While there are plenty of mortgage rate specials offered to home buyers, what we don’t see are the posted rates that play and important role in the mortgage business.
You might be surprised to know the banks have kept their posted mortgage rates unchanged. Many are not even aware of a posted rate, which could financially impact you down the road.
Posted rates are key if you opt for a variable rate mortgage or any term less than a five years.
The federal government imposed new rules for qualifying in an attempt to limit the option of a variable or a term less than five-year fixed rate mortgage, making it mandatory that you qualify at the higher posted rate.
The posted rate is currently 4.74% and variable rate mortgages are being offered as low as 2.2%. So you qualify at 4.74% and pay only 2.2%. How does that affect you?
You will qualify for a much lower amount and as a result the variable and one- to four-year term mortgages tend to be out of reach.
If you opt for a five-year fixed mortgage currently as low as 2.69% that is the rate you will qualify at and a rate over 2% lower than the posted rate will provide much more room to qualify for a mortgage.
So how does the posted rate come into play if you have qualified for a five-year fixed mortgage at 2.69%.
Should you need to break the term, something most of us think will never happen, knowing the posted rate of the lending institution where you are getting a mortgage could save you thousands of dollars down the road.
The posted rate is used to calculate the penalty for breaking your fixed rate mortgage early. The penalty to break a fixed rate mortgage is three months interest or an interest rate differential.
Every bank calculates the interest rate differential slightly differently.
Typically it involves the difference between the posted rate (not the rate you are paying) on the mortgage at the time you signed your mortgage and the posted rate on an equivalent mortgage at the time you cancel your mortgage.
Most banks also add in the discount you received on the posted rate when you got the mortgage.
A penalty based on an interest rate differential can be in the tens of thousands of dollars higher than a penalty based on three months interest.
In all fairness when a borrower does break their mortgage the lending institution may lose profit they would have made if current rates are lower (they will now have to lend the money at the lower going rate) and you did opt for a five-year fixed for security.
What isn’t fair is calculating these penalties based on the posted rate and not the rate you are actually paying.
It is also the main reason why prepayment penalties have not decreased even though mortgage rates have come down so much.
For example, consider a $300,000 balance owing on a five-year term mortgage you took out three years ago at a rate of 3.39%. The posted rate at that time was 5.24%. The three month interest penalty would be $2,542 the interest rate differential would be $14,400.
The bank charges you the greater, resulting in a penalty of 14,400.
Now let’s say you arranged your mortgage with one of several lending companies available through a mortgage broker. Their posted rates are nowhere near what the banks show as posted rate.
Using the example above, their posted rate would have been 3.69% resulting in an interest rate differential of $5,100. Not great either but remember you are breaking the contract and it’s far more favourable than $14,400.
So while your mortgage is never the “posted rate,” you can see why it is one of the most important questions you can ask when you are shopping for a mortgage.
Don’t be flattered when the bank offers you a huge discount from posted rate—just be aware of the future potential consequences.