A recent article in the Toronto Star highlighted a little known secret that the banks don’t want you to notice when you sign the paperwork on a mortgage. If you take a 5 year term and need to end the mortgage early whether it’s because of illness , divorce , a job transfer or any other possible reason, if you are less than half way through the term, a condition called Interest Rate Differential kicks in rather than the 3 months interest option.
In the Star article, a RBC mortgage holder found he could not afford his home and he wanted to sell the home and get out of the mortgage. He was hit with a $13,000 penalty when money was already stretched to the limit. On one of the last pages of a mortgage commitment it often states how the IRD is calculated. When you get your mortgage at a discounted rate, there’s a posted rate shown at the bank. This rate is often 1 1/2% higher than the rate you received. While you feel great receiving this rate, it can come back to bite you in the butt.
IRD;s are calculated based on the difference between the posted rate and your rate multiplied by the number of months remaining in the mortgage term. The highest IRD I have heard of a client paying was $90,000.
A good mortgage broker will ask you if there’s any chance you will have to end the mortgage before the end of the term. If there’s a possibility we take you to a mortgage company or a trust company rather than a bank. These lenders do not calculate the IRD based on a posted rate as they do not have one. They often will just charge the 3 month interest penalty and leave it at that.
This is one more reason why you should see a mortgage broker for your home financing needs rather than going to a big bankContact me if you need more information on this topic. David Cooke, your Calgary mortgage broker. The Toronto Star article