Posted Rates vs Discount Rates: Why You Should Never Pay the Posted Rate

Walk into any bank branch and you'll see posted rates displayed prominently. What they don't advertise is that almost no one actually pays these rates. Understanding the difference between posted rates and discount rates can save you thousands over your mortgage term.

What Are Posted Rates?

Posted rates (also called "advertised rates" or "rack rates") are the benchmark mortgage rates that banks publicly display. They serve several purposes:

• Establish a baseline for rate negotiations
• Calculate mortgage penalties for variable and some fixed mortgages
• Set the mortgage stress test qualifying rate
• Provide a reference point for rate discounts

Key Insight: Posted rates are intentionally set high. They're the starting point, not the finish line.

What Are Discount Rates?

Discount rates are the actual rates borrowers pay after negotiation or by using a mortgage broker. The "discount" refers to the reduction from the posted rate.

Current Example:

• Big Bank Posted 5-Year Fixed: 6.79%
• Typical Discount Rate: 4.64%
• Savings: 2.15% off the posted rate

On a $500,000 mortgage, that 2.15% difference saves approximately $50,000+ in interest over 25 years.

Why Banks Use Posted Rates

Banks have strategic reasons for maintaining artificially high posted rates:

1. Negotiation Flexibility

Starting high allows banks to offer "discounts" that feel like wins for customers while still maintaining profitable margins.

2. Penalty Calculations

For variable-rate and some fixed-rate mortgages, penalties use the Interest Rate Differential (IRD) formula, which references the posted rate.

3. Stress Test Requirements

The federal stress test uses either the Bank of Canada qualifying rate or posted rate + 2%, whichever is higher.

How to Get the Best Discount Rate

1. Work With a Mortgage Broker

Brokers access rates from 50+ lenders, including exclusive rates not available directly. Banks don't offer their best rates to walk-in customers.

2. Compare Multiple Lenders

Get quotes from at least 3-4 lenders before committing. Competition drives better offers.

3. Negotiate Directly

If going directly to a bank, don't accept the first offer. Tell them you're comparing rates—they often have room to move.

4. Time Your Application

Lenders are most competitive at quarter-end and year-end when they're trying to meet targets.

Posted Rate Penalty Trap

Here's why posted rates matter even if you never pay them:

If you need to break a fixed-rate mortgage early, your penalty may be calculated using the IRD formula:

IRD = (Posted Rate at Signing - Current Posted Rate) × Remaining Term × Mortgage Balance

Banks using high posted rates create massive IRD penalties. This is why:

• A $400,000 mortgage with 3 years remaining
• Could incur a $15,000-$25,000 penalty at some banks
• But only $3,000-$5,000 at lenders using fair comparison rates

Monoline Lenders: Better Penalty Policies

Many monoline lenders (non-bank lenders) use the discount rate for penalty calculations instead of the posted rate. This means:

• Lower IRD penalties if you break early
• More flexibility without excessive costs
• Sometimes slightly higher rates, but better overall value

The Bottom Line

Never accept a posted rate as your final rate. The discount rate you actually pay should be 1.5% to 2.5% below posted, depending on market conditions. Working with a mortgage broker is the easiest way to access these discounts without negotiation hassle.

Ready to see what discount rates you qualify for? Apply today and we'll shop the market for your best rate.