Comparing Your Actual Penalty With the Initial Estimate

When you plan a mortgage break, your mortgage broker or financial institution provides an estimate of the penalty to be paid. This figure is based on data available at the time of the request: current mortgage balance, contractual rate, lender's benchmark rate, and number of months remaining in the term. However, between the estimate and the moment the break is actually executed, several variables can change, creating a sometimes significant gap between the projected and actual amounts.

Common Causes of Discrepancy

• Benchmark rate fluctuation: if rates drop between the estimate and the break, the interest rate differential (IRD) increases, inflating the penalty. Conversely, a rate increase reduces the IRD.
• Lender's comparison rate: major Canadian banks (RBC, TD, BMO, Scotiabank, CIBC) often use their posted rate as the reference, which is systematically higher than the contractual rate. This practice widens the gap and increases the penalty.
• Balance adjustment: each monthly payment reduces your mortgage balance. A delay of a few weeks between the estimate and the break can change the calculation base, though this effect is generally minor.
• Proprietary calculation method: each lender has its own IRD calculation method. Desjardins, National Bank, and Laurentian Bank do not necessarily use the same formula as the Big 5 fédéral banks.
• Calculation error: though rare, a mistake in the penalty calculation by the institution is possible. The computer system may use an incorrect benchmark rate or wrong balance.

Posted Rate vs Contractual Rate: The Crucial Difference

The most frequent cause of significant gaps in IRD calculations lies in the choice of comparison rate. Major Canadian banks generally use their posted rate as the reference to déterminé the applicable comparison rate for the remaining term duration. This posted rate is systematically higher than rates actually offered to borrowers, as it also serves as the basis for the OSFI stress test (Guideline B-20). For example, if your contractual rate is 4.50% and the posted rate for the remaining duration is 3.80%, the IRD will be calculated on a 0.70% gap. But if the lender used the equivalent contractual rate (for example, 3.20%), the gap would be 1.30%, nearly doubling the penalty.

Interest Rate Differential (IRD)

A mortgage penalty calculation method that compares the borrower's contractual rate with the lender's current rate for a term equivalent to the remaining duration. The difference is applied to the mortgage balance, then multiplied by the number of months remaining in the term. The result is compared with 3 months of interest, and the lender charges the higher of the two amounts.

Steps to Contest a Significant Discrepancy

1. Request the full breakdown: Demand in writing the detailed breakdown of the calculation: contractual rate, comparison rate used, reference balance, number of months remaining, formula applied, and resulting amount. The lender is required to provide it.
2. Compare with your mortgage contract: Re-read the prepayment clause in your contract. Verify whether the lender is using the method described in the contract. The contract prevails in case of disagreement. In Quebec, the CCQ protects borrowers against abusive clauses.
3. Have it verified by your broker: Your AMF-certified mortgage broker has the tools and expertise to independently redo the calculation and identify the source of the discrepancy. This is a service most brokers offer their clients.
4. File a formal complaint: If the lender refuses to adjust or adequately explain the discrepancy, file a written complaint with the institution's complaint handling service. For fédéral banks, then contact the FCAC. For provincial institutions, contact the AMF.
5. Consider legal recourse: As a last resort, if the penalty contravenes the contract terms or CCQ provisions, a formal notice from a lawyer specializing in mortgage law can force a review. Quebec's Small Claims Court can handle disputes under $15,000.

Preventing Future Discrepancies

To avoid unpleasant surprises during a future mortgage break, several precautions are necessary. When negotiating your next mortgage, favour lenders that use the contractual rate rather than the posted rate for IRD calculations. Monoline lenders such as First National, MCAP, and Merix Financial are generally more transparent in this regard. Desjardins and National Bank have also adopted more borrower-friendly practices in recent years. Systematically ask your AMF-certified broker to clarify the penalty calculation method before signing your mortgage contract.