Why Bank Posted Rates Matter

     

I am coming up on 10 years as a mortgage broker this spring. However, I started negotiating for better rates before that: on my own mortgage.  Several years ago, my mortgage came up for renewal. I contacted my bank to say that I had received an unacceptable interest rate. Reading the Calgary Herald, I knew that it was possible to get a mortgage for 1%+ less than my bank was offering me.

   I was transferred to the mortgage department at the headquarters in Toronto and I explained my problem and asked for a better rate. I was told that they would have to get back to me after reviewing my file. I didn't hear back for 2 weeks. I called back and wasn't able to get any satisfaction. I then went to another bank and was able to get an even better rate. This was a common strategy. 25% of people would sign the renewal letter without asking for a better rate. This helped to increase profits. Those who asked would be told they were preferred clients and would be offered a better rate. What a game they were playing ! 

   The bank posted rate does not play that much of a role today but it is still important if you have a bank mortgage. We all know that if you want to get out of your mortgage term early, you have to pay a 3 month interest penalty. Re- read your mortgage commitment and I'll bet it says 3 months interest or IRD, whichever is greater. . IRD is Interest Rate Differential. This is the difference between the bank posted rate and the discounted rate that you received. Let's say the 5 year posted rate was 5% and you received a discounted rate of 3%. You are 30 months into your 60 month (5 year ) term.  In order to break the mortgage you would have to pay 2%( the difference between the posted and your rate) times the remaining term of 30 months. 2% X 30 is a lot more than the 3 months interest you were expecting to pay. 

    How can you avoid this problem? Speak to a mortgage broker and have them place you in a mortgage with a mortgage company or a trust company. Banks use the posted rate but mortgage companies use the discounted rate. Most of the time, you end up only having to pay the 3 months interest if you need to break the mortgage. 

     There are other options available to avoid paying the IRD. Be sure to speak with your mortgage broker before you sign a purchase offer to see if they can save you money. 

   Here's a recent article on Posted Rates from the Financial Post - http://business.financialpost.com/2015/02/09/why-you-should-care-about-the-banks-posted-rates-on-mortgages/

David Cooke is a mortgage broker in Calgary, Alberta. Contact him at davidcooke.ca