I see this time and time again.

Clients have opted for a fixed rate mortgage with their bank – a chartered bank – and they find out the ‘great’ rate they signed up for comes with a massive curveball!

IRD – Interest Rate Differential – get to know this term.  It is scary.

To get the market rate received, the bank gave you a ‘discount’ off their posted rate.

This posted rate is used in their interest calculations on full pre-payment.

Your 5 yr fixed at 2.99% or 3.09% had a discount of 1.8%-2.15% (from 4.79, 5.09 or 5.24%).

At the 3 yr mark, the posted rate could be 3.44% is deducted from the posted rates at the time of your mortgage.

The applicable posted rate less this 3 yr rate (or 1, or 2 or 4 as applicable) can generate a rate differential of 1.35% to 1.80% times your mortgage balance times the time remaining.

Example: 3.09% Big Bank fixed needs to be ‘broken’ after 2 years for whatever valid reason.

Balance $500,000 x 3 years (36mos/12) X 2.15% rate differential = $ 32,250 penalty due.

A broker channel lender with whom I work with – the penalty would be 3 months interest – as they don’t have the posted rate model.  Penalty = 500,000 x 3.09%/12 x 3 = $ 3862.50 penalty due.

Did you see the difference?

Broker Penalty : $3862.50

BIG Bank Penalty: $32,250

Which one would you prefer to pay?

Why not consider using a mortgage broker and save yourself down the line!

It is $28,000 question!

Yours in Mortgages,

Michael James

As 2015 whips into gear, here are some borrowed quips on the rate forecast and housing market insights for the year to come….

• The CREA revised its forecast for annual housing sales in December, projecting national activity to reach 485,200 units, a year-over-year increase of 0.8 per cent.
  • In December, Scotiabank predicted that interest rates will stay lower for at least another year, with the first increase not due until the beginning of 2016.
  • The Bank of Canada, in a report published in December, forecasted a moderation of housing prices in the coming year.
  • Economists predicted that the Bank of Canada will not raise interest rates until the last quarter of 2015.
  • A poll, published by Reuters in November, forecast that 2015 would see a slowdown in housing construction and prices.
  • In November, the OECD forecast that Canadian interest rates will rise in May 2015.
  • Data from the BCREA, published in November, predicted that housing starts will be slightly below 30,000 units in the province in 2015, while residential sales are forecast to increase 1.2 per cent to 84,900 units.
  • Economists, speaking at the Calgary Economic Development’s 2015 Economic Outlook in November, predicted that there will be a softening of the economy in Calgary and throughout Alberta next year, but were careful not to predict a crisis.
  • A report published by CMHC in November said the overall trend for housing starts will continue steady with a dip in 2015, before rising again the following year.
  • The annual Emerging Real Estate Trends report, published in October by Urban Land Institute and PricewaterhouseCoopers, said the hot housing market will continue into 2015. The report also said 2015 will see a greater focus on creative solutions for city living.
  • CMHC’s third quarter Housing Market Outlook, published in August, said that economic and demographic fundamentals will continue to support housing activity into 2015.