What Banks Don’t Tell You About Penalties
When you take out a mortgage, you’re offered an interest rate — sometimes a very attractive one. But few institutions take the time to explain the real cost of ending your mortgage early.
This penalty, often referred to as a “prepayment charge,” can reach several thousand dollars, especially if you’re with a traditional bank.
The Trap of Posted Rates
Let’s take an example. You sign a $500,000 mortgage at an effective rate of 5.00%. However, your bank calculates the penalty using a posted rate of 6.50% — a rate that no client actually paid.
Three years before your term ends, they compare that 6.50% to their current posted rate of 4.50%, creating an artificial 2.00% rate differential.
Penalty Calculation:
$500,000 × 2% × 3 years = $30,000
Result: A $30,000 penalty — even though you thought you had a reasonable 5.00% loan.
Chartered Banks: The Highest Penalties
The following institutions generally use posted rates in their penalty calculations, which significantly increases the cost of breaking a mortgage:
- Royal Bank of Canada (RBC)
- Bank of Montreal (BMO)
- Toronto-Dominion Bank (TD)
- Scotiabank
- CIBC
- National Bank of Canada (NBC)
- Desjardins
With these lenders, the penalty is often based on a larger rate gap than what actually applies.
Virtual and Direct Lenders: A Fairer Approach
Some lesser-known lenders offer much more transparent methods. Their calculations are based on the actual rate granted to the client, without any manipulation.
Reputable lenders include:
- First National
- MCAP
- CMLS
- Merix Financial
- Manulife Bank
- Lendwise
Comparison:
With a signed rate of 5.00% and a current 3-year rate of 4.30%, the differential is 0.70%.
Penalty Calculation:
$500,000 × 0.70% × 3 years = $10,500
Here, the penalty is three times lower than with a chartered bank.
The Silence of Banks… and the Importance of Good Advice
Most clients have no idea how their penalty will be calculated. And that’s no accident — the conditions are often buried in the fine print.
The interest rate is what you’re shown. The penalty is what’s hidden.
Why Consult a Mortgage Broker?
A mortgage broker doesn’t work for a bank. They represent you and compare conditions across multiple lenders.
They consider:
- The interest rate
- The penalty if you break the contract early
- Contract flexibility, portability, and more
This kind of guidance helps avoid costly mistakes.
Conclusion
Two loans with the same interest rate can have vastly different financial consequences. It’s not just about the rate — it’s about the entire contract.
A low rate is attractive. A low penalty is strategic.
Before signing, always ask:
“How will my penalty be calculated if I end the mortgage early?”
The answer is usually vague (ask to get it in writing). That’s when you realize your mortgage broker is your true ally, and why it’s essential to work with an independent, objective professional.
