According to an informed mortgage department rep, at PC Financial, all 5 major banks were sued almost two years ago for accepting “pre-payment” payments not on the discrete mortgage re-balancing dates, as per the standardized contract. Because of that lawsuit, two years ago, I lost $400, today. Read on to not let it happen to you. If I had known sooner, I could have saved the minor fee.
Picture this scene. A home owner wants to use some of the penalty free pre-payment, to increase equity in their home, and reduce the mortgage payments before their 5 year term is up. Before the lawsuit, the bank would say “Sure, we can take that cash, today, and on the 1st of next month, your new payment will be lowered to $XXX”. That’s how I figured it would work, but the lawsuit slapped the banks hands for being flexible, and now they choose to only accept payments on the dates when mortgage payments are also collected.
See, the banks used to take pre-payment money any given day of the month and applied the same flat calculations. The legal document (the one with all the fine print, borrowers sign when they get the mortgage) gave them the right to not bother to account for the (negligible) difference in present value of paying down your mortgage on say the 10th vs the 20th of the month. Ie, if you paid down $25K worth of mortgage on the 10th, by the banks flat calculations (which they were legally allowed to do) it had the same effect as paying down your mortgage on the 20th. Somebody got mad about this, and sued, and won. So, Banks said “Fine, we’ll stop (being flexibly) and accepting payments except for recalculation days (days when we regularly just collect a mortgage payment)”.
Now, since I’ve sold my house on the 15th of April, with a close of the 30th of April, I don’t have a mortgage payment date in between. So there is no recalculation day where PC Financial will collect my ~$25K of pre-payment. Since there is a penalty, which is a function of the outstanding debt, due when the mortgage is broken I’m forced to pay the penalty on my entire outstanding mortgage, rather than paying down my pre-payment and paying just a penalty on the remaining 4/5ths of the debt. The penalty for breaking the mortgage early, on 1/5th of debt is approximately $400. The conclusion is, if I would have closed the sale of the property on the 1st of May, I could have used my pre-payment privileged and sent them a check for the ~$25K on the first of May, but since the deal closes on the 30th of April, I’m screwed out of $400.
Thanks big banks…keep up the good work *rolls eyes*