Bank's Posted Rates Are Set to Maximize IRD (Interest Rate Differential)

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 fight to retain clients lured by discounting at some bank branches across the country. Those rate cuts average anywhere from 2 percentage points to close to three (from the posted rate). Last month, reported on what appears to be a looming rate war. But as some lenders were racing towards historically low rates 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 some banks calculate IRD based on the difference between posted rates at the time of the loan and posted rates at the time of refi. Other banks calculate posted rate vs. discounted rate given to the borrower.'

The bottom line here is that you need someone who has your best interests at heart i.e. an independent broker, when putting your deal together, and not just the best interests of the bank, their employer.

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