NEWS

...continued from Page 1

Lenders can always re-loan that paid-out mortgage to another homeowner, but since it will be at a lower rate they need to make up that loss of interest somewhere, and that somewhere is the IRD.

"When you don't pay the IRD out in cash, but actually add it to your new mortgage, sometimes the recovery period could be so lengthy that it's not worth the monthly savings," says Suddaby, who has found that if the IRD is $5,000 or $10,000, when added to your mortgage, it could take up to two years to pay off and usually works out to save money in the end. But if the penalty is above (and they can climb up to $30,000), tacking that onto the mortgage can lengthen the amount of time it will take to pay off so much that you're better off sticking to the original, slightly higher rate.

And while it's always been in the fine print, the IRD has been causing a lot of outrage lately.

In fact, the number of consumer complaints related to mortgage renegotiations is rising due to mass confusion over penalties, according to a report in the Montreal Gazette.

Option Consommateurs, a non-profit consumer rights group in Quebec, told the Gazette that since interest rates began to fall in January it has received dozens of calls from consumers unsure about how much it will have to owe financial institutions if it breaks its current mortgage. The Financial Consumer Agency of Canada told the paper it received 80 mortgage penalty-related complaints since January and has decided to investigate 16 compliance cases.

Lawyer Dominique Gervais told the paper that the confusion is over the IRD because most consumers think they will only be penalized three months of interest.

"These [IRD] clauses are legal," Gervais said. "But we think that in many cases, the banks are going too far because they are making their calculation on the basis of what the posted rate was at the time of the loan and not on any discounted rate that was agreed upon with the customer."

It's a practice that is in all lender's right to do, and varies between each one. Another common occurrence is that while several lenders will calculate the IRD penalty based on the difference between your old rate and a similar, current rate, some will compare it to a discounted rate, and others, a three-year bond rate. And since the greater the difference between the two rates, the greater the IRD penalty, this can make a big difference.

But consumer rights groups aren't the only ones getting complaints, as a lot of homeowners are going directly to lenders, CRE has learned.

"We are getting a lot of calls from borrowers who had no idea about the Interest Rate Differential," said Laura Tomulka, a mortgage specialist at First National Financial. "They are shocked that they weren't told about this fee by their mortgage specialist."

In fact, she adds, many mortgage specialists don't fully understand how the IRD works themselves, which would explain why clients are calling lenders to complain about the "surprise" fee.

It's something mortgage broker Neil McJannet, in Abbotsford B.C., has been telling his clients for years.

"I tell every one of my clients that there are two penalties - the three months interest, which everyone seems to know about, and the IRD, which historically always comes back," said the ex-banker turned broker. "No one ever expects they'll be hit with something this big, and we've really only seen it twice in the last five years (once following the World Trade Center attacks and again with the recent economic slowdown). It can raise its head whenever it wants."

He said the IRD was created in the '80s when rates were so high and "everyone wanted out," leaving the lenders to come up with a way to make their money back. Part of the reason why people don't seem to know enough about it is that variable rates, which aren't affected by IRD penalties, have been increasing so much in popularity that it has never really come up.

On top of that they can still be confusing, as mentioned above, when each lender calculates it in a different way. And even when you do take the proactive approach and ask your lender for a penalty quote, as time passes and rates drop, the penalty changes. Some lenders will honour a quote for 30 days at the most, but some won't honour it past the day it's written.

McJannet devised an excel spreadsheet the last time IRDs were common which he e-mails out to clients explaining how it works. While it can't pinpoint the exact penalty, and it can give the client a good idea of where it might sit. Simply put, it's "when rates go down, the IRD goes up," he says, but the actual calculation isn't much more difficult to anyone with excel or a calculator.

First, take the principal balance, multiply it by the difference between the previous high interest rate and the newer low interest rate [i.e. if the rate was 5.5 per cent, but now is 3.5 per cent, this number would be two] and divide that by 12. Multiply that number by the remaining months on the mortgage term to get the IRD payment owed. Most lenders will either take that, or three months interest, whichever is greater.

Before recommending to any client whether or not to keep their higher rate or renegotiate for a lower one, First National's Tomulka will calculate the IRD penalty, then determine how much interest would be paid over the course of the mortgage at the current rate and compare that to the interest that would be paid with the newer rate.

"If the IRD fee is less than the savings between the two rates then it's worth renegotiating," she said. "If not, then perhaps making a lump sum for the same amount and keeping your old rate would be more beneficial to the client."

McJannet performs a similar service for his clients, and said it's worth early renewal for about only 20 per cent of them.

"If someone has received an inheritance, for instance, and wants to pay their mortgage off early but faces a penalty larger than what they would save in interest, I tell them to put it in the bank," he says, adding that "there is no forgiveness when it comes to the IRD. Even if the client is doing something like selling their property, lenders need to make up that money, so it's always something that should be calculated and considered."

That said, since the nature of the IRD changes from lender to lender, CRE recommends talking to your bank or your mortgage broker before making any early payments to your mortgage outside of its regular pre-payment terms. Compared to the penalty you could face, that old rate doesn't look so bad.

Call Lisa Au for more information
Invis Mortgage Associate
P: (403) 681-0217
F: (403) 277-8079