Canadians thinking about taking advantage of historically low interest rates to refinance their mortgages should think twice, as many people are finding the penalties for breaking old mortgages are much higher than anticipated.

With two years left on a $75,000 mortgage, Neil Reavely of Winnipeg wanted to renegotiate his mortgage at a lower rate. According to his mortgage fine print, he was expecting a penalty of three months' worth of interest to renegotiate.

"I calculated [my penalty would be about] $900," he says. But when the paperwork from the Royal Bank of Canada arrived, it was closer to $3,200.

"It makes no sense," he says.

May 12, 2008 file photo, showing a foreclosed house in East Palo Alto, Calif. Canadians trying to take advantage of historically low mortgage rates are finding the penalties for doing so are much higher than anticipated. (Paul Sakuma/Associated Press)

The bank told him his penalty wouldn't be based on his negotiated rate of 5.15 per cent, but rather on the bank's posted rate of 6.6 per cent. The penalties are clearly articulated in the contract Reavely signed, the bank says.

"[The penalty will be] the greater of three months bonus interest at the mortgage rate, or interest for the rest of the term at a rate equal to the extent to which the mortgage rate exceeds the remainder of the posted rate we are offering," Reavely's contract reads.

But some say it could and should be clearer. In 2000, Canada's big banks committed to improving contract language, but critics say they've yet to act upon that pledge.

The regulator in charge of Canadian banks says transparency has definitely improved.

"You'll see a lot fewer of those issues now than you would five or eight years ago," says Doug Melville, Deputy Ombudsman for Banking Services and Investments.

The problem is that people fail to adequately read their contracts and so the devil, Melville says, is in the details.

To avoid misunderstandings, he suggests asking a lot of specific questions, getting details on any penalties, payment options, and how interest is calculated. Then, get any agreements in writing, or via email, so there's a paper trail when disputes arise.

The mechanisms to avoid these situations are already in place, he says, but he acknowledges that his office is handling hundreds of similar complaints at the moment.

"Those numbers are huge compared to what they've been in past years," he says.