Royal Bank Penalty Break Down - Legalized Fraud

[RobertKlein]

I just spent 2 days breaking down RBC Interest Differential Break Fee. It's legalized fraud:

http://www.robertkleinmortgagegroup.com/1/post/2013/10/how-royal-bank-creates-massive-profits-from-mortgage-penalties.html

 

[RedlineBrett]

All this would be spelled out in your mortgage contract and is hardly 'fraud'. Yes payout penalties suck, but if you aren't going to keep the loan for five years, why would you sign a five year term?

 

[Thomas Beyer]

Remember the golden rule: He who has the gold makes the rules.



Know the rules of your business, and play by them.



If you don't like the rules, play a different game !

 

[housingrental]

Robert: If you have a tenant move in on a year lease, and they want to move out in the second month because they are moving towns on no notice, do you refund their deposit and pro-rated second month rent and let them out of lease without finding someone to take their spot?

 

[RealtorAssist]

Some controversy has risen on the penalty blog post:



http://www.robertkleinmortgagegroup.com/1/post/2013/10/how-royal-bank-creates-massive-profits-from-mortgage-penalties.html

 

[3canctheayr]

Some things people should be aware of if they plan to break a mortgage;



Almost all mortgages have some sort of a prepayment privilege, ie. a 10/10, 20/20 etc. These prepayments are usually based on the original amount of the mortgage. Many of these are based on the calendar year.



When you break a mortgage, the penalty is only supposed to be calculated after the maximum lump sum prepayment amount has been subtracted from the mortgage.(assuming you have this privilege) However, almost nobody knows this and the banks won't do it unless you demand it. (It became law in Canada in or about 2005). Most bankers probably aren't aware that legally this is how it's supposed to be done.

If you have a 20% prepayment option on a mortgage that was originally $300,000.00, you will be able to reduce the amount on which they calculate the penalties by $60,000. Don't be surprised if the bank puts up a fight on this. Remind them it's the law.



If you know ahead of time that you plan to break a mortgage, try to do it early in the new year. Before the existing year is out, obtain a secured line of credit with a cheap rate and prepay the maximum you can against your mortgage.

Then use the legal maneuver I noted above to prepay the next lump sum at break time. On a 20/20 mtge, this will reduce your penalty by up to 40%. You then pay out the LC at sale of the property, or on refinancing.

You will likely pay a bit more in interest on the LC, but it will save you a lot more in penalties.

 

[Cory Sperle]

What a coincidence as I find myself in this exact situation. Normally I always go variable, but this case I forgot the rule of man plans, god laughs, so to speak. Yes RBC uses very "creative" math to calculate the penalty, and in my case the penalty is enormous. Does it suck? yes, can I blame anyone but myself? no. After pouting for some time, I did some more investigation and found as mentioned above, the prepayment privilege which in my case is 10%. So far so good. Only other options are have someone assume, or port it. Assumption is out of the question, since rates are less than they were two years ago, which is why the penalty is so high. If rates were higher now, it would have been the greater of 3 months interest, or the magic formula. The only option left is to port it to another property within 90 days, so selling our home is a blessing in disguise, as it has become a perfect opportunity to pick up a new rental property. The main lesson I learned here is to resist the urge to lock in, as life can change in a hurry!

 

[RealtorAssist]

Curious, how big was your "discount". You can find this on your mortgage statement.

 

[RealtorAssist]

Great comment, this is very smart. Thanks for posting.

 

[Cory Sperle]

What RBC told me was this:


last April the 7 year posted was 5.95%, minus your discount of 2.46 and then as
of now the 5 year posted is 5.24% minus your discount of 2.46%.


Hence this mumbo jumbo and confusion added up to an astronomical penalty, comparable to a commercial mortgage penalty. For myself I will never get a fixed rate mortgage for the personal residence, but if you do have the option to port it over to another one if you move. Better yet no mortgage at all.