Great article here. "Why you shouldn't ignore posted rates"
http://www.bnn.ca/News/2015/3/19/Sho...k18Lw.facebook
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More importantly, banks use posted rates to calculate fees for borrowers who break their fixed mortgages early.
When interest rates are rising, banks typically charge a penalty that works out to three months’ worth of interest payments on a mortgage. But when rates are falling, and when people are more likely to try to get out of their mortgage, banks often base their penalties on something called an “interest-rate differential.”
Each bank calculates this slightly differently, but it usually involves the difference between the posted rate on a mortgage at the time borrowers signed the contract and the posted rate on an equivalent mortgage at the time they cancel. Some banks also add in the discount borrowers are actually getting off the posted rates.
In most cases, a penalty based on an interest-rate differential can be tens of thousands of dollars higher than a penalty based on three months’ interest. (The penalty to break a variable rate mortgage is based on the three months’ of interest payments).
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The bolded part is especially important, and typically applies to the 'big banks' such as your Scotia's, CIBC's, RBC's etc. If you are looking to break your mortgage let's say 3 years into your 5 year fixed rate of 3.09%, they're going to base the payout penalty off their posted rate at the time you signed (most likely above 5%), saying the 3.09% they gave you is actually a 'discounted rate'. This IMO, is one of the main reasons big banks don't have your best interests in mind.
Example:
Quote:
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Take Brian, for example. With three years and $520,000 left on his five-year mortgage, Brian (who didn’t want his last name used) is getting ready to sell his Vancouver home in order to downsize. He’s now facing nearly $30,000 in fees to break his mortgage early, a calculation based on the difference between the 5.24 per cent posted rate on his mortgage when he first signed it two years ago and the 3.39 per cent posted rate his bank is offering today on a three-year mortgage (because Brian has three years left on his mortgage.) The bank uses these numbers despite the fact that Brian’s actual mortgage rate is just 2.79 per cent. Had the penalty been based on three months’ of interest payments, it would have been around $3,627.
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There are plenty of lenders I have access to that base their penalties on your contract rate, not a discounted one. As mentioned before, it's very important to have flexibility in real estate.