Below is a guest law blog article on changes to mortgage penalty rules under Canadian Law.
The Canadian Government announced some major changes to its legislation this January to make sure that the Canadian consumers are protected. There have been a lot of major changes made to mortgage loan section of the Canadian Law. Mortgage Penalty Rules was one of the important areas that underwent changes.
Background of mortgage penalty rules
The penalty rules have been changed to standardize the calculation of penalty for refinancing mortgages. In the year 2009, the Federal Government announced that it would “standardize the calculation and disclosure of mortgage prepayment penalties”, which is now being acted upon.
Many banks and other financial institutions have been asking the borrowers to pay penalties that are huge. The calculation methods for penalties are not uniform and sometimes they are so complex that it is very difficult for a common man to understand. The Prepayment Rights Act of Interest Act requires the borrowers to pay a penalty of three months’ interest rate, if they agree to prepay the entire loan amount with the interests. But most of the banks and lending institutions look into other factors, when it comes to the penalty.
Lenders are more interested in the Mortgage Interest Differential or the Interest Rate Differential (IRD) of the mortgages today. The IRD consists of period of the loan still left in the loan term, the unpaid part of the loan including the payment and the interest for the loan term, and the prevailing market interest rates when imposing penalty on the borrowers. The market rates of affect the Interest Rate Differential largely. The new regulations are to be introduced to protect consumers from these unfair penalties.
What you can expect from the changes?
Lenders often use formulae, which are complicated and are not comprehensive. The Federal Government requires banks to make some changes in the way the penalty is calculated so that the customer can know that he is not being ripped off. It requires the banks to use a standardized formula that is simple to understand and easy to use. The consumers should be able to calculate for themselves how much penalty they will have to pay by making use of this formula. There has to be a structure to the formula that can be broken down. This ensures a simple flow to the way the penalty is being calculated.
The formula will include many variables that will have to be explained to the consumer before imposing penalty so that he or she can understand that the amount of the penalty is fair. The banks should also work and come up with a way to explain the steps from the beginning to the end to the consumer. If possible, they can take the help of spreadsheets and other resources to enable a consumer to understand how the amount was reached. There are many calculators available online to determine the mortgage loans. So if a lender is able to come up with such resources, it would make the calculation of the penalty easier for the consumer.
Author Bio :
Penny Cooper is an expert associated with Mortgage Broker firm Mortgage Central. The firm has experts assisting people with Home Mortgage, mortgage refinancing and debt consolidation areas.