Paying mortgage off too early may mean paying a penalty

January 19, 2018

Key Learnings:

Make sure any verbal agreements you make with your financial institution are reflected in writing.
Be aware of any potential prepayment penalties prior to paying off a loan in full.

In December 2010, Mr. B got a five-year fixed closed term mortgage at a rate of 3.44% with his bank. In 2013, midway through the term, the branch manager suggested switching to a “blend and extend” mortgage. This would reduce the interest rate by 0.22% but extend the maturity date to 2018. Mr. B said he was told that when a customer chooses to blend and extend their mortgage, the bank implicitly agrees to limit the early prepayment penalty to the equivalent of three-months’ interest. Mr. B chose to go with this option.

In 2016, Mr. B paid off the remaining balance of his mortgage, two years ahead of the maturity date set from the blend and extend agreement. The bank charged him a penalty of over $20,000, which they said corresponded to the terms set out in the agreement.

Mr. B complained because he believed that the bank had promised to limit the penalty. He also believed the bank made an error in its calculation. He asked the bank for reimbursement of the difference between the amount he paid and the equivalent of three months’ interest. The bank declined this request, which is why he came to OBSI.

OBSI’s investigation found that the Early Renewal Disclosure Statement and Agreement (ERDSA) signed by Mr. B in June 2013 clearly explained the interest rates and the penalty calculation in the case of a prepayment. The document included a hypothetical calculation to illustrate how the prepayment penalty would be calculated. There was no reference to three-month interest prepayment penalty that Mr. B believed was discussed. By signing the ERDSA, Mr. B agreed to all the conditions outlined.

OBSI also investigated the penalty calculation to ensure it was accurate. Applying the terms of the agreement to the facts, OBSI determined the calculation was correct and explained the calculation to Mr. B.

Ultimately, OBSI found that Mr. B had been informed about the prepayment penalties that could be incurred after changing to a blend and extend mortgage. It was also clear that the penalty was calculated according to the terms in Mr. B’s signed agreement. As a result, we did not recommend that the bank compensate Mr. B.

Complaint not upheld

(2017)