Why you should care about the banks’ posted rates on mortgages

There are not too many Canadians these days who blindly accept the posted rate on a mortgage, but that doesn’t mean no one should care when the banks drop their published rates.

What’s key about the posted rate is that it is used by the Bank of Canada to create what is called the 'qualifying rate'. The prime rate is 2.70% as of the last change in July 2015 and you can obtain a Variable Rate mortgage at rates that are well below the Prime Rate, but if your mortgage is for a term under five years, you qualify based on the 'posted rate' — meaning you must borrow based on a higher monthly payment which ultimately means you will be restricted to taking on a smaller mortgage.

If you took a fixed rate mortgage, as 75% of Canadians have been doing for at least 5+ years, and you want to pay off the mortgage now, you would be subject to a mortgage penalty based on a very complex calculation call IRD (Interest Rate Differential).  Ostensibly this is to make the bank whole for you breaking your contract early as the bank would have contracted to pay a given interest rate to the entity that provided the funds for your mortgage for the entire term. When you break the term the bank is still obligated to the payments they committed to. And that's fair enough, but many would argue that the IRD calculations are not in keeping with the above concept. And that's because they use the Posted Rate in calculating the penalty.  In fact there is a class-action lawsuit winding its way through B.C. courts now on this very issue Class-action lawsuit against CIBC for mortgage penalties

Read on here for the skinny on this subject in this Financial Post article Why you should care about the banks’ posted rates on mortgages