Dispute over mortgage prepayment terms

A couple decided to sell their house and buy one better suited to their needs. They contacted their bank and inquired about their financing options for their future house. They also asked about the effect an early discharge would have on their existing mortgage and were advised that an early discharge would result in the bank charging them a $4,000 prepayment fee.

Despite their unhappiness with the amount, the couple went ahead and bought a new house a few months later. When it came time to close the deal, the customers were told that the prepayment charge could not be avoided and further, it would now be $5,900. The couple learned that just a few weeks prior the calculation switched from using the 3-year to the 2-year mortgage rate, and this resulted in the increased amount.

The couple complained to us that the bank failed to properly disclose all the consequences that the timing of the discharge would have on their prepayment. Also, since the new mortgage was for a higher amount than their old one, the customers felt they should be able to discharge their first mortgage without paying anything extra at all.

We noted that the customer's mortgage contract allowed the bank to charge a prepayment fee. However, since the fee had been a significant concern for the customers, and they were in regular contact with the bank while they searched for a new house, OBSI concluded that the bank should have better informed its customers. By advising the couple of the impact the date of the discharge would have on the calculation, they would have been able to make a better-informed decision.

Ultimately, we were not convinced the couple could have been able to discharge their mortgage before the date the calculation switched, and recommended that the bank pay them half of the difference between the prepayment charge that the couple paid and the amount they would have been charged prior to the switch in calculation dates.

(2004)