By Nick Holloway 

I would like to discuss an important aspect of mortgage lending which the big banks have done a fine job of convincing many borrowers that they have the right mortgage for you.

Two words – Posted Rate.

It is common for home owners to consider the mortgage rate they need to concern themselves with is the 5 year closed fixed rate mortgage. If you are looking to purchase or thinking about renewing, you think this will be a simple matter of checking your banks website to see what the rate is, maybe have a quick look what the other big banks are offering too and you’ll be good to go. The reality is this rate is often hidden from view, instead you are met with the banks posted rate and you expect that your actual mortgage rate will not be calculated anywhere near this rate, so you prepare yourself to negotiate with your bank to obtain the best rate and you set out with one goal, achieve the biggest discount you can from the posted rate. There is nothing wrong with negotiating, some people love it, some people hate it, and if you are familiar with buying a new car from a showroom, it is common that the recommended retail price tends not to be the price the car will be sold at, you may need to make your salesman have a word with his manager, his manager with head office, on and on it goes until you have negotiated your discount from the recommended retail price. The price of your mortgage is important, but one should never lose sight that not all mortgages are born equal, and an investment in your home should be considered a significant part of a financial plan which protects the best interests of you and your family. 

So Nick, what is the advantage of having a posted rate?

For the borrower, there is no advantage to the posted rate. For the bank, well that is a different matter. After having the back and forth with the bank representative, their manager, their head office, you now have a 5 year fixed rate at a set discount from the posted rate, and this will be neatly outlined within your mortgage commitment and terms.

So how does the posted rate provide an advantage to your bank?

The 5 year fixed term is important here, as not all of these mortgages will last 5 years, some may need to be broken early by the borrower for a multitude of different reasons. In fact in Canada, it is common across the industry that around 65% of 5 year fixed rate mortgages will not reach the end of term and this almost certainly triggers a pre-payment penalty for the borrower. This is where the posted rate becomes important for the bank as they tend to work out the penalty in the form of an Interest Rate Differential (IRD) which is a calculation primarily based on the elevated posted rate, not your actual mortgage rate, resulting in a substantially higher penalty that you have little choice but to pay and likely no room for negotiation here! The result of these penalties can be significant, and can vary on a number of different factors based on time to maturity and what movement in the posted rates have occurred since taking out the mortgage, but as a general rule of thumb, you should account for around 4.5% of the remaining mortgage balance to be paid on this type of IRD penalty. On a $400,000 mortgage amount, that amounts to a penalty payment of around $18,000.

Wow, those penalties seem rather steep! Is there a way I can protect myself?

There are many ways to protect yourself from these penalties, the best way is to engage in a licensed mortgage agent or broker who is impartial and can review your application and select the right mortgage products which have your best interests in mind. We have access to multiple mortgage lenders and products within our channel and continually negotiate for the best rate on your behalf. We work hard to make a plan and find tailored solutions that meet each borrower’s individual needs. We take the time to explain the benefits and associated costs for each and every mortgage so our clients can make an informed decision to proceed with one of the biggest investments you might make in your lifetime – your home.

If you have any questions and want to discuss your mortgage plans in more details, I would be more than happy to help.