Posted Rates, Mortgage Penalties and Alternative Lenders

This is a common inquiry these days:

I hear banks refer to posted rates but I don’t really understand what they are and why I should care as the banks seem to be offering good interest rates to get my business?

You likely won’t have to pay the posted bank rate on your next mortgage. Pretty much nobody does that any more, especially if you use a mortgage broker. The real danger is that posted rates will be used to calculate the penalty if you ever have to break your mortgage, probably costing you thousands of extra dollars.

A mortgage penalty compensates a lender for the interest payments it loses out on when you break a mortgage contract. With houses as expensive as they are today, it’s crucial to get the lowest mortgage interest rate you can. But, it is also important to pay attention to the mortgage penalties clause.

Mortgage penalties are straightforward if you have a variable-rate mortgage – expect to pay the equivalent of three months’ interest in most cases. With a fixed-rate mortgage, the penalty is set at the higher of three months’ interest or a calculation called the interest rate differential, or IRD. A critical question to ask when negotiating a fixed-rate mortgage is: Do you use discounted or posted rates to calculate these penalties? This is important because using posted rates can result in a much higher penalty.

Not all lenders use the posted rates in their penalty calculations. In fact, many of the alternative mortgage lenders use formulas which do not calculate based on the posted rate and the net result is a lower penalty for the borrower.

Borrowers need to remember that as well as producing revenue for lenders, inflated mortgage penalties also help trap clients who might otherwise move their business to another lender. Imagine you want to refinance your mortgage or buy a bigger home and your bank won’t come across with a competitive rate. You say you’ll change banks, only to find out how prohibitively expensive it is to break your mortgage.

Alternative lenders often have better rates than the big banks and they typically have cheaper penalty fees. So while some borrowers like the convenience of having their mortgage where they bank, and of being able to go into a branch to talk about their mortgage they need to remember that they are often paying more money for this experience.

Alternative lenders work with mortgage brokers and play a major role in the mortgage lending market in Canada. Working with your mortgage broker allows you to explore options you might not otherwise known were available and it is their role to make sure you find the best financing available from traditional lenders and alternative lenders to meet your individual needs.
As always, if you have any questions about the information above or your mortgage in general, I’m here to help!