Download IRD - Mortgage Concepts Inc.

80 KING STREET EAST
STONEY CREEK – HAMILTON, ON
L8G 1K2
PHONE: 905-664-9493
FAX: 905-664-3970
MORTGAGECONCEPTS.ca
INTEREST
ONE CHOICE.
RATE
DIFFERENTIAL
ONE BIG DIFFERENCE.
FIND OUT WHY >
WHAT IS INTEREST RATE DIFFERENTIAL?
IRD refers to a calculation that Mortgage Lenders use to determine the cost of
breaking a fixed rate mortgage. This protects the lender should you choose to
end your mortgage term early.
Standard Fixed Rate Mortgages are generally subject to a penalty that is the
greater of IRD, or 3 months of Interest. In the Mortgage Industry there are two
ways in which your IRD can be calculated.
In order to figure out the IRD calculation, we need to know:
- the amount left owing on the mortgage
- your current interest rate
- the current market rates
THE IRD CALCULATION, WE CHOOSE:
— WHAT YOU SEE IS WHAT YOU GET—
Your Current Rate
The rate you’re paying on
your mortgage
Subtract the Current
Market Rate
This is the closest rate to the
remaining time left on your
mortgage. If 2yrs are left, use
today’s rate for a 2yr mortgage.
Multiply by the Time
Left
Multiplied by Your
Mortgage Balance
Take a look at the # of
years left on your term
And we’re done, in 4 easy
steps! How much do you
owe?
IN 4 SIMPLE STEPS
HERE’S AN ILLUSTRATION:
•
You have a 5 year rate of 2.64% and two years left in your term.
•
Today, your mortgage balance sits at $375,000.
•
You are changing jobs, moving to a new city, or just want to buy a
new house, which means, you will be breaking your term & paying out
your mortgage early.
• Today , your Lender is offering a 2 year mortgage rate at 2.19%.
NOW WE HAVE THE VARIABLES, LET’S TALK NUMBERS…
THE
IRD CALCULATION
WE CHOOSE:
— IN 4 SIMPLE STEPS —
Your Current Rate
Subtract the Current
Market Rate
2.64%
2.19%
Multiply by the Time
Left on Your Mortgage
Multiplied by Your
Mortgage Balance
2 Years
$375,000.00
2.64% - 2.19% x 2 x $375,000.00 = $3,375.00
It’s complicated…
Let’s take a closer look at how most Banks calculate
INTEREST RATE DIFFERENTIAL
While, advertising low rates for new business, the Bank’s published interest rates are
generally much higher and be can found in the fine print of the mortgage commitment.
Although, it seems like you are catching a great interest rate, in actuality you are receiving
the Bank’s published rate with applied discounts that reduce the amount of interest you will
pay across your term to meet the rate which was advertised.
Now, if you stick out your term, this generally won’t affect you, but when breaking or
paying out your mortgage early, it costs you big time!
In the following example, we are going to examine a mortgage with an advertised
interest rate of 2.64% for 5 years, with a published interest rate of 4.74%, the discount
will be used to determine the IRD penalty.
BREAKING IT DOWN: (A)-(B)=(C)
(A)
(B)
(C)
represents the Bank’s 5 year published rate
represents the current rate on the mortgage
represents the differential
(A) 4.74% - (B) 2.64% = (C) 2.10%
1. Next, we need to find out what the Bank is charging today for a 2
year mortgage since that is how much time is left on the term we
are breaking to pay out early.
2. Based on the Bank’s website, today a 2 year mortgage is being
advertised with a 2.85% rate.
3. Now, that we have all variables we can calculate the Bank’s penalty
for breaking a mortgage early >
The Other IRD
YOUR CURRENT
RATE
The rate you are paying
on your mortgage.
SUBTRACT CURRENT
MARKET RATE ( --)
YOUR DISCOUNT
Current rate equal to the
time remaining in your
term less the discount
on the original rate.
MULTIPLIED BY
THE TIME LEFT ON
THE MORTGAGE
Look at the number of
years left on your term.
MULTIPLIED BY
YOUR BALANCE
What Is Owing To The
Lender
2.64% - (2.84% - 2.10%) x 2 x $375000.00 = $14,250.00
A Bank’s IRD
Penalty:
Our Broker’s
IRD Penalty:
$14,250.00 - $3,375.00 =
$10,875.00
Today, when we are out shopping for a car, stereo, internet provider or
even the groceries, it’s only natural to look for the best prices or rates,
but with the complexity of mortgages available, there are many other
factors one should consider equally important like the difference
between the IRDs being offered in the market today.
Given the intricate nature of mortgages, careful thought and
comprehensive research can save you thousands of dollars
OR
You can put your feet up, relax and have a Broker doing the shopping
for you, tailoring a mortgage that will suit your unique needs & long
term financial goals, while saving you money!
THE BOTTOM LINE:
With 67% of Canadian mortgages being broken halfway before their 5 year term
closes, the Interest Rate Differential penalties become as important as the
interest rate is. Asking about IRDS will keep you protected should you need to
refinance, consolidate, or move.