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TagInterest rate differential

Higher Bond yields are bringing higher fixed rates..but that’s not all.

Some of Canada’s major banks have raised their 5 year fixed mortgage rates… but not their posted rates.   It’s become common practice for the Big Six Retail banks to show a posted 5 year fixed rate ….but in the past few years the Banks have also started to advertise their so-called ‘special’ rate.

The ‘special’ rate has increased by 0.25% to 4.19% to 4.29%, depending on which Bank you visit.  Of course, these rates are still much higher than the true discounted rates available through Mortgage Brokers.   Wholesale 5 year fixed rates are still around 3.69% to 3.79% (these will probably go up in a few days by 0.25%).  But this is nothing new.

What’s different this time is that the Posted Rates didn’t go up.  We’re not sure why, but here is one definite result of this move…your mortgage prepayment penalty will not decrease, which is the usual effect of an interest rate hike.   That’s right, if you have a closed fixed rate mortgage to payout, your penalty is either 3 months interest or Interest Rate Differential (IRD).

IRD is calculated many different ways now and we are hoping the Federal Govt’s announcement of a standardized prepayment penalty will come soon (we hear it could come this spring).   Currently, Banks use formulas that include the Posted rate to calculate your penalty.  This calculation has become a lucrative source of revenue for the Banks.  Reports of 6, 10 and even 14 months worth of interest have been charged to unsuspecting borrowers.  Record low rates means record HIGH penalties.  Come on Federal Govt, we need this change now.

As an aside, Variable rates are still around 2.25%…. this larger gap between fixed and variable is going to make Variable more attractive.

Don’t expect new mortgage penalty laws til next year…maybe.

Mr. Potter would be proud

Seeing that it’s near Christmas, I thought this old classic movie pic was appropriate for today’s topic.  “The house always wins” (in case you can’t read the small print).   And how true that is…

It sounds like the long-awaited Federal Govt’s Standardization of Prepayment Penalties won’t happen til some time next year at the earliest….maybe.    A good source told me that the Govt wants to put that Bill through together with several other Finance laws…..but I’m beginning to wonder if they will make any changes at the pace they are going.

The Bank lobbyist’s have done their jobs well.   Mr. Potter would be proud.   Record low mortgage rates brought us record high mortgage penalties.   6, 10 and even 14 months of interest were charged as prepayment penalties to Canadian borrowers in the past 20 months.   To put it another way, we have seen penalties of $10,000, $20,000 and more. Continue reading “Don’t expect new mortgage penalty laws til next year…maybe.”