Discounted rates are resulting in Huge Marked-Up penalties and how to avoid them.

I want to be clear on this…..marked-up penalty calculation are not done by all the lenders….but unfortunately the big 5 banks in Canada are applying this calculations to their mortgages. Mortgages are no longer just about the lowest rate, rather ensuring the product you take will not hurt you in the long run. As a professional mortgage broker serving Abbotsford, Chilliwack and Mission BC, we help you understand these little differences from lender to lender.

When I started in this industry 15+ years ago mortgage penalties for breaking the term of a mortgage consisted of 3 months interest. Then interest rates started to drop and the Standard IRD Penalty Calculation started creeping into the world of mortgages.

What is interest rate differential (IRD)? Here is how one lender puts it.

“Interest Rate Differential (IRD) is calculated by applying the difference between the interest you are being charged on your mortgage and the current discounted rate at the time of payout that is closest to the remaining term on your mortgage.

This rate difference between the two amounts is then applied to the outstanding principal balance of you Mortgage for the remaining term of the mortgage.”

To put this in simpler terms.

If you have 3 years left on your 5 year term the bank will charge you the difference between the rate you have on your mortgage and the going rate for the 3 year term.  They will take that difference and apply it in form of “loss of interest earned” by the bank to the remaining 3 years and come up with the penalty amount.

THAT IS NOT EVEN THE SNEAKY SCAM YOU SHOULD AVOID.

When this started happening penalties were higher but not as high as they are now. The reason is the banks had not yet figured out how to take discounting and use it to their advantage. Well next came Discounted Rate IRD Penalty Calculation.

Discounting is a maneuver now done by banks to give the appearance that they are offering you a deal off their “posted rates”. It makes you feel like you negotiated a rate lower than the advertised rate they introduced up front. On the surface all is good. Nobody pays sticker price at a car dealerships and clients loved negotiating deeper discounts on their mortgages too. Keep in mind this is now to the delight of the Big Banks armed with their new Discounted Rate IRD Penalty Calculations.

In the past, before Discounted Rate IRD Penalty Calculation, it looked like this. The banks gave a similar discount off all of their posted rates across the board.

Term Posted Rate Discount Discounted Rate
3 years 4.69% 1.90% 2.79%
4 years 4.89% 1.90% 2.99%
5 years 4.99% 1.90% 3.09%

Here is an example of what penalties used to look like on these old discounted mortgages. In this case I am going to use an example of a mortgage balance of $300,000, and 3 years remaining on your term with the assumption rates did not change over the previous 2 years.

Calculation for IRD would look as follows.

3.09% – Rate on your mortgage

– 2.79% – 3 year posted rate less discount given on 5 year term (4.69% – 1.90% = 2.79%)

Standard IRD Penalty Difference = 0.30%

You would be charged the 0.30% for the remaining 3 years left on the mortgage which comes to $2600.

What the Banks did next was so simple yet increased their bottom line by enormous amounts.  All they did was change the discounts on the terms less then 5 years.

This is a rate sheet I pulled from one of the big 5 banks today.  I have highlighted the differences and how much extra penalty they will charge from the exact same mortgage about

Term Posted Rate Discount Discounted Rate
3 years 3.39% 1.00% 2.39%
4 years 3.89% 1.40% 2.49%
5 years 4.49% 1.80% 2.64%

You will see the discounted rate is very similar but the posted rates and discounts have changed.

The same penalty on the same $300,000 mortgage now looks like this.

2.64% – Rate on your mortgage

-1.59% – 3 year posted rate less discount given on 5 year term (3.39% – 1.80% = 1.59%)

Discounted Rate IRD Penalty Difference = 1.04%!

Now instead of being charged a penalty of $2,600 you would be charged $9,055 all because the bank changed the posted rates and discounts they give you. A vast majority of clients are given the discounted rates so why do we even have posted rates?

This example above is not even that bad as I have seen penalties in the $30,000 + range.

These are the details you will never get unless you go through a mortgage expert. Shop your mortgage, don’t just shop your rate!

Jordi Browne Mortgage & Insurance Team

8387 Young Rd
Chilliwack, BC V2P4N8

604 615 1312
604 795 2933
604 795 2770

www.AbbotsfordsMortgageBroker.com 

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Dave  604 897 2741 Jordi 604 615 1312
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*By Referral Mortgage Consultants – doing business as BRMC is: Verico Preferred Financing Inc / Verico Canadian 1st Mortgage Corp which have a co-brokering agreement and there is a common Mortgage relationship and are licensed with the Verico Dreyer Group. Mortgage ownership, that employees of both Mortgage companies may review, advise and help process the Mortgage files. That Verico Preferred Financing Inc & Verico Canadian 1st Mortgage Corp share the some expense and income from mortgages. Kim Langille Featured on thess site is an unlicensed mortgage assistant only, not a Mortgage Consultant. Jordi Browne featured on this site is the Mortgage Broker of record. “The Broker” is Jordi Browne. Jordi Browne also holds a Life Insurance License and represents Verico Canadian 1st Mortgage Corp. Dave Browne featured on this site has a Life Insurance License too but is an independent agent– Jordi and Dave Browne co-broker life insurance files and share expenses, all income retained by Verico Canadian 1st Mortgage Corp.

 

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