Last week, we blogged about the mortgage prepayment penalties that may apply if you have a fixed mortgage and sell your home or refinance before your maturity date. Later, we read about a Canadian soldier who was charged a $7,000 penalty for breaking his mortgage because he was medically discharged. After Master Cpl. Martin Pitre shared his story with CBC News Go Public, Scotiabank apologized and cancelled the fee.
Still, this story raises a few important points that military members and their families should consider before taking out a mortgage. Soldiers and their families are entitled to a final move paid for by the military. But in 2012, the government cut coverage for breaking a mortgage early. This could affect many of the estimated 14,500 service members who are relocated each year, since the change applies to all military members, not just those who are medically discharged.
In Pitre’s case, the bank branch reportedly told him they do offer assistance to active soldiers who face penalties when they are sent to new postings, but because he was medically discharged, that assistance was not available to him.
Lucie Mann, a former stock broker and military spouse, has dealt with the frustrations of mortgage penalties herself, so several years ago, Mann negotiated with several large Canadian banks to create new policies for soldiers and their families who are sent to postings outside of Canada (OUTCAN). These changes would not have benefited Pitre, since he was moving back to his hometown in New Brunswick, not relocating for an OUTCAN posting. However, it could help many other service members, since Canadian mortgages are not portable outside of the country.
Instead of being subject to the usual mortgage prepayment penalties of three months interest or the Interest Rate Differential (IRD), the new policy limits the penalty of military members who are sent outside of Canada to three months interest or $3,000 ($5,000 in some cases), whichever is higher. Some banks may waive these fees altogether for service members.
Even so, Mann suggests that military members read their contracts carefully and ask that a portability clause be included if it’s not already, in case a move within Canada is necessary. (These changes only impact those moving outside of the country.) Most major Canadian banks have a Canada-wide charter that allows them to export your mortgage to another province, but smaller banks may not have this charter.