So are we.  Ever wondered how your bank might calculate Interest Rate Differential (IRD) penalty on a 5 year mortgage when you are 2 years and 7 months into your term?  The time to understand this of course is not when you are looking to pay out your mortgage, but instead before you commit to your mortgage.  Here are some examples:

TD – Use a 2 year posted rate discounted based on the discount offered on your current 5 year mortgage rate.  Read here about the costly effect of all TD mortgages being Collateral charges!

CIBC - Would use the 3 year posted rate.

Scotia Bank – Use a 3 year posted rate discounted based on the original discount offered on your 5 year VRM.

BMO - Use a 3 year posted rate.

Royal Bank - Would use the 3 year posted rate.

HSBC - Use a 2 year posted rate discounted based on the discount offered on your current 5 year mortgage rate.

The whole idea of the IRD penalty is to allow the banks the opportunity to collect the interest that the client has committed to pay over the period of time that the client committed to paying it!   Based on this the major banks should be charging, like most broker channel lenders do, the difference between what the client was paying and what they can re lend the money out for today for a similar time frame, plus costs.

Yet as shown above, most of the major banks base their IRD calculation on posted rates which inflate the penalty to an amount greater than what the bank would have originally received had the mortgage not been paid out early.

The IRD calculation, like many bank policies, has always been something hidden behind a veil of secrecy and we want our clients to be aware of these potential charges before they enter into any mortgage.  The time to understand the potential costs is not when you are looking to pay out your mortgage, but instead before you commit to your mortgage.

If you plan to be in the market for a mortgage, or are already considering a mortgage with any lender, feel free to Contact Us for a professional second opinion.  After all, it’s free, and comes with no obligation on your part.