Today I went to TD Bank with the BF to discuss some investments and account choices. Most of the decisions had to do with the BF’s accounts, so I’m not going to get into specifics for his stuff. I did, however, have a question about discharging my mortgage. We’re not planning to move anytime soon, and there are three years left on the five year mortgage, however I was curious to see exactly how much the penalty would be today if we were to discharge the mortgage.
When I first got my mortgage two years ago, I was totally focused on the excitement of buying my first place. Yes, I did some research on the process, and I also had a mortgage broker to help find the best rate. However at the time I didn’t look into what would happen if I moved before the mortgage was due, partly because I didn’t think I’d move in five years and partly because, well, I just didn’t think know enough for that to be on my radar.
During the past year I’ve read quite a few articles on the discharge fee, which is typically three months interest or the interest rate differential (IRD) amount. Ellen Roseman, a financial champion of regular people, wrote a two articles (part 1 and part 2) on mortgage penalties a couple of years ago. So I was somewhat familiar with how the IRD is calculated.
This part of the meeting did not go well. While the TD financial rep claimed to be competent in answering my mortgage related questions, she did a horrible job in explaining how it would work. She claimed that I would have an IRD fee of $5,900 (versus three months interest at $2,000). I did not understand why the IRD fee was higher than three months interest, since rates are a bit higher now than when I got my mortgage two years ago (even when taking my discounted rate into account). If the bank can turn around and lend my mortgage money to someone else for more, why am I being charged an IRD fee? I kept asking for her to actually show me the calculation they used for the IRD amount, but said she couldn’t, and went on about how the bank had to borrow GIC funds to loan me the money and there was some penalty associated with that. Which does not make any sense, since (as I kept telling her) this little caveat was not in my mortgage contract (which I had on me). There’s even a section in my contract on how the IRD is calculated but she didn’t look at that.
I got really frustrated and angry, because I felt like the bank was screwing me, and sometimes when I get angry like that, I cry. Which is exactly what happened. In the bank. It was really embarrassing and awkward. Obviously I do not want to cry in the bank, and it’s so much harder for me to get my point across when there’s tears running down my face and snot coming out of my nose. I’m sure both she and my BF were uncomfortable with the entire exchange.
We left without understanding the IRD amount at all, and I felt totally stupid. We went for breakfast and I calmed down. This really isn’t an issue right now, since we aren’t moving at the moment. So why bother getting worked up about it? I was asking a theoretical question, and even if I don’t like the answer, it doesn’t matter now – this is something we can deal with if it ever actually comes up. However it still ticks me off that she wasn’t able to explain things better (even the BF was confused by what she was saying).
When I got home, I sat down to figure out what the interest rate differential would be, by my calculations. I realized that the bank would use the current interest rate for a similar mortgage with a fixed term that is closest to the remaining term of the mortgage, so they were probably using a rate for a THREE year mortgage and not a five year mortgage. (At the bank the advisor indicated they would use the five year rate for the calculation). When I crunch the numbers with the the three year rate, then I can see that there would in fact be a fee of at least $5,000, which is close to what she said it would be.
In the end, all that frustration was for nothing. If she had been able to explain the calculation, line by line, rather than just showing me a number, we both would have been on the same page. And if your financial rep can’t do a simple calculation like that, would you trust this institution with all your money?
Edit: When I first published this post, I left out the name of the bank. After mulling it over for a few days, I’ve decided to update the post to include the institution name.