The Canadian Mortgage Pre-Payment Penalty Scam

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– You are about to learn the great Canadian mortgage penalty scam.

Statistical fact: 65% of Canadian mortgage holders pay a penalty during their mortgage term.

That number of mortgage clients in Canada paying penalties must pump up the banks margins by a tidy bit for sure.

I tried to find out how much the banks “earn” annually from these criminal mortgage pre-payment penalties.  Nothing online…

I tried to find out the average Canadian mortgage penalty…nothing online... hmmm…

The Americans Must Pay Penalties Like Canadians, right?

In the United States, mortgage pre-payment penalties can exist but they are not universally applicable. Whether or not a mortgage includes a pre-payment penalty depends on the terms and conditions of the specific mortgage agreement.

Traditionally, pre-payment penalties were more common in mortgages, particularly in subprime and adjustable-rate mortgages. These penalties were designed to discourage borrowers from paying off their loans early or refinancing before a specific period, typically within the first few years of the loan. The penalties were often based on a percentage of the outstanding loan balance or a specific number of months’ interest.

However, regulations and market practices have evolved, and today, many mortgages in the United States do not have pre-payment penalties.

Regulation and Dodd-Frank

The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in 2010, established rules that made pre-payment penalties less common for most mortgage types.

Additionally, conventional mortgages, which are the most common type of mortgage in the U.S., typically do not have pre-payment penalties.

I surveyed a few friends I have down south and they’d never heard of a mortgage pre-payment penalty.  When they want to pay off their mortgage, they go to the bank and pay it off.  No extra penalty fees required.  One of my US friends said, “Isn’t the interest they charge enough?”

Apparently, not for the Canadian banks

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Main controversial issue for major Canadian banks

Canadian banks are becoming increasingly concerned by discussions surrounding their fixed-rate mortgage penalties.

Competitors continuously exploit stories of exorbitant big 6 bank penalties to undermine big bank credibility and the media eagerly amplifies these narratives.

Of particular note is the Ombudsman for Banking Services and Investments’ 2018 Annual Report, which revealed that mortgage prepayment penalties remained a prevalent consumer grievance.

This report underscores the significance of considering fair penalty lenders when making mortgage financing decisions versus big penalty big 6 banks particularly since most borrowers opt for a 5-year fixed mortgage and end up breaking it prematurely.  65% to be exact.

Anticipate a surge in such discussions as mortgage penalties reach unprecedented levels.

This is one of a few reasons to consult with a professional mortgage broker before signing for a mortgage.  Learn more HERE.

Canadians terminate or change their mortgages frequently

Terminating a mortgage earlier than expected is more common than people realize. Life circumstances can change unexpectedly, such as the need to upgrade one’s home, refinance for debt consolidation, take advantage of lower interest rates, or face separation or relocation.

Any of these situations could necessitate breaking a mortgage agreement and lenders will ding you any chance they get.

It is crucial to understand that the same borrower, with the same term, could end up paying nearly three times or worse as much to exit their mortgage with a Big 6 bank versus other fair penalty lenders.

I say “fair penalty lenders” but it seems unfair to charge penalties at all seeing as the practice is almost unheard of south of the border!  Unfortunately Canada has these penalties and we need to plan to avoid them.

I’ve said this to clients in the past, “Lenders are all going to screw you with mortgage fees, administration charges and especially penalties.  My job is to ensure you get screwed the least.”  How very eloquent.

The number of frustrated individuals suffering financial harm due to mortgage termination will continue it’s skyrocketing trend as long as people stand for the mortgage penalties overall and continue to blindly borrow from big Canadian banks vs fair penalty lenders.

Avoid becoming one of these frustrated individuals.  Ask Huber Mortgage for advice!  Call 250-212-7954 or email at

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Here are some general details and criticisms about Canadian bank mortgage pre-payment penalties:

  1. Calculation Methods: The calculation of pre-payment penalties can vary among different banks, and they typically depend on factors such as the outstanding mortgage balance, the interest rate differential (IRD), or a combination of the two.
    • Interest Rate Differential (IRD): This method calculates the difference between the interest rate on the mortgage contract and the current interest rate at the time of pre-payment. The penalty is typically based on the higher of the two rates and the remaining term of the mortgage.
    • Three-month Interest Penalty: Some lenders may charge a penalty equivalent to three months’ worth of interest on the outstanding mortgage balance.
  2. Criticism: In the past, there have been instances where Canadian banks faced criticism for charging high mortgage pre-payment penalties. Critics argue that these penalties can be substantial and can sometimes act as a deterrent for borrowers seeking to switch lenders or pay off their mortgages early.
    • Lack of Transparency: One common criticism is the lack of transparency in how banks calculate pre-payment penalties, making it difficult for borrowers to understand the exact amount they will be charged.
    • Impact on Competition: High pre-payment penalties have been viewed as a potential barrier to competition in the mortgage market, as they may discourage borrowers from seeking better terms with different lenders.
  3. Regulatory Actions: In response to concerns regarding mortgage pre-payment penalties, the Canadian government and regulatory authorities have taken measures to enhance transparency and consumer protection.
    • Disclosure Requirements: Regulators, such as the Office of the Superintendent of Financial Institutions (OSFI), have introduced guidelines to ensure that lenders provide clear and consistent information about pre-payment penalties to borrowers.
    • Mortgage Rule Changes: In 2012, the Canadian government implemented mortgage rule changes that limited the use of IRD calculations for certain types of mortgages with terms of five years or longer.

Conclusions and Further Thoughts

It’s really important for Canadians to know about this penalty scam.  This is a huge profit line item for Canadian banks.  Over the amortization period of the typical mortgage, banks will charge you nearly nearly as much in interest as the principal original purchase price of the home.  Then to add insult to injury and damage people’s financial situation, criminal penalties are charged to clients just to pay back the amount borrowed in the first place.

This seemingly unjust fact of life in Canada has a lot to do with politics.  The banks have an impressive lobby and tend to tell the government what to do rather than the other way around

Until we Canadians get out our pitchforks and demand change, its up to you to connect with a professional mortgage broker to strategize how to avoid paying mortgage penalties or at least “how to get screwed the least by your mortgage lender”.  Let Huber Mortgage help you!



PS – One of my hobbies is blogging about mortgages, debt and government policy.  During the day I’m a MORTGAGE BROKER in Kelowna, BC!

Check out the Huber Mortgage Home Buyers Guide HERE

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