Although it’s completely negotiable (they hardly ever show you their “best”), banks use the highest posted rate in various calculations later on to dramatically increase your mortgage costs.
Most mortgage holders don’t recognize their rates are negotiable, so they simply sign and unknowingly absorb the additional interest cost.
And the truth is, few people enjoy negotiating, but the big banks’ posted rate system has made negotiating a requirement. You’ll rarely find the banks absolute lowest rate published out in the open. New home buyers, especially, are led to believe that they’ve not earned the “right” to receive low interest rates like experienced borrowers. This is simply not true.
Let’s examine the difference between a banks’ posted rate (4.99% for example) vs. the negotiated, discounted rate (2.89%) for the average mortgage:
If you went with the 4.99% posted rate you’d pay $87,847.51 in interest.
If you negotiated a 2.89% you’d pay $51,096.52 in interest over the same period of time!
That’s a difference of $36,750.99.
Even if you get a discount, you can’t relax.
If you don’t watch out, the posted rate will be used later in calculations to raise your costs. Here are two important scenarios to look out for where the posted rate can come back.
Most banks send an auto-renewal letter to you when your original term is due to expire. This letter contains a list of renewal options. Each option consists of a term and the associated posted rate (not the available “best” discounted rate). The client is then asked to pick one.
This is the bank’s attempt to get clients to renew at higher rates, with no effort. It’s a win for the bank every time a client signs the Auto Renewal Letter. They’re “banking” on you not shopping around before renewal or hoping that you’re too busy / confused to think about what you’re signing.
Unfortunately, it works really well – many clients are surprised and upset when they have to fork over more money than ever at the end of the next month. Current statistics put auto renewals at over 85% for big banks. OUCH.
Mortgage penalties are used when you end your mortgage earlier than the agreed upon term.
All of the top 5 banks use the posted rate as a component of the penalty calculation, regardless of your ACTUAL discounted rate. Since the posted rate is 1.4% to 2% higher than your actual rate, your penalty will be significantly higher.
We’ll go into the details of mortgage penalties and how to avoid them in the next part of this tutorial. We’ve seen this particular penalty calculation effect A LOT of mortgage holders. Stay tuned.
If you’re wanting to get started with shopping, see how much you can afford. Our team scans the market and finds offers catered for you, then we’ll compare them to your current offers and help you figure out which one’s best — and most importantly, help you avoid a Posted Rate that could come back to haunt you.