Unexpectedly large mortgage prepayment penalty

Mr. W had a mortgage with his bank, and wanted to know what penalty he would be charged if he paid out his mortgage early. Mr. W was told that the penalty would be $2,300. He was also made aware that this amount could be significantly higher if five years or less were remaining on his term. At the time of this call, this second clause did not apply.

In the end, Mr. W decided to transfer his mortgage to another bank. Shortly after he did this, he received a payout statement that showed his actual prepayment penalty would be nearly $12,000. Stunned by this figure, Mr. W asked his bank for an explanation.

In its response, the bank explained that since the remainder of the term was now less than five years, the prepayment penalty had to be calculated on a much higher interest rate. Mr. W decided to pay out his mortgage despite the large penalty. Mr. W then complained to his original bank that it did not give him all the required information and as a result they should refund the difference between the original penalty quoted and the one actually charged. The bank refused, and Mr. W brought his complaint to OBSI.

Complaint not upheld

When investigating mortgage prepayment penalty cases, we examine the signed agreements between the client and the bank and review the accuracy of the penalty calculation. We also look at the manner in which the client was informed of the penalty before they proceeded with the mortgage transfer. In Mr. W's case, we found no errors. Our investigation showed that Mr. W knew that his penalty could increase significantly when the remainder of this term was less than five years. The fact that the client was not told all the specifics of the calculation did not change the fact that he had the necessary information to make an informed decision. In addition, if he had looked carefully at all of his mortgage information, he would have been able to see that he was approaching the date when he would fall within the five-year period previously communicated. OBSI did not recommend compensation.

(2010)