Contract vs. Discounted Interest Rate
While every mortgage has a contract rate some lenders record this differently in their paperwork. You may have a contract rate or you may have a discount from a posted rate as a contract rate. This discount comes into play when you are charged an interest rate differential (IRD) penalty.
• Contract Rate: The contract rate is the interest rate that you are being charged by the lender. This is the rate of return the lender will be receiving on the money they have lent you for your mortgage. This rate will be defined in your mortgage commitment from the lender.
• Discounted Rate: We want you to be aware that some lenders offer the contract rate as a discount from their posted rate. When you see that you are being offered 3.14% it may say 2% discount from the posted rate of 5.14%. While these seem like the same thing, they are actually different. If a lender is providing you with a discount then if you should have to break your mortgage this discount will be incorporated into their calculation and will drastically change the penalty amount. Beware of contracts that do this if there is any chance you may need to break your mortgage.