Paying the IRD
My love for mathematics and my interest in computers led me to develop www.amortization.com software, over 25 years ago. As a result, hopefully some of the mysteries of mortgage calculations have been clarified . This web site strives to provide correct financial information concerning all aspects of mortgages and loans.
A January 23, 2009 article, “When it’s worth refinancing your mortgage” caught my attention. The title of the article is “catchy” but the writer’s answer to the implied question is incorrect! The writer continued …
” …homeowners are experiencing significant savings – even with rate differentials of two points (or possibly more).”
You cannot save interest by paying the Interest Rate Differential (IRD)! You are changing four quarters for a dollar! When a borrower pays the IRD the borrower pays the lender the same interest NOW or upfront instead of throughout the term. The IRD, if calculated properly, fairly compensates the lender for the borrowers premature exiting of the term of the mortgage. This is what the IRD was intended to accomplish when it was introduced by CMHC many years ago. As a side issue, lenders who charge the three month interest penalty because it is greater than the IRD are gouging the borrower, but that’s another story.
Simply speaking, lenders try to match mortgages to guaranteed investments. Therefore, I think you would be very upset if you had your GIC rate reduced in mid term because a borrower wanted to opt out of their mortgage term. Chose your mortgage experts carefully because some of them are only interested in renewal commissions!