Case Studies

Problems with Mortgage Penalty Refund

The Problem

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From the Client's Perspective

A couple sold their house to move to another city after the husband was laid off. Since their Royal Trust (RT) mortgage was not up for renewal, they faced a large prepayment penalty, which RT offered to reimburse if they financed a new home with RBC Financial Group within 90 days. When they applied for a new mortgage, however, they were turned down because they didn't have enough equity in the purchase. They came up with the equity, but were turned down again because the husband was unemployed. After getting a mortgage elsewhere, they asked RT to refund the prepayment charge, but RT refused.

From Royal Trust's Perspective

RT based its offer to reimburse on the assumption that the clients' new mortgage would be for at least the same amount as the old mortgage. In fact, that ís a condition for moving a mortgage from one property to another. The clients' second application would have satisfied that condition. But, because the husband was unemployed, the couple didn't qualify for the additional financing. In the circumstances, RT was not required to refund the prepayment charge.

The Resolution

The Office of the Ombudsman reports, "Both parties agreed there was no contractual obligation to refund the fee. However, they also agreed that conditions for the refund were not clearly identified or understood.

"This misunderstanding had both parties caught in an 'all-or-nothing' negotiation. The clients wanted the entire penalty refunded. RT refused.

"We believed an all-or-nothing outcome would be unfair and that any resolution had to meet the interests of both parties. With this in mind, we helped them consider alternative solutions.

"RT agreed they could have better informed the clients. The clients acknowledged they did not fully understand their contractual obligation. To make it right for the clients, RT offered to compensate them for the misunderstanding, and agreed to further compensation if the couple moved their mortgage back within two years. The proposal was accepted."

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