The Evil IRD Penalty

The IRD penalty (Interest Rate Differential) has become a very hot topic in the last year.  With the recent plunge in interest rates, many fixed rate mortgage holders, have contacted their banks to find out what it would cost to break their mortgage term in pursuit of today’s much lower mortgage rates.

Many are shocked to find out that the IRD penalty is so high, that breaking their mortgage has even become impossible for some as it would eat up any small amount of equity that they managed to build. If you are selling a home outright, add to this penalty amount, the real estate fees to sell, and many are completely trapped and unable to find the extra cash they need, in their home equity, to move away from the mortgage obligation.   The IRD penalties are often huge and in most cases are absolutely outrageous.

I have experienced the same feedback from my own clients, who have made these calls. A recent client discovered their penalty would be $20,000……..I compare this kind of penalty charge to a form of predatory lending…….perhaps similar to the behavior of a loan shark? Is that too strong a term to use? Maybe not when you consider that while the bank won’t break your legs, or threaten your family’s safety, their imposed IRD penalties could very well “cripple you financially” …..now you know why I compare it to loan sharking.

In difficult times, when many home owners are already struggling to make ends meet because of lost jobs, pay cuts, ex-spouses no longer receiving child support, others struggling to maintain support payments, and others with unexpected requirements to move a family out of a house, would it not make sense for banks to re-visit their IRD penalty policy and agree to settle for a 3-month interest only?   Everyone else has been expected to reduce their expectations, so why are the banks not doing the same for their customers, especially in light of the current financial devastation, being faced by many individuals and families today?!

Consumers and industry professionals need to stand up against the IRD penalty as it is quietly eroding and undermining the financial stability of many households who have decided to re-finance or to get out of a current fixed rate mortgage.

Here also, is a link to a website where there has been much lively discussion, about the IRD penalty, sponsored by Ms. Ellen Roseman, of the Toronto Star.   You will see many shocking personal stories of mortgage holders who have faced the reality of the IRD penalty.   It is even more shocking to see that our own government has done nothing to protect consumers, even after many have already written their personal stories to organizations like “Ombudsman Ontario”.   Here is the link:

http://www.ellenroseman.com/?p=414

I believe that there will be great negative fallout, for many home owners down the road, unless home owners are given the option to freely re-finance their mortgages to obtain lower rates now as rates remain low.   Once mortgage rates climb, those who are very new home owners, who took out 35-year amortizations 5 years ago, have accumulated little equity and at the same time increased their household debt-load, their ability to carry a mortgage renewal, at a higher mortgage rate, will be a huge challenge.

Government must step in and force banks to change the rules. The IRD Penalty should be illegal and banks should be limited to charge only the standard “3-month interest penalty” instead of the IRD penalty being used today.    I already see it choking many mortgage holders, today, who are simply looking to move out of a higher mortgage rate into a lower mortgage rate, or perhaps even get out of a mortgage obligation due to current financial pressures, for example, a lost job.

I just returned from visiting the States and read an article in the USA Today.   It discusses how Texas banks have held a strong position, based on their tight regulations, even when many other banks around them failed.    An especially interesting point, in this article, is that the state of Texas prohibits banks from charging high mortgage penalties …… Canadian banks should also be prohibited from using the IRD penalty calculation.   You can read the article in the USA Today, at the following link:
http://www.usatoday.com/money/economy/2009-12-28-texas-banks_N.htm

Ottawa is presently reviewing Canadian mortgage rules and may change financing rules to increase minimum down payments and decrease the extended amortization of mortgages (currently at 35 years) – these would be very positive moves to make.   Texas banks have done well and their tough guidelines governing the mortgage financing industry have been the very reason why a housing fallout there, has been minimal.

If you want to express your concern about the IRD penalty, and you live in Mississauga or Streetsville, you should write to the Honourable Bonnie Crombie, Member of Parliament, for Mississauga and Streetsville areas, to request that the Government work to remove the IRD penalty, in use today, by our banks.

Her email address is:
crombie.b@parl.gc.ca

This post was written by Elizabeth Blair, a licensed Mortgage Agent with Mortgage Edge in Richmond Hill, Ontario. Elizabeth services mortgage clients in Mississauga and all over the Greater Toronto area.
You can contact Elizabeth directly by phone at (905) 510-5785
by email at eblair@mortgageedge.ca
or you visit her website at: http://www.missmortgage.ca
Elizabeth is licensed with the Financial Services Commission of Ontario and is also a Member of IMBA (the Independent Mortgage Brokers Association of Ontario) http://www.imba.ca
Lic # M08005880
Brokerage Lic # 10680
Head office is located at: 15 Wertheim Court, Suite 210, Richmond Hill, Ontario, Canada.