Posted rates set to maximize IRD

Posted rates set to maximize IRD

There’s a very good reason why some banks continue to advertise unusually high posted rates, argue some brokers, even as other lenders move to slash theirs to the point of precipitating a rate war.

Some brokers believe banks are posting “artificially high rates” only to then offer significant discounts more in line with market forces. The practice is all about increasing interest rate differentials.

“What is not always made clear is that the artificially high rates are used by some banks to calculate IRD and this will make for higher penalties down the line when borrowers refinance or break the mortgage,” Keith Leighton, a broker at Mortgage Intelligence - Ideal Mortgage in Halifax, told “Brokers should warn borrowers that by biting at the discounted rate offered by the banks, borrowers could end up being dinged with steep IRD fees when it comes time to refinance the loan.”

The warning comes as many brokers struggle to retain clients lured by the deep discounting at bank branches across the country. Those rate cuts average anywhere from 2 percentage points to a whopping three.

Last month, reported on what appears to be a looming rate war. But as some lenders were racing towards 2.84 per cent on a five-year fixed, others have decided to hold to posted rates above 5 per cent. They’ve also resisted offering special rates.

The potential IRD penalties for borrowers opting for bank discounts are very real, said another broker, Michael Marini, with Dominion Lending Centres Funds in Toronto.

“Yes, this happens,” he told “Although the terms are written in the contract, many borrowers are not aware of what they mean.

“People could end up paying high penalties because banks some banks calculate IRD based on the difference between posted rates at the time of the loan and posted rates at the time of the refi. Other banks calculate using the posted rate versus the discounted rate given to the borrower.”

  • John W 2012-08-10 4:33:55 AM
    This would also result in the penalties calculated today to be lower. I can't see the banks losing money now to gain money later.
    Post a reply
  • Island Advisor 2012-08-10 8:02:06 PM
    Posted Bank rates have a valid purpose and are mis-understood and mis-interpreted by a majority of the population. Banks being Federally Regulated offer mortgages and loans to a broader group of Canadians than most ALT A monolines... examples include those of less marketable area's and riskier properties which are unable to be financed through monolines for this reason. Posted rates become a great rate when buying a mobile home on leased land in northern remote Canada when no other lenders come to the table... Posted rates also exist to calculate cash back mortgages and other specialty products that will be increasingly popular as the new refinance rules start to restrict peoples options. That is why they are called MARKET RATES... as not all markets have the same economic strength and demand and the market rates reflect that. Posted to posted penalties are more often steeper than discounted to discounted but not always and Banks also have Port and refinance policies to avoid IRD or any penalty at all... Not all bad just saying
    Post a reply
  • Ad Lakhanpal, Mortgage Broker, Mortgage Alliance 2012-08-11 2:32:06 AM
    There seems to be a misunderstanding in the basic premise of this article. IRD is not affected by the posted rate. It is calculated based on the difference between a client's current rate and what rate the lender can re-lend the money for at that time, or some other rate such as Canada bond etc.If the new rate is lower, the penalty will be higher.Since most mortgage are written at a rate that is lower than posted, comparing that to the posted rate will lead zero IRD.
    Post a reply