Posted rates set to maximize IRD

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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 MortgageBrokerNews.ca. “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, MortgageBrokerNews.ca 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 MortgageBrokerNews.ca. “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 on 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.

  • Island Advisor on 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

  • Ad Lakhanpal, Mortgage Broker, Mortgage Alliance on 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.

  • Alberta mortgage broker on 2012-08-11 7:37:37 AM

    what the article missed is how the major bank calculate the IRD. Most of the major banks calculates the IRD this way. If you received a 1.5% discount from the post rate. and your rate is 3.54% and you have two years left in your client mortgage. The banks takes the 2 year rate minus your original discount of 1.5% and gets you to pay the difference between your rate of 3.54% and the new discount rate of the 2 year rate.

    what this means is that a client who deals with the big bank will have a massive IRD pre-penalty compare to companies such as mcap or xceed or resmor.

    the client are getting punished for getting a low rate and a discount from the major banks. if the bank did really care and looking after the client, they would not have any posted rate and only have the best rate so this way they could not confuse or rip off the client.

    I personally had a mortgage where I had a year left on the mortgage and my penalty was very high. after I redid this mortgage and double the amount, and only have 1 year left I switch to another lender for a better rate, my penalty was 1/3 less than the first time I paid out my mortgage. The difference? The first time my mortgage was with a regular bank, had a great rate but deep discount. the 2nd time I had an xceed mortgage where they charged me the difference between discount rate that I received to the new discount rate. that is the main difference.

    if you are helping your clients think twice before sending your clients to the big banks.

  • 15 Year Banker & Broker on 2012-08-16 2:38:11 PM

    As a banking and broker veteran I can say without any question the focus of this article and the "Alberta Broker" have it exactly right. The primary reason for the larger banks (the big 5) to maintain high posted (market) rates is to USE them. Along with every contractual mechanism at their disposal, to exact clients from their money. It's banking folks, it's all about the bottom line. The larger banks have a signnificantly higher over head and profit requirement than the most "wholesale" mortgage lenders. Common sense dictates they must exact a higher revenue from clients by any legal means. Steep IRD Penalties are one of the less obvious ways still available in an increasing transparent mortgage market. Recent legislative changes regarding client qualification (and re-qualification) help the big 5 greatly in their return to Posted Rate pursuit. Not only do they still have 70% of the current borrowers but offering "deep discounted" rates recently, lures more back to the fold. For many borrowers (if not most) re-qualification over the next 5 years Will be an issue as rates come off their historic bottoms. So what happens if you've been making your payments but your service ratios or LTV prevent you from shopping elsewhere?.. Posted Rates. The higher the better for the bank. Caveat Emptor (Buyer Beware). Banks also know that statistically over a third of mortgages do not reach a typical 5 year term maturity. Life happens, a need for more funds, kid's college, an emergency, a new business, a move, a divorce, etc etc. Because of these all too frequent events, I have unfortunately seen more than my fair share of extremely high IRDs and shocked borrowers. Not to mention 2 significant class action suits against 2 of the big of the big banks during previous periods of IRD feeding frenzies. Do your homework, ask the right questions READ & UNDERSTAND the fine print. An experienced, impartial Mortgage Broker can be your most valuable asset and ally in the war on your wallet.

  • 15 Year Banker & Broker on 2012-08-16 7:11:08 PM

    As a banking and broker veteran I can say without any question the focus of this article and the "Alberta Broker" have it exactly right. The primary reason for the larger banks (the big 5) to maintain high Posted (market) Rates is to USE them. Along with every contractual mechanism at their disposal, to extract the most money possible from clients. It's banking folks, it's all about the bottom line. The large banks have a signnificantly higher over-head and profit requirement than the most "wholesale" mortgage lenders. Common sense dictates they must derive a higher revenue from clients by any legal means. Steep IRD penalties are one of the less obvious ways still available in an increasing transparent mortgage market. "Bargain" rates are the bait. 

    Recent legislative changes affecting borrower qualification (and re-qualification) help the big 5 greatly in their preferred good 'ol Posted Rates for the masses. They miss the profits. They still have over 70% of the borrowers and are now offering "deep discounted" rates to lure more back to the fold. Why? For many borrowers re-qualification over the next 5 years Will be an issue, as rates rise off their historic bottoms. What happens if you've been making your payments but your service ratios or LTV prevent you from shopping elsewhere? You guessed it.. Posted Rates. The higher the better. Caveat Emptor (Buyer Beware). Banks know (and borrowers should to) that statistically over a third of mortgages do not reach the typical 5 Year Term maturity. Life happens, a need for more funds, kid's college, an emergency, a new business, a move, a divorce, etc etc. Because of these all too frequent events, I've unfortunately seen more than my fair share of extremely high IRDs and very shocked borrowers. I've also seen 2 significant class action suits against 2 of the big banks during previous periods of IRD feeding frenzies. Pretending or debating that money (your money) isn't the motivation is naive. Do your homework, ask the right questions READ & UNDERSTAND the fine print. An experienced, impartial Mortgage Broker can be your most valuable asset and ally in the war on your wallet.

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