A Vancouver man is speaking out about how Scotiabank charged him $25,000 to pay out his mortgage early — nine months after telling him the fee would be half that much.
"It totally doesn't make sense to me," said Mohsen Movahed. "I learned that dealing with banks in Canada it could be very dangerous. Everything is against the customers. You should have a huge knowledge."
Movahed is an engineer who moved to Canada from Iran in 2006 and landed a job at BC Hydro. The following year, he and his wife bought a condo in North Vancouver with a mortgage of well over $400,000.
Then they had a second child, his wife stopped working and he said the payments became unaffordable.
"My income seems not enough. We have a baby," said Movahed. "So I thought, I have to do something. Let's contact the bank and see what I should do."
In April of 2010, Movahed was one year into a five-year blended rate mortgage, locked in at 5.19 per cent. Scotiabank told him the penalty to break the contract would be $13,000.
Movahed felt that was too much, so he decided to hold off.
Penalty kept rising
In July, when rates dropped, he asked Scotiabank again what it would cost to get out of the mortgage. Because he would get a lower rate if he refinanced, he was told the bank stood to lose more — so the penalty had increased to $17,000.
Movahed decided he had no choice but to sell the property and cut his losses. He said he banked on the penalty staying at approximately $17,000 — provided rates didn't change.
"These numbers are easy when you are writing on the paper, but they are not easy when you have [to] pay from your pocket," he said "I am financially in trouble. I just want to sell the property."
He said he was shocked when he sold his home in November, and went back to the bank to confirm what the penalty would be. Instead of the $17,000 he expected, Scotiabank told him the fee had doubled — to $33,800.
"I can't forget that day," said Movahed. "Thirty four thousand dollar penalty! One of the guys at the bank said it was the biggest penalty he'd seen for that size of mortgage."
Movahed said he couldn't understand why the fee had gone up so much, since interest rates had decreased only slightly.
Scotiabank told him it was because — unlike earlier in the year — it was doing the penalty calculation based on three years left in the mortgage, instead of four. Since the three-year rate was much lower than what he was paying, Movahed was told the bank had more to lose.
Less time left, higher fee
"Three years fixed rate has a rate. Four years has a little bit higher rate," said Movahed. "When they compare me with three years, the gap was bigger."
By the time the sale of his home went through, the penalty had dropped again to approximately $30,000. Scotiabank then reduced the fee by another $5,500 — in what it called a "goodwill gesture".
Scotiabank confirmed to CBC News that Movahed's penalty grew essentially because there was less time left on his mortgage.
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"When he spoke to us in July, we would have used the four-year rate because he had about 45 months left on his mortgage. At the end of the year, he had 39 months left, so we apply the three year [lower] posted rate to the calculation," said Scotiabank spokesperson Ann DeRabbie in an email.
"The three-year rate is lower than the four year rate, so the interest rate differential and the corresponding charge is higher."
Movahed said he came out of it with less than a quarter of his original down payment. He said he now works at a second job — delivering pizzas — to make up for the money his family lost.
I just want to let Scotiabank knows that how much that $25,000 is worth to me. I had to deliver pizza to the people — get dollar by dollar — to try to recover that," said Movahed.
"I was really hurt."
The Canadian Banker's Association said the fee calculations for breaking a mortgage contract are standard at all major banks.
"Typically, the charges for early termination of a mortgage are three months interest or the interest rate differential (IRD), whichever is greater," said a CBA spokesperson.
"In times of declining interest rates, typically the prepayment charge will be calculated using the IRD. In times when interest rates are increasing, the three months interest is usually greater so that would be the charge."
CBA president Terry Campbell told CBC News in an interview that penalties are calculated so the banks can recover the costs of losing the contracts.
"The bank has had to borrow and they've entered into their own contract. So, when that is broken there are costs to that. It's a matter of simply covering the costs," said Campbell.
"We are always open — if there are cases of hardship or cases of concern — we recommend to our customers don't wait. Don't suffer in silence. Come and talk to us. Let's see what we can do. We are very sensitive to that."
Since interest rates dropped in 2007, the Ombudsman for Banking Services and Investments (OBSI) said it has seen a sharp increase in complaints from Canadians about mortgage prepayment charges.
The OBSI is an independent body, financed by the banking industry, which adjudicates consumer complaints.
OBSI figures show half of all the mortgage complaints in 2010 were about prepayment fees. The majority of consumers — in 59 per cent of 58 cases — got some of their money back as a result of filing a complaint.
Movahed complained to Scotiabank's Office of the Ombudsman, but was told "all aspects of credit adjudication are the sole prerogative of Scotiabank…this office is, therefore, unable to assist you."
The letter also discouraged him from filing a complaint with the OBSI.
"I must inform you that the OBSI may also decide this matter lies outside his mandate."
"This is a major issue that all Canadians are having throughout the country," said Richard Beaumier of the Quebec Federation of Real Estate.
"I see, every day, clients who want to sell but they can't because the penalty is too high."
As a real estate broker and the VP of government relations, Beaumier said he's been lobbying the federal government for years to abolish mortgage prepayment penalties — or regulate them so they are more predictable for consumers.
He gave one recent example — of a small businessman facing a $180,000 penalty for breaking a mortgage on a building.
"There are no rules. There is no regulation — and banks can do whatever they want," said Beaumier. "Banks are already protected for the interest rate situation. The penalty is redundant and is hardly justified."
He pointed out, when interest rates are moving up, consumers can be the ones losing out when they have to get out their mortgage. Instead of compensating those consumers, Beaumier said, banks still charge them three months interest.
The federation has suggested Ottawa cap prepayment penalties at a maximum six months interest. It also suggested fees could be set by the Bank of Canada.
Beaumier said Canadians should be more aware that most mortgages in the U.S. have no such penalties.
'In the U.S. this type of situation would not appear' —Richard Beaumier, Quebec Federation of Real Estate
"In the US this type of situation would not appear because there is no penalty in the US generally."
CBA president Campbell said Canadian banks are not willing to take the same risks as banks in the U.S.
"There are costs that have to be taken into account and there are risks that have to be managed and if you take those out of the equation you have by definition a riskier kind of environment in Canada and we don't want that."
However, Campbell said he expects the federal government to announce that it will soon require banks disclose more information to consumers about prepayment fees up front.
"We do know the government has indicated it wishes to bring in some regulations," said Campbell. "We agree it's important to have very strong disclosure to the customers so there is no confusion and they understand precisely what they are getting into."
Movahed said more disclosure would not have helped him, though, because at the time he took at his mortgage, he didn't know he would soon be facing financial hardship.
"People in Canada are really unprotected, unsupported and so vulnerable at the mercy of the bank," he said.