Mortgage prepayment: rights and responsibilities
Mortgage prepayment means paying more than the regular mortgage payments you have agreed to pay in your mortgage contract. If you have a closed mortgage, your mortgage agreement may include prepayment privileges, which allow you to pay more than your regular payments without triggering any prepayment charges.
On the other hand, breaking your mortgage contract, or prepaying more than your privileges allow, will generally result in prepayment charges that could cost you thousands of dollars.
If your lender is a federally regulated financial institution (FRFI), such as a bank, it must outline prepayment privileges and charges, along with other key details, in an information box at the beginning of your mortgage agreement.
By law, it must tell you how the prepayment charge will be calculated. It must also provide you with a description of the components used in the calculation of the charge. This information must be presented in a manner and written in language that is clear, simple and not misleading.
If the calculation is complex, your lender may provide a simplified example, illustration or method to help you estimate the prepayment charge.
Voluntary code of conduct
Some financial institutions have also agreed to provide additional information on prepayments under a voluntary Code of Conduct. As of January 2013, banks that are members of the Canadian Bankers Association have agreed to comply with this Code.
Lenders following the Code have agreed to provide:
- information to help you understand the factors that can affect a prepayment charge so that you can make informed decisions. It should cover the following topics:
- the differences between:
- ways you can pay off a mortgage faster without having to pay a prepayment charge
- ways to avoid prepayment charges
- how prepayment charges are calculated, along with examples
- actions that may result in you having to pay a prepayment charge such as:
- prepaying amounts that are higher than your mortgage agreement allows
- refinancing your mortgage
- transferring your mortgage to another lender
- online financial calculators to help you estimate a prepayment charge that could apply if you break your mortgage or prepay more than your prepayment privileges allow
- toll-free telephone access to knowledgeable staff who can tell you the actual prepayment charge that would apply at the time of your call. You can also ask for a written statement with the amount of the charge
- an annual statement with information about:
- your prepayment privileges, including the dollar amount you can prepay each year without triggering a prepayment charge
- how the lender would calculate a charge
- factors that could cause the charge to change
- information about your mortgage that you can use to estimate a charge, such as:
- the outstanding balance
- the time left in the term
- the interest rate
- other factors the lender uses to calculate the charge (for example, if the lender will use posted interest rates or apply any discount you have received on your interest rate)
- how the lender determines the comparison rate for charges that are calculated using the interest rate differential (IRD) method, and where you can find the comparison rate
- any other amounts you would have to pay if you prepay your mortgage, and how the amounts are calculated
- where you can find the lender’s online financial calculator and the information required to estimate a charge
- how you can speak with a staff member who is knowledgeable about mortgage prepayment, such as by calling the lender’s toll-free telephone number
- a written statement if you confirm you will be making a prepayment that will result in a prepayment charge. It must include:
- the actual prepayment charge
- how the charge was calculated
- if the lender calculates your charge using the IRD, certain information used in the calculation, including:
- the outstanding amount of your mortgage
- the annual interest rate of your mortgage
- the term remaining on your mortgage that was used for the calculation
- the comparison rate that was used for the calculation
- the period of time the charge will be valid
- any factors that could cause the charge to change over time
- any other amounts you will have to pay and how these amounts are calculated
Note that some information from lenders that have adopted the voluntary Code of Conduct, such as the written statements, will only be provided to you after you have signed your mortgage agreement.
While you are shopping around for a mortgage, ask questions about prepayment privileges and charges. Follow up with potential lenders by asking about anything that is not clear. Looking at these details closely while shopping for a mortgage could save you thousands of dollars if you want to make prepayments later.
Before signing your mortgage agreement, it is your responsibility to read and understand the terms and conditions, including those related to prepayment privileges and charges.
What you should do if you feel your rights are not being respected
If you feel that a federally regulated financial institution is not respecting your rights, contact the Financial Consumer Agency of Canada.
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