A story came out last Friday about an Edmonton couple who was “devastated” to find out that they owed TD Bank $17,000 in mortgage break fees.
I was going to play devil’s advocate and point out the illogical nature of that couple’s thought process, but I figured I’d give them a break.
Now having mulled this over the weekend, I just can’t let this one slip by. I’m sorry, but if you read the article, you’ll see that the home-owners were relying on some sort of divine intervention or “have-a-heart” mindset from the bank, and I find that to be naive, irresponsible, and part of a growing trend among society where people don’t want to account for their own decisions and actions…
Sometimes I think the world is a terrible place; a place where mankind, in large part due to the anonymity and voice that the Internet provides, are more negative, judgmental, and hurtful than they’ve ever been. And you can always turn on your CBC news app at any time to read about the latest Toronto shooting or the next pedestrian struck by a car.
Then sometimes, I think the world is softer than it’s ever been, and it’s a change that’s taking away the tenacity and survival that’s helped mankind to survive for two-hundred thousand years. Political correctness run amok, socialism in the public education system that breeds a generation of mediocrity, and by God, they’ve taken fighting out of hockey!
So when I read an article like the one from Friday’s CBC, entitled, “TD Bank Client Devastated By $17,000 Mortgage Penalty,” I can’t help but see the story in two different lights.
On the one hand, we all hate banks. They’re not quite on par with Rogers and Bell, but we don’t like them. I see a headline like the one above, and think about the poor-shmuck that got hit with a $17,000 mortgage break-fee, and I feel sympathy for him, and scorn for the faceless financial conglomerate.
On the other hand, I feel as though his story underscores a dangerous trend in today’s society toward people not taking accountability and responsibility for their actions.
As I read through the rest of the article, the latter feeling won out.
Read that article in full, and let me know what you think in the end. If the comments on the CBC’s website are any indication, most people feel the same way.
But let’s backtrack for a moment and discuss mortgage break fees, what they are, why they’re present, and what you, as a responsible consumer, need to know.
Consider that when you ask the bank for a loan so that you can afford to purchase a home, with money that you do not have, you’re asking for something from the bank – something of value to you, and in return, the bank is getting something of value from you as well.
A mortgage is a contract, not unlike any other you would sign, whether it’s for employment, or goods and services, and there are terms and conditions within that contract.
As with any contract, there may, or may not, be the option of breaking, cancelling, or altering the terms and conditions, or the entire contract itself.
With a mortgage, we must remember that the bank is loaning you money according to a certain timeline, and with a certain expected return.
If the contract is for five-years, then the bank is putting their eggs in a 5-year basket; not an 18-month basket if and when you decide you want “out” of the deal. The bank has made arrangements with and for that money, and they have proceeded accordingly. There are costs associated with the bank changing course.
So when you, the borrower, decide that you want “out” of that mortgage – that contract that comes with terms and conditions, there is going to be a fee. Call it a “penalty” if you want, but it’s the same thing.
That fee, or penalty, is spelled out in the contract that the lender and borrower both sign, and whether it’s on the front of page one, or buried on page-297, it’s in there.
Now, consider that mortgage rates float, and the bank is taking on an “investment” when they loan out money.
If interest rates at the time the mortgage was signed are at 5%, and 18 months later when the borrower wants out of the deal, prevailing rates are at 3%, then the bank has an incredible asset in this loan! They have an above-market rate of return.
So if the borrower wants out of the deal – a 5-year “contract,” after only 18-months, the bank may elect to let the borrower out of the deal, but then they would turn around and only be able to loan that money at 3%, and not 5% as was the case with that 5-year mortgage.
That, ladies and gentlemen, is why we have “interest rate differentials,” and they are not, in any way, shape, or form, unfair.
“Fair” is a relative term in today’s society.
Every time the word “fair” is uttered, you almost want to follow up with the term “first world problems” just to put that “fairness” in perspective.
So if a borrower takes on a 5-year mortgage, and if that borrower wants to terminate the mortgage early, and if interest rates have changed since the mortgage was signed, then how is it “unfair” for the bank to take the IRD?
Let’s now return to the CBC article, and keep in mind before we do, that I’m not seeking to assault this lovely Edmonton couple, but they are the ones that called “Go Public” and sought the help of the media. They put themselves out there, and just as I put my opinions on this blog, along with my name, and risk taking heat from “Mike,” or “Noel,” or “Condodweller,” or anybody else on a regular basis, I don’t think it’s unfair for me to examine and potentially scrutinize these folks, their actions, and their complaints.
The Edmonton home-owners were “expecting” to pay only $4,000, based on three months’ interest.
That’s their first mistake.
Most mortgages today contain the phrase “…..the higher of three months’ interest or the interest rate differential.”
I know that these folks are not mortgage experts, but they did sign a contract. They can’t simply assume that the bank will give them the lower of the two because they want it to be so.
The CBC article explains, “The IRD is based on a complicated mathematical formula that includes the principal owing, the months remaining on the mortgage’s term, and a comparison of the interest rate the client is paying versus the rate the bank would charge for the remainder of the term.”
I couldn’t possibly disagree more.
If the IRD is a “complicated mathematical formula,” then what the hell are those first-year university students doing at Waterloo?
Now here is where things get really interesting:
For the past two years Trusz has been a board member of the Haitian Children’s Aid Society (HCAS). He’s made three trips to Haiti to help reconstruct an orphanage for 60 children in Mirebalais, in the centre of the earthquake-damaged country.
This summer, the Truszes decided to sell their home and his business and move to Haiti to help run the orphanage for up to 10 years. Trusz said the family had budgeted to live in Haiti on $24,000 a year.
“We have some money set aside for project costs, to buy land, create businesses. We’re going to be using our own money to do that – and so when all of a sudden we’re going to have $17,000 less than we thought we were going to have, we see that in human terms.”
So, it would seem to me that, and correct me if I’m wrong, these people believe that the reason they want to break their mortgage matters as far as the bank is concerned.
Is there any other way to read this?
Now I’d be remiss if I didn’t congratulate these folks for the incredible work that they do, their selflessness, and the fact that they’re doing something that literally one-in-a-million people on our planet would do.
But having said that, the idea that the mortgage break-fee doesn’t apply to them because they’re doing this humanitarian work sets a really bad precedent for society.
What if everything we did in life worked like this?
The next time I get parking ticket, should I tell the parking enforcement officer, “If you write me that ticket, I’m not donating $1,000 in clothing to Elisa House again this Christmas?”
Okay, maybe that’s different, and maybe it’s not the quite zero-sum-game that the Edmonton couple is experiencing.
But the situation still reeks of somebody who shot first, asked questions later, and then tried fruitlessly to put that spent bullet back in the gun.
A few years ago, I sold a house to clients who turned around twelve months later, told me they were getting divorced, and said they wanted to sell.
I told them that they were going to lose money – having paid land transfer tax, having to pay real estate fees, lawyers, and break their mortgage.
I told them they should find a way to keep the house, or have on person buy the other out, or for the love of God – go to a marriage counselor and work it out!
I broke down the numbers, and laid out how the fees would work, and they were aghast at the $22,000 mortgage break fee.
But the woman simply brushed it off, and said to me, “Don’t worry, I’ll call the bank tomorrow.”
I asked, “What do you mean?” I had a feeling I knew what she was getting at, but I was hoping I was wrong.
She said, “I’ll tell them that we just can’t pay that fee, that it’s ridiculous, and I’m sure we can work something out.”
Is this what we’ve come to as a society?
The level of naivety was off the charts!
“Hello, bank? This is Jane calling. You know that twenty-two large we owe you? Well we don’t really want to pay that, so we’re hoping you can just not charge it to us.”
This wasn’t quite like waiving an overdraft fee!
These people bought a house, and took out a 5-year mortgage. Did they not understand the seriousness of that commitment?
In the case of the Edmonton couple from the CBC story, it seems that they did understand the commitment, but they would just rather not have the unwanted result apply to them, on account of them somehow occupying the moral highground.
But what about the next person in line who doesn’t want to pay the break fee?
What if the next person is selling his house to pay for private school for his kid? Is that a rung down on the ladder from opening a Haiti orphanage?
What if the person after that is selling his house because he, sadly, was laid off…….for poor work performance. Then how does the bank evaluate his request to have the mortgage break fee waived?
Folks, tell me that I’m being insensitive here, but it comes with purpose.
You can’t just say, “I really want to have a child” and then after seeing how your life changes in two years, say, “I don’t want this anymore.”
How is the content of the CBC story any different?
A mortgage is serious business, and if a borrower doesn’t understand the terms or the risks, then that person should hire somebody who does.
I always recommend a mortgage broker to my clients, since I know they’ll actually explain things like mortgage break fees.
A few years back, when the “stripped-down” mortgages at 2.99% (remember when that was “low”?) were becoming all the rage, my mortgage broker was screaming about how there were no features – no portability, no pre-payment, and massive break fees!
But consumers gobbled up the low-rate mortgages without doing any homework, and you just know that somebody finding out they have to break the mortgage and get a new mortgage when they sell their condo and buy their house, is screaming foul.
And the Edmonton couple in the CBC story simply used their bank “who they had banked with for 20 years,” which is a serious no-no in today’s mortgage environment.
With naivety being the theme of this story, this couple was wrong to assume that a 20-year relationship with their bank would help them, when in today’s market, it hinders them. Banks prey on people who they know are loyal, and who they know won’t look for a mortgage anywhere else. These banks simply expect the business, and spend their time working hard for consumers at other financial institutions.
It’s a tough world out there, folks.
And I feel for the people in the CBC story, while commending them for their charity work at the same time.
But you simply can’t make decisions, and take actions, with the expectation that an unsatisfactory consequence can be altered to your liking…