If you have ever tried to break your mortgage early you know the penalty can be expensive and the process tedious. But the benefit of paying your mortgage off before the term ends or taking it to another lender for a better interest rate can make a lot of financial sense. Now, a code of conduct has been introduced that promises to make these often confusing mortgage penalties easier to understand.
New Code Means More Clarity
The new government code is working to make the process of mortgage prepayment and breaking a mortgage agreement more accessible, and to bring transparency to how penalties are calculated. Called the Code of Conduct for Federally Regulated Financial Institutions – Mortgage Prepayment Information, its purpose is to ensure banks provide enhanced information about mortgages and the possible costs associated with prepayment. It’s part of an effort to assist borrowers in making informed decisions about their mortgages, according to the Financial Consumer Agency of Canada.
Here are a few measures promised by the financial instItutions:
On their annual statement borrowers will now get details of their prepayment privileges. The statement will show mortgage holders the options they have to pay their mortgage faster without paying any penalty and how the lender would calculate the prepayment penalty if they wanted to pay their mortgage off now. As always it will detail the interest rate on the mortgage and how much is still owed.
Transparency Around Charges
If a borrower is subjected to a penalty charge as a result of paying their mortgage early, the lender must state very clearly what that charge will be. This includes describing how it was calculated and events that could cause the charge to change over time. It will also show if there is any other money or charges the borrower will have to pay back.
In addition to increased transparency, lenders are also taking steps to better educate their clients on mortgage basics, for example, the difference between a fixed and variable mortgage, open and closed mortgages, as well as long and short-term mortgages. They’ll also strive to give borrowers alternative options to pay off their mortgage without facing a penalty.
Accessible Consumer Tools
Lenders are now promising to have penalty calculator available on their website. This will help borrowers calculate the penalty for prepayment charges. This estimated cost will help borrowers make a much more informed decision about their mortgage situation.
Direct Access To Advice
Lenders are to provide toll free numbers for clients with mortgage questions looking to connect with an expert. This will make it easier for consumers to obtain information about their specific mortgage needs, the penalties they may face, as well as their options. Staff members on the line will also be able to provide to a borrower a written statement of their prepayment charge
The Code Is Still Voluntary
Its important to note the code is voluntary and financially institutions are not obliged to comply, but most major banks are embracing these changes hoping it will help Canadians make more informed decision about their mortgage.
“The mortgage payment is usually one of a homeowner’s biggest expenses. Looking at ways to pay off a mortgage faster or changing it to get a better rate can save a lot of money, but might also result in prepayment charges,” stated Ursula Menke, Commissioner of the Financial Consumer Agency of Canada. “Consumers will now be able to make decisions based on current information about those charges and how they will be calculated.”