You may have seen that a few chartered banks have raised their posted rate. This doesn't necessarily mean that you will receive a higher mortgage rate when you get a mortgage with them today since they advertise both posted rates and discounted rates. They have to offer discounted rates since there are many lenders out there that do not have posted rates. So why is the posted rate so important? Keep reading.
It is important to highlight something regarding the chartered bank posted rate increase that is more behind the scenes but right up there in importance when someone is getting a mortgage. Even though posted rates went up, we have not seen as big of an increase in discounted rates. The bond rate is holding at the same level for the last few weeks so nothing indicating a big increase like this. But where we will see a major difference is penalty calculations. Any lender that advertises (or has) posted rates uses a discounted rate interest rate differential (IRD) calculation. Typically lenders that only advertise (or have) discounted rates would use a standard IRD calculation.
The examples below are based on today's info. If everything remained the same you would have this situation. This is how the two are calculated:
1. When you get a mortgage with a posted rate lender, the posted rate is saved in the mortgage documents. I'm going to show some formula's so bare with me. In the end, the most important number is the penalty at the end.
(Posted Rate at time of mortgage - Posted rate for term remaining) / 12 = IRD Factor
IRD Factor x Current Mortgage Balance x Remaining Months = Penalty
Current rate situation:
(5.59% - 3.44%) / 12 = 0.1791% or 0.001792
0.001792 x $400,000 x 24 = $17,200 (penalty you would face)
2. If a lender does not have a posted rate they compare the contract rate to the current rate offered for the remaining term.
(Contract Rate - Current Rate for Remaining Term) / 12 x Current Mortgage Balance x Remaining Months = Penalty
(3.34% - 3.59%) / 12 x $400,000 x 24 months = -$2,000
Since the IRD is negative they will do a 3 month interest penalty:
(3.34% x $400,000) / 4 = $3,340 (penalty for this lender)
As you can see the difference in penalty calculation is quite significant. By increasing the posted rate from 5.14% to 5.59%, the lenders have added $3,600 to the penalty they can charge for this mortgage situation.
This is a little long winded but we thought it was important to share. Those penalty calculations are eating into your equity when try and do something with your mortgage in the future.
Remember: Your mortgage is about more than just rate!!
Your Mortgage Guru
This article is in the category: General.