If you’ve ever had to break a fixed-rate mortgage early, you’ve probably been hit with a surprisingly high penalty. One of the biggest reasons for this? Bank posted rates—which are often much higher than the rate you actually received. Let’s break down what they are, how they impact Interest Rate Differential (IRD) penalties, and why banks use them to their advantage.
What Are Bank Posted Rates?
Bank posted rates are the official mortgage rates that big banks advertise. But here’s the thing—these rates are usually way higher than the discounted rates most borrowers actually get.
For example, a bank might list a 5-year fixed mortgage at 6.79%, but with some negotiation (or the help of a mortgage broker), you could lock in something much lower—like 4.99%.
How Bank Posted Rates Inflate IRD Penalties
When you break a fixed-rate mortgage early, most lenders charge the greater of:
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Three months’ interest, or
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The Interest Rate Differential (IRD) penalty.
How IRD Is Calculated
IRD is based on the difference between:
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The rate you’re paying, and
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The rate the bank can charge a new borrower for a term similar to what’s left on your mortgage.
But here’s where banks tip the scales: instead of using the actual rate you got, many of them use their posted rates—which inflates the penalty big time.
Example: How IRD Penalties Can Skyrocket
Let’s say:
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You have a 5-year fixed mortgage at 4.99%.
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You need to break it 2 years early.
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The bank’s current 2-year posted rate is 6.00%.
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Your original discount from their posted rate was 1.80% (because the posted rate when you got your mortgage was 6.79%).
Instead of comparing your actual 4.99% rate to today’s real 2-year rate, they subtract your original discount (1.80%) from their current posted rate:
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New comparison rate = 6.00% - 1.80% = 4.20%
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IRD calculation = (4.99% - 4.20%) × balance × remaining term in months ÷ 12
If your mortgage balance is $400,000, this could mean tens of thousands of dollars in penalties.
Had the bank used your actual rate (4.99%) instead of the inflated posted rate, your penalty would be significantly lower.
Why Do Banks Use Posted Rates?
Banks do this for a few key reasons:
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To Maximize Penalties – Using posted rates in IRD calculations makes breaking a mortgage much more expensive, keeping you locked in.
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To Keep Customers from Switching – High penalties discourage borrowers from refinancing with another lender before their term is up.
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To Make Their Discounts Look Better – Banks use high posted rates to create the illusion that their discounted rates are a great deal, when in reality, most borrowers never pay posted rates.
How to Avoid Huge IRD Penalties
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Choose a lender with fair penalty calculations – Some lenders use actual rates instead of posted rates, which can save you thousands.
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Consider shorter fixed terms – A 2- or 3-year fixed mortgage reduces the risk of needing to break it.
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Look for better prepayment terms – Some lenders have more flexible early payout options.
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Work with a mortgage broker – I can help you find a lender that won’t gouge you on penalties if you need to make a move before your term is up.
Final Thoughts
Bank posted rates are a sneaky way for lenders to charge you more when you need to break a mortgage. If you’re thinking about refinancing, breaking your mortgage, or just want to make sure you’re with a lender that plays fair, let’s chat. I’ll help you find a mortgage that works for you—without the nasty surprises.