• Transcript of Video Blog:

    Hi, everybody. It’s Rowan Smith with the Mortgage Centre. I want to talk today about interest rate differential penalties, mortgage penalties, and non banks. The reason I’m bringing this up is a lot of people have said to me, “Rowan, how come you don’t fund more mortgages with TD Bank or Bank of Montreal and all the big banks?”

    The reason is, amongst many other things, but one of the primary ones, and the one I want to talk about today, is their penalty calculation. In my experience, the big banks have a more punitive form of interest rate differential calculation than that that we get through a non bank.

    The reason being is most financial institutions, most of the big banks, will base their penalty that you’re going to pay on a fixed rate mortgage off of their posted rate, which is much higher than, say, a discounted rate. The difference right now can be the difference between 5.29 being posted and 3.49 or thereabouts being their discounted rate.

    Well, if you were to add that up over five years, the difference between 5.29 and 3.49, figure out what that portion is, it can be pretty huge. So you want an institution that’s not going to use a high posted rate or not going to use a high rate on their IRD, interest rate differential, penalty calculation.

    Now most non banks don’t even have posted rates, so when they’re calculating their IRD, they’re basing it off of a much lower rate. In other words, you’ll be paying a penalty between 3.79 and 3.49 for the remainder of the term versus 5.29 and 3.49. It’s a very big difference between the way those penalties are calculated.

    This is all nuts and bolts stuff that goes on the back end. You won’t be aware of it until you go to pay out your mortgage and are horrified by the penalty with your big bank. So if you’ve been dealing with the same institution for many years and you’re fiercely loyal to them, understand they are in it to make a buck, and they’ll make it on you.

    For the Mortgage Centre, I’m Rowan Smith.

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