Posted vs Negotiated Mortgage Rates: The Broker's Role

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In Canada, mortgage rates posted by major banks and lenders are almost always higher than the rates actually offered to borrowers. This difference between the posted rate and the negotiated (discounted) rate is a fundamental feature of the Canadian mortgage market that every borrower must understand. The posted rate is the official rate published by the financial institution, while the negotiated rate is the rate actually offered to the borrower after negotiation. The spread between the two can range from 0.50% to over 2.00% depending on the loan type, term, and market conditions. The AMF-certified mortgage broker plays a central role in obtaining the best possible rate. Unlike a bank advisor who represents only one institution, the broker has access to products from dozens of lenders and can put offers in competition. In Quebec, under the LDPSF, the broker has an obligation to serve the client's interests and present the most advantageous options. The posted rate also serves as a reference for calculating the interest rate differential (IRD) penalty, which directly impacts the cost of breaking a fixed-rate mortgage. Some lenders use the posted rate rather than the discounted rate in their IRD formula, which can considerably inflate the penalty.

Posted vs Negotiated Rates: Understanding the Spread That Changes Everything

If you have ever checked mortgage rates on a major Canadian bank's website, you probably noticed that those rates seem high compared to rates mentioned in the media or advertised by mortgage brokers. This difference is no accident: it reflects a fundamental mechanism of the Canadian mortgage market where the posted rate and the rate actually offered to borrowers are two very different things.

What Is the Posted Rate?

The posted rate is the official interest rate published by a financial institution for a given mortgage product. It represents the starting rate before any negotiation or discount. Major Canadian banks publish their posted rates daily, and they serve as a reference for several important calculations, including the OSFI stress test, mortgage qualification, and the interest rate differential (IRD) penalty.

Posted rate: The official interest rate published by a financial institution for a given mortgage product. This rate is higher than the rate actually offered to borrowers and serves as a reference for the OSFI stress test, mortgage qualification, and, at some lenders, the IRD penalty calculation.

The Typical Spread and Its Implications

The spread between the posted rate and the negotiated rate is substantial. For a 5-year fixed term, it can reach 1.50% to 2.25%. On a $400,000 mortgage amortized over 25 years, this spread represents tens of thousands of dollars in avoided interest over the term. The negotiated rate is obtained through direct negotiation with the lender or, more effectively, through a mortgage broker who leverages competition between multiple lenders.

The Mortgage Broker's Role in Rate Negotiation

Multi-lender access: the AMF-certified broker works with dozens of financial institutions, from major banks to monoline lenders, credit unions, and alternative lenders.
Business volume: the volume of mortgages the broker generates provides negotiating power that an individual borrower does not have. Lenders offer preferential rates to brokers to attract this volume.
Competitive bidding: the broker can submit your file to multiple lenders simultaneously and put them in competition to obtain the best offer, something a borrower cannot do effectively on their own.
Legal obligation: in Quebec, the broker is obligated under the LDPSF to serve the client's interests and present the most advantageous options given their situation.

Impact of the Posted Rate on Mortgage Penalties

The posted rate plays a crucial role in the IRD penalty calculation at certain lenders. Major banks often use the posted rate as the reference in their IRD formula. Since the posted rate is significantly higher than the discounted rate, the spread between the comparison rate and the contractual rate used in the formula can be reduced, affecting the penalty amount. Monoline lenders, on the other hand, generally use the discounted rate in their calculation, producing penalties that are often more predictable and lower.

Frequently Asked Questions

Why do banks post rates higher than what they actually offer?

The posted rate serves as a starting point for negotiation and as a reference for various calculations, including the IRD penalty and the OSFI stress test. It also allows banks to create a perception of value when they offer a reduced rate. This practice is standard in the Canadian mortgage industry.

What is the typical spread between the posted and negotiated rate?

The spread varies by term and market conditions. For a 5-year fixed term, the spread is generally 1.50% to 2.25%. For shorter terms (1 to 3 years), the spread is often 0.75% to 1.50%. Mortgage brokers generally obtain better rates than what borrowers can negotiate on their own with their bank.

How does a mortgage broker obtain a better rate than the bank?

The broker has access to a significant volume of mortgages across multiple lenders, giving them superior negotiating power. Lenders offer preferential rates to brokers to access their business volume. Additionally, the broker puts offers in competition between different lenders, forcing each to propose their best terms.

Does the posted rate impact my mortgage penalty?

Yes, significantly. Some lenders, notably the major banks, use the posted rate in the IRD calculation rather than the discounted rate. Since the posted rate is much higher, the spread used in the IRD formula is smaller, which paradoxically reduces the IRD-calculated penalty but can still produce results higher than three months' interest.

Do all lenders post inflated rates?

No. Monoline lenders and some credit unions often post rates closer to their actual rates. These lenders generally use the discounted rate (not the posted rate) in their IRD penalty calculation, producing fairer penalties for the borrower.