Posted Rates – How Do They Affect My Mortgage?

Hopefully you are enjoying the spring weather that has finally arrived ☺ .  You may have heard in the news over the past few weeks that some of Canada’s chartered banks have increased posted rates on their mortgages. These were generally accompanied by a call to action to get locked in before rates go up!  But what exactly does this increase in posted rates mean for you as a borrower? Today, we are going to cover what you need to know so you can be an informed shopper!

What Exactly Is a Posted Rate?

A posted rate is essentially the mortgage rate that the banks and other lenders publicly announce.  It got its name literally from how banks post their mortgage rates on the wall within the branch. Back in the pre-technology days, that was one of the only ways for borrowers to figure out how much interest rates were—to walk into the branch to check out the rates posted on the wall!

Are the Posted Rates What I Should Expect to Pay as a Borrower?

No, definitely not. Posted rates are usually inflated by 1-2%. To give you an example, on May 9, 2018, on a 5 year fixed mortgage, BMO has a posted rate of 5.19% and a best rate of 3.29% (as per ratehub.ca). Now, not everyone can qualify at best rates but you see the significant spread.

Why Do Banks Have Posted Rates Then?

For profits! It sounds bad, but essentially it’s a bit of a game where the bank hopes that borrowers aren’t financially savvy. If you don’t shop around you may not know what market interest rates are and are less apt to negotiate. Plus, it gives them room to negotiate a “discount” (Ie they offer you 1% below posted rates and you think that is a deal but 2% below their posted rate is easily attainable in the market).  One other major reason to note is that mortgage penalties on fixed rate mortgages are usually calculated using a complicated interest rate differential formula.  For example: say you were breaking your mortgage and the interest rate is currently 5%, but rates have since gone down and now the interest rate is 4%. Therefore, the bank has an interest rate differential of 1% that they are missing out on so will charge you the difference by way of your mortgage penalty. But these interest rate differentials in your mortgage contract usually compare posted rates with your discounted rates, and usually because of this 1-2% artificial spread, the interest rate differential can be quite large, equating to penalties of thousands of dollars.

What Else Should I Know About Posted Rates?

Now that the government has implemented stress testing for mortgage qualifications in Canada (click here for more info on the topic), posted rates do have an impact on the mortgage amount you can qualify for. So these increases in Bank posted rates have resulted in the Bank of Canada raising their qualifying rate. This is the main effect from the posted rate increases. If you were planning on buying something later this year and were bumping up into the maximum mortgage amount you qualify for, this may negatively affect your ability to buy in the same price range as before.

The next time you hear about banks increasing posted rates, now you know what it means for you. It doesn’t necessarily mean interest rates on your mortgage are increasing. Always read beyond the headline!