Only the most naïve customer would pay the “posted” rate for their mortgage.
Whether you use a third-party mortgage broker, or simply walked into your nearest bank branch and spoke with their mortgage specialist, you almost certainly were offered a discount off the posted rate.
So why do financial institutions bother having these rates? Well, aside from being a benchmark to start the negotiations from, the posted rates do serve a few purposes.
When it comes to making money, bankers are pretty smart. (You don’t make quarterly – as in “every three months” – billion-dollar-plus profits by accident.) They also know that most Canadians aren’t as financially savvy as they should be.
So when that mortgage renewal letter comes in the mail, many of us simply sign on the dotted line. The extra money made on each of these mortgages adds up to a decent chunk of those profits.
Banks also seem to equate loyalty with gullibility. If, along with your mortgage, you also have your chequing, savings, RSP, and line of credit accounts with the same institution, they’re going to assume – probably rightly – that you’ll be reluctant to go through the hassle of switching everything to another bank.
As a result, when you go in to sit down with the friendly mortgage specialist at your local branch, you may be offered a half per cent off the posted rate. If they really like you, you may even get a little more off. Either way, you’ll walk out thinking about what a great deal you got for being a loyal customer.
Meanwhile, your neighbour who’s letting a mortgage broker do the shopping around, may end up going with the same institution, but at a rate a full per cent or more off the bank’s posted rate. In short, the posted rates are in part to catch a few suckers. But there’s a bit more to it than that.
Even if you’ve been smart enough to shop around, the banks use their posted rates for another profit-generator: calculating the Interest Rate Differential (IRD) if you break a mortgage before the term is up. The bank will charge you a penalty for this which will be the higher of either three-month’s interest or the IRD. And more often than not they calculate the IRD using the higher posted rate, not the discounted rates they offer customers who’ve done their homework.
Check out this Mortgage Penalty Calculator tool or this interesting article for more info of IRDs. It’s worth noting that some banks, like ING Direct Canada, have only one set of rates. Which means that if you do choose or need to break a mortgage held with them, the penalty will be calculated on the competitive rate they’re offering customers at the time.
The posted rate can also rear its head if you opt to switch your variable rate mortgage to a fixed rate mortgage. Some lenders will only let you switch to the posted fixed rate or offer you a measly discount to the posted rate.
So, while you’re shopping around for rates, you should also consider how nervous rising interest rates will make you feel before you sign up for a variable mortgage. If you anticipate moving to fixed at the first sign of hikes, you may be better off locking in from the start.