Quebec Federation of Real Estate Boards

Quebec Federation of Real Estate Boards

February 08, 2011 09:38 ET

QFREB Asks Federal Government for Legislation to Regulate Mortgage Penalties

ILE-DES-SŒURS, QUÉBEC--(Marketwire - Feb. 8, 2011) - The Québec Federation of Real Estate Boards (QFREB) is taking the federal government to task, requesting legislation be established surrounding mortgage penalties imposed on households that prepay the full balance of their mortgage.

In Canada, when a borrower prepays the full balance of his mortgage, the lender imposes a penalty that is equal to the highest of:

  • three months of interest;

  • an amount based on the differential between rate A, the rate in effect at the signing of the mortgage, and rate B, the rate in effect at the prepayment date.

The second scenario allows the lender to cover the financial loss incurred by their mortgage investment in the event that interest rates decrease.

"The problem is that in the second case, some financial institutions try to maximize the difference between the two rates by using, for example, the posted rate as rate A and the negotiated rate, or a rate even lower than the negotiated rate, as rate B. As a result, the penalty paid can significantly exceed the lender's actual loss," said Pierre Langlois, Manager of Government Affairs at the QFREB. "Another problem is that mortgage penalties are asymmetrical. Borrowers must pay a penalty regardless of whether interest rates increase or decrease," he added. 

The QFREB is asking the government to enact legislation that will eliminate and prevent abuse from Canadian mortgage lenders, as it pledged to do when its budget was tabled in March 2010. The QFREB proposes four possible solutions:

  • eliminate mortgage penalties in Canada;

  • set limits (e.g., a minimum of three months of interest and a maximum of six months of interest);

  • use the negotiated rate (rate A) and the rate that the financial institution is willing to offer for the remaining period (rate B);

  • use a curve of negotiated rates established periodically by an independent organization (e.g., the Bank of Canada) that reflects the prevailing market conditions.

"When households learn the amount of the penalty to be paid, many of them decide to postpone the sale of their property, thereby slowing down the real estate market," said Pierre Langlois. "Moreover, this problem adversely affects market liquidity and promotes household debt," he concluded.

About the Québec Federation of Real Estate Boards

The Québec Federation of Real Estate Boards is a non-profit organization composed of Québec's 12 real estate boards as associate members and the 15,000 real estate brokers who are affiliated members. Its mission is to promote and protect the interests of Québec's real estate industry so that the boards and their members can successfully meet their business objectives.

Contact Information

  • Quebec Federation of Real Estate Boards
    Chantal de Repentigny - Assistant Director
    Communications, Industry Relations and Legal Affairs
    514-762-0212, ext. 130
    Toll-free: 1-866-882-0212, ext. 130
    chantal.derepentigny@qfreb.ca