHed Academy’s “Smart Start for Financial Genius”! This program has been designed to educate young adults (13-23) and their families on the fundamentals that build wealth in an entertaining, funny and entirely interactive way. No program like this currently exists, and the need and demand across North America is at an all-time high. This is our way of giving back to communities across Canada, ensuring our youth embrace financial literacy. Click here to view the EnRICHed Academy trailer on YouTube. Why we created EnRICHed Statistically, 6 out of 10 Canadians live paycheque to paycheque, which means if their income stopped for only one pay period they’d have to rely on a Line of Credit or Credit Card to make ends meet  From 1989 to 2006, total credit card charges rose from $69 Billion to $1.8 Trillion; a 2,600% increase  Today the average household credit card debt is $16,007 The yearly savings rate of an average Canadian has gone from over 12% of income in the early 90s to under 2% today Household debt in Canada has more than doubled over the past 10 years 84% percent of college graduates in North America indicated they needed more education on financial management topics. Parents expect the schools to teach financial literacy and schools expect parents to. The fact is, most parents and teachers are ill equipped to teach students and kids on this subject and, therefore, don’t

The average college graduate is $23,186 in debt What EnRICHed looks likeThe program comes in a box and contains 5 DVDs of entertaining but highly educational video on creating a foundation for building wealth. There is a 100-page workbook that the family will work through that includes activities and exercises as well as other materials that correspond with the topics covered in the program. 15 key topics covered by EnRICHed Understanding money 101 Why some people don’t save money… no matter how much they make How much we actually spend at an early age Saving money vs Making money Why starting to save at an early age is critical The magic behind compound interest and how it works How to buy your first investment property by the age of 23 How to get into the stock market How credit cards work Good debt vs Bad debt How taxes work on a paycheque Why goals are critical to building wealth The difference between a dream and a goal How to write down goals and take action The importance of building your personal brand Feel free to give me a call or send me an email if you’d like to learn more about EnRICHed Academy.