When the pandemic hit Ontario, Kristina Barybina's income as a real estate agent dried up and she knew the writing was on the wall — she'd have to sell her own house.
She also knew there'd be a penalty for getting out of her five-year mortgage with TD Bank early — she just wasn't expecting it to be almost $30,000.
"I thought my eyes were going to pop out," said Barybina. "It's insane."
A mortgage expert says people who have to sell their homes and have fixed-rate mortgages are being hit particularly hard right now, because of how financial institutions calculate penalties — and he's calling on the banks to have some leniency.
"When you lose your income from a financial crisis like we're facing now and you have to fork over tens of thousands more to your lender, it's heartbreaking," said mortgage planner Rob McLister, founder of RateSpy.com, a mortgage rate comparison website, and mortgage editor of rates.ca, an insurance comparison website.
"Ideally banks would show some compassion," he said.
Barybina says she had considered selling her home before. She put it on the market in November, then took it off when no buyers expressed interest.
But by mid-March, she says, selling her house became a necessity, not a choice.
Almost overnight, the real estate agent based in East Gwillimbury — 50 kilometres north of Toronto — lost all her clients. "People are not listing," she said. "And nobody knows when the end of it is coming."
Compounding her problems, two tenants who had been renting rooms in her house moved home to be with their families. Income from a mortgage-helper Airbnb suite also dried up.
Scrambling to look after her elderly mother, who lives with her, and a 12-year-old son, the single mother says she started taking medication for anxiety.
"They're perfectly within their rights under the agreement, but we're in a pandemic," she said. "I'm not selling this house because I love to move."
Barybina requested a one-month deferral on her mortgage, but says she quickly realized that deferring it any longer would just be pushing debt she couldn't pay further down the road. She says she was fortunate to sell in April, just as the housing market started to plunge.
She was only 19 months into a five-year mortgage, with a fixed-rate of 3.71 per cent, and still owed $591,000. TD used a controversial calculation to arrive at the penalty for breaking the terms. She owed another $29,530.
All of Canada's big banks use similar methods for calculating what penalty people owe if they end a fixed-rate mortgage early.
They can either charge three months' interest or what's called the interest rate differential (IRD) — whichever is higher.
The IRD is a calculation involving the difference between the interest rate on the negotiated mortgage, the bank's current posted fixed interest rate and the length of time remaining on the contract. Banks argue they lose anticipated revenue from their client if they end the mortgage prematurely.
When the Bank of Canada lowers interest rates, the banks' posted fixed rates also drop, increasing the penalties for people breaking fixed-rate mortgages.
"TD is profiting by collecting this ridiculous amount of penalty, which is only based on the fact that the interest rate posted by Bank of Canada is so low — which was done to help people," said Barybina. "It's heartless."
Had the bank used the option of charging three months' interest, Barybina says she would only have owed $3,000.
Penalties exceed losses
McLister says banks incur costs and risk when borrowing money to cover a customer's mortgage so they need to recover that lost income. But he says mortgage penalties often exceed their losses.
"Most of the time bank mortgage penalties are bigger than they need to be," he said.
According to Mortgage Professionals Canada, 74% of all mortgages have fixed rates.
TD Bank declined an interview request. In a statement to Go Public a spokesperson said the bank takes care to make sure customers understand mortgage penalties and that Barybina was offered an additional five-month mortgage deferral.
The statement did not address why — after Barybina filed a complaint — the bank didn't negotiate reducing the $30,000 penalty, but did say the bank had "discussed options that were available to reduce the charge."
Barybina denies she was offered any helpful options.
The bank also cited options — for example, deferrals and financial advice — it is offering to customers hurt by the pandemic.
Penalty shoots up
Flora Kenari and her husband Mohammad Mehdiour say they, too, are paying an unfair mortgage penalty because of the pandemic.
The couple found a house in Gloucester, east of Ottawa, and 15 months ago obtained a five-year fixed mortgage with a rate of 3.56%.
But when they returned to the bank in January to discuss moving their mortgage to a new house, they were told they'd have to break the mortgage and pay a penalty — of $8,000.
In the weeks to follow, the Bank of Canada kept dropping the interest rate, driving up their penalty.
"Every time that we heard that the prime is going down there was more and more stress," said Kenari.
By March, the penalty had climbed to $12,000.
"The money didn't return to our pocket, it went to the bank's pocket. It reminds me of the Sheriff of Nottingham," she said, referring to the villain in the legend of Robin Hood, who mistreats people and subjects them to unaffordable taxes.
After they complained to the office of the bank's president, Scotiabank offered to reduce the penalty to the original $8,000. But the couple feels that fee shouldn't exist at all, as they say they were told the mortgage could be transferred to another property.
In a statement, a Scotiabank spokesperson said customers are offered "various resources" to better understand mortgage penalties, that it takes "the concerns of our customers very seriously" and is working on a resolution with Kenari and Mehdiour.
Scotiabank did not address the allegation that they were misled about transferring the mortgage.
Penalties for ending a fixed mortgage have long been unpopular. A decade ago, growing calls to cap mortgage penalties and make them easier to understand prompted the federal government to require more transparency about mortgage penalty regulation.
A 2010 study by the Quebec Federation of Real Estate Boards found that the IRD penalty for breaking a fixed-rate mortgage was often 200 per cent higher than the actual loss incurred by the bank. The author of the study says since the report, there've been no significant changes.
McLister predicts the coming months will see a spike in the number of people "blindsided" by penalties as they're forced to sell their homes.
"We're already seeing a big jump in refinance requests as people try to restructure their debt ahead of potential income loss," he said.
It's hard to know how many Canadians will face hefty mortgage penalties due to the COVID-19 crisis, but Canada Mortgage and Housing Corporation (CMHC) CEO Evan Siddall expressed concern before the federal finance committee two weeks ago.
Siddall said thousands of Canadians who have deferred their mortgage payments during the pandemic will face a "debt referral cliff" once the payments come due this fall.
The CMHC estimates that as many as one-fifth of all mortgages will be in arrears at that time — and a large percentage of those homeowners will be faced with stiff mortgage penalties.
'Government must act'
Such extreme penalties generally don't exist in the U.S., which frustrates homeowners like Barybina.
"The government must act," she said. "It cannot force banks [to end mortgage penalties] unless it has a legislative framework. So go ahead and pass a law."
Go Public requested an interview with Finance Minister Bill Morneau, which was declined.
In a statement, a spokesperson said banks are required to be transparent about mortgage penalties and that Canadians facing financial difficulties should contact their lender "to learn what options are available."
Prime Minister Justin Trudeau has called on the banks to "do more" to help customers during the pandemic, but when Go Public asked whether that included easing hefty mortgage penalties, he did not offer specifics.
"There's always more to do and we're going to make sure our financial partners are part of the solution to making sure Canadians get through this," Trudeau said Friday.
But without more specific direction from Ottawa, the banks seem mainly to be offering only deferrals and financial advice.
McLister says calls to scrap mortgage penalties could have unintended consequences.
"There is no free lunch," he said. "You could have the government mandate a $1 penalty for all the banks and all that would do is encourage banks to increase interest rates, increase fees and make back that profit another way."
He says dozens of lenders, including many credit unions, don't require "horrendous penalty calculations" — so people should shop around, bearing in mind that the big banks can often offer lower interest rates on a mortgage.
Barybina says she's resigned to paying the $30,000 penalty, but wants to call out her bank's behaviour during a time when she says everyone is being asked to support and accommodate one another.
"That's why I think it's unconscionable and unethical to proceed this way."
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