When it comes time to choosing a mortgage, many homeowners opt for the lowest rate they can find, at the traditional five-year term, without paying attention to the fine print. In many cases, these no-frills mortgages – and even some that have frills -can make a huge dent in your wallet if you ever try to break them.
The concept of Interest Rate Differential (IRD) is one that often comes up in these situations – and is currently in the news thanks to a single mom’s lawsuit against CIBC. The woman, who recently went through a divorce and was forced to break her mortgage, is suing CIBC for using vague language in her mortgage contract that is forcing her to pay the IRD – the amount of money the financial institution will lose in interest payments as a result of the broken contract. In this situation, it’s around $45,000 because she had eight years left on her mortgage.
The formula that banks use to calculate the IRD are among life’s great mysteries, and often differ between bank to bank, and whether you have a fixed or variable rate mortgage. If you’re signing a mortgage, it’s best to find out what your bank’s policy is upfront, just in case you may have to break it at some point. You may also want to pay a few extra points to ensure your mortgage is portable (can be moved to another home, if you choose to move during the term of the mortgage) or, if you’re not quite sure what the future might bring, sign on for a shorter term. There’s no rule that says you have to sign on for five years – and, in many cases, a lesser term makes more sense, and might even save you money.