They say that a good financial consumer should ask questions and be able to get clear and open answers. When it comes to mortgage breakage fees, there is a secret ingredient that the lenders don't feel an obligation to share. This is wrong and must be changed by law. Here is my story.
I took out a mortgage a couple of years ago. It was a five-year fixed mortgage at 3.50 per cent.
As you may know from a previous column, I am concerned about where interest rates will be in three years when I need to renew my mortgage. I believe there is a real risk that interest rates will move up fairly quickly once they start to move – although they will likely remain very low for at least another year.
Given that I can get a five-year fixed mortgage today for as low as 3.19 per cent, and not need to worry about interest rates for another five years – I am considering breaking my mortgage and locking in for another five years.
Here is where the problem lies.
I have no clue what my breakage costs will be. Only the bank does. Unlike even the dreaded deferred sales charge mutual funds and other financial products with 'buried fees', my mortgage breakage cost truly is a mystery. It can't be found in the fine print. I have read my mortgage contract. I am a Certified Financial Planner (CFP), who helps clients with many of their mortgages. I still have no clue what my breakage cost is.
How can this be? How can mortgage lenders not disclose this?
My mortgage contract from TD Bank does explain how to calculate the breakage cost by using what is known as the Interest Rate Differential (IRD), but it doesn't provide the numbers required to figure it out. In order to complete the formula, I need to know my current interest rate, the current posted TD rate for a three-year mortgage (because this is roughly what is left in the term), the current amount owing on my mortgage, the term left in the mortgage, and then the mystery ingredient.
The mystery ingredient is my 'discount rate.' The discount rate is determined by subtracting my 3.50-per-cent mortgage rate from the posted five-year mortgage rate at TD Bank on the day my mortgage was set up.
One problem. The posted rate was never discussed with me. It was never relevant to mortgage discussions. In fact, it wasn't even put in my contract – anywhere.
Who cares what the posted rate is? Only the most unscrupulous bank employee would ever charge a client the posted mortgage rate. Everyone knows that the real rate is much lower.
Apparently though, when it is time to break a mortgage, the discount rate is key.
So, how do I find out my discount rate? I have to call TD Bank and ask them what it is. It takes them a little time to look it up, but that is OK. They can use that time to convince me not to leave TD Bank.
Good news for TD Bank. It turns out my discount rate was 1.9 per cent. This means that my breakage cost is going to be very high. TD would be pleased to 'blend and extend' my mortgage or provide many other helpful solutions. Of course, the discount rate serves only one purpose. It is to ensure that the mysterious breakage cost is extraordinarily high. This way, TD can keep my mortgage business, or if not, at least get paid a large fee.
I don't have a problem with a breakage cost on a mortgage. It is a contract, and if I don't want to keep my end of the bargain, I understand there should be a cost.
The problem is that TD and other lenders need to disclose these breakage costs in the open. They knew the discount rate on my mortgage at the time they finalized the mortgage. They could and should have put it in my mortgage contract, but they purposely do not include that information. If they did disclose it, people will understand how much they have been gouged, and put pressure on lenders to lower the fees. It will also allow people to break their mortgage without having to undergo a sales pitch from their lender.
I asked TD Bank to comment on their breakage fee policy for this story, but did not get a response. I was told in my discussions that many people complain about the breakage fee. Big surprise.
It is time that lenders like TD Bank are forced to put the discount rate in their mortgage contracts – and stop hiding these fees for their gain, and our pain.
Ted Rechtshaffen is president and CEO of TriDelta Financial Partners, a firm that provides independent financial planning advice. He has an MBA from the Schulich School of Business and is a certified financial planner. He was vice-president of business strategy at a major Canadian brokerage firm.
Follow Ted on his blog at The Canadian Financial Planner.