Prepayment Penalty Calculations
“Prepayment Penalty Calculations Continue To Be Foggy For Most Borrowers”
Mortgage prepayment penalty clauses and calculations are some of the most difficult things anyone can try to understand in the world of consumer finance and perhaps beyond.
The major banks in particular are famous for providing very cryptic language that can be difficult to understand and even harder to apply to your mortgage if and when you get into a situation where you are looking at prepaying the mortgage outside of the allowable provisions that don’t invoke a penalty for doing so.
Consumer frustration has built to the point that class action lawsuits have been filed against mortgage lenders with the plaintiff’s claiming that the prepayment penalties calculated and charged were not appropriate or enforceable.
The purpose of a prepayment penalty is allow a mortgage lender to not be placed in a loss position on a mortgage when interest rates are falling.
Mortgage lenders provide funding on a margin between their own cost of funds and the mortgage rate provided. If a borrower prepays the mortgage during a time when interest rates are lower than when the mortgage term was issued, then the borrower will not be able to replace those funds in a lower interest rate market without incurring a loss or at the very least a lower profit margin.
So while the applicability of a prepayment penalty makes business sense, mortgage lenders have not gone out of their way for the most part to make the wording and the calculation of the penalty easy to understand for the borrower. And in the case of some of the class action lawsuits, the claims speak to vague or unenforceable wording being used.
Whether these lawsuits hold any water or not is yet to be seen. But the reality here is that the mortgage industry as a whole as a ways to go to make the understanding and application of the prepayment penalty more customer friendly.
And we are starting to see this with certain lenders. We can only hope that the trend to greater transparency and clarity with this issue will continue.
In the mean time, if you are entering into a mortgage that has a prepayment penalty clause, make sure that you take the time to understand it so that if and when it becomes applicable to you there aren’t going to be any surprises.
One of the ways to gain greater insight into prepayment penalty clauses provided by various mortgage lenders is to work with an experienced mortgage broker who can guide you through the nuances from one mortgage lender to another and put you in a position to make a more informed decision when it comes to selecting a mortgage option.
About the Author Joe Walsh
I'm a Toronto Mortgage Broker that arranges mortgage solutions on residential and commercial real estate property. With over 30 years of mortgage financing experience, I'm able to quickly assess your financing requirements and provide relevant solutions for your immediate consideration. Joe Walsh Google+ YouTube Channel