A recently certified class-action lawsuit against the Canadian Imperial Bank of Commerce (CIBC) may mean refund cheques for over 50,000 borrowers in British Columbia, reports Business in Vancouver.
The case’s representative plaintiff is a Victoria woman who has hit was nearly $50,000 in fees after she tried to break her 10-year mortgage due to divorce. Her lawyer is arguing that the mortgage contract’s vague language makes the contract legally unenforceable and that the lender used an improper mathematical fee to calculate the woman’s prepayment penalties.
All borrowers who took out mortgages through CIBC’s FirstLine Mortgages and President’s Choice brands after mid-2005 are included in the class action unless they specifically opt out. This isn’t the first issue involving prepayment penalties. Earlier this summer, Scotiabank apologized and cancelled the prepayment penalties of a Canadian solider who was medically discharged.
Within the past few years, it became mandatory for all lenders to publish a penalty calculator on their website. However, these calculators aren’t always accurate as there doesn’t seem to be a clear-cut formula. The exact calculation for prepayment penalties varies from lender to lender but it’s typically equal to three month’s interest on your current mortgage or the interest rate differential (IRD), whichever one is higher.
Here’s the kicker, though: lenders sometimes use the posted interest rate rather than the actual interest rate the borrower received when calculating IRD. This can lead to a wider spread between the initial posted rate and the current interest rate, because almost no one actually gets the posted interest rate, and thus a higher penalty.
There are some strategies for avoiding prepayment penalties, including porting your mortgage to a new home, having the buyer assume your mortgage when you sell the property or prepaying at the maturity of a closed mortgage. In some cases, monoline lenders may offer more flexibility on prepayments. If you’re unsure of whether prepayment penalties would apply to your situation or how to calculate the penalty, talk to your mortgage broker.