Now that rates are extremely low the IRD (interest rate differential) penalties are in full force.
Penalties from the big banks are calculated based on posted rates and discounts given at the creation of the mortgage.
They are calculated differently throughout the lenders. Most of the non-branch lenders use the rate on the mortgage, less the current rate of the term closest to what is remaining on your term, to calculate the differential.
The big banks calculate the differential. The first number is found by using the posted rate less your discount. The second is the current posted rate closest to what is remaining on your term less the original discount you received. The 2 numbers are subtracted and that is your differential. Sounds confusing.
Non branch lenders 5 year rate 2 years ago 4.99%
Big Banks posted rate 2 years ago 6.85% and discounted by 1.86% to equal 4.99%
Non Branch lenders current 3 year rate is 3.60%
Big Banks current posted 3 year rate is 4.1% less discount received 2 years ago, 1.86%, = 2.24%
That is a big difference when calculating a penalty.
For a $300,000 mortgage, the penalty for non branch lender, based on IRD of 4.99-3.60=1.39% is $12,500.
Same mortgage with HSBC is 4.99-2.24=1.75% is $24,750.
The discounts are higher with the longer term mortgages. So when they are used to calculate the penalties on shorter term mortgage rates the difference is substantial. That is how they tighten their grip on you. It limits your options.
The banks rarely explain this to you, and even if they did, there are very few people that would understand.
Options and knowledge are your friends. Using a bank limits them incredibly from the start of the mortgage to the finish because they are looking out for themselves.
They keep you because they limit your options by not giving you the knowledge. Using a broker like myself gives you both. I choose what is best for you with unlimited resources.