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