Maximizing Mortgage-Related IRP Benefits

As a Canadian Forces member when you are posted, you may be entitled to a posting allowance offered through the Integrated Relocation Program (IRP).  The IRP program provides funding to cover many aspects of home relocation.  One such benefit of the program is mortgage interest rate buy down.

The mortgage interest rate buy down can be viewed as a prepayment towards your mortgage interest payments.  When you prepay a portion of your interest the mortgage lender will quote you a lower interest rate.

Interest rate buy down example

To illustrate this point, let's take an example where a borrower decides to take on a $100,000 mortgage.  The mortgage lender offers a 5 year mortgage term with an interest rate of 5%.  The amortization of the mortgage is 25 years.

Over the course of the 5 years, the borrower will pay $19,404 in mortgage interest.

If through IRP the CF member receives a interest rate buy down benefit of $10,000, the the CF member will only be required to pay $9,404 (=$19,404 - $10,000) of interest.

The interest rate for a 5 year term (25 year amortization) were only $9,404 of interest is paid is 2.52%.

From this example, a prepayment of $10,000 can be expressed as buying down the interest rate by 2.48% (=5%-2.52%).

What happens if you need to break the mortgage early?

The interest rate buy down is a fabulous posting benefit, but you must be aware that you are prepaying the interest amount.  Many times mortgage lenders offer very competitive interest rates for a 5 year term.  However, many CF postings are less than 5 years.  What happens to your interest rate buy down when you are posted before a 5 year mortgage term has ended?

One option may be to port your mortgage to your new home (if you plan to buy another home at your new posting).  While this option may seem attractive, there is a lot of legal fine print associated with mortgage ports.  For example, you must port your mortgage within a certain number of days or you may be required to pay an interest penalty.   Another fine print clause is that the mortgage lender must approve the porting of the mortgage.  This means that the porting of the mortgage is not automatic and is entirely up to the discretion of the mortgage lender. 

If for any reason you are not able to port your mortgage, you will be required to break your mortgage contract.  This causes a double whammy. Firstly, since your interest rate buy down benefit is a really prepayment, you will loose your the benefit of the prepayment.  The mortgage lender typically do not refund back to your unused balance of the prepayment amount.  Secondly, the mortgage lender will charge you a penalty fee for breaking the mortgage term early.  Depending on the legal fine print of your mortgage contract, you may be required to pay a penalty on the value of the interest rate buy down.  Under this circumstance, you ended up paying a penalty on the interest that you have already prepaid to the mortgage lender! 

Strategy to maximize IRP mortgage benefit

In order to maximize your mortgage related IRP benefit, a good strategy is to match your mortgage term to the length of your posting term.   If you posting message says that you are going to be posted for 2 years, then your interest rate buy down should be based on a 2 year term mortgage.  This way you don't risk loosing the value of your interest rate buy down in case you are required to relocate before the mortgage term is up.