Regulations may be coming for mortgage prepayment penalties
With interest rates as low as they've been in years, many people selling their homes or refinancing have been faced with tremendous prepayment penalties. Although you can negotiate the penalty if you stay with the same lender, a lender isn't going to waive a prepayment penalty completely unless they can charge you a higher interest rate for the term of the loan. 
The penalties are based on what is called ‘the interest rate differential', essentially, the difference between the rate you are paying and the rate the lender could charge you, or someone else, for a new loan.
If you know you're going to be breaking your mortgage early, and you've sat down and tried to calculate your prepayment penalty, good luck. Even if consumers understand the basic concept behind the interest rate differential, calculating what this means in real terms is beyond most people's ability. Calculation of the penalties is complicated by the fact that the interest rate differential is sometimes calculated using posted rates, rather than the ‘discounted' rates that consumers actually pay.
The Finance Minister is considering introducing regulations to standardize how prepayment penalties are disclosed to consumers, and how they are calculated.
If you have a complaint about a mortgage prepayment penalty and you're getting nowhere with your lender, you can always file a complaint with the Ombudsman for Banking Services and Investments.
This blog is intended as general information only and does not constitute legal advice. If you need legal advice, please speak to a lawyer.
Kerry Fox is a real estate lawyer practising in Nepean, Ontario.
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