Rates and interest
Discounted rate
The rate you pay after the lender's discount off its posted rate, and the rate a fair penalty calculation should use.
Nearly every Canadian mortgage is written at a discounted rate. The posted rate is the list price and the discounted rate is the price you pay. It's the rate that appears on your commitment.
The difference gets expensive if you break a fixed-rate mortgage. The interest-rate differential compares your rate to a comparison rate, and lenders choose different comparison rates. Monolines and most credit unions compare against their current discounted rate, which is a like-for-like comparison. The big banks generally compare against their posted rate minus the discount you originally negotiated, which makes the differential much wider.
On an ordinary Alberta balance with 3 years to run, the 2 methods can differ by five figures on the same mortgage on the same day.
Ask which method your lender uses before you sign. It's written into your mortgage terms, and you won't see its effect until the day you need to break the mortgage.
Related terms
Posted rate
A lender's advertised list rate, well above what borrowers pay, and the rate some penalties are calculated from.
Interest-rate differential (IRD)
A prepayment penalty calculated from the gap between your rate and a comparison rate, applied over the months left in your term.
Prepayment penalty
The charge for paying off a closed mortgage early: 3 months of interest on a variable, or the greater of that and the IRD on a fixed.
This definition describes how the term is used in Canadian residential mortgage lending. It’s general information, not advice on your file. Rules, thresholds and rates change. Where a figure is quoted, it’s current as of the date shown on the related guide.
Sharp rates. The full picture.
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Daniel De Sousa, Mortgage Associate, can walk you through it before you sign anything. Or get a rate quote: 6 questions, about two minutes, and no credit check to start.
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