Wednesday, December 13, 2017 20:43

How To Get The Best Mortgage Rate

Bank Of Canada Logo

Have you ever wondered why you were offered a better or worse rate than someone else from your Bank?

The Bank of Canada recently published a research paper titled “Discounting in Mortgage Markets” that addresses that question.  What their research found is that over time there has been an increase in the discounting that happens on the average mortgage. Also, they discovered that the range of rates that are offered to customers has also increased.

In Canada the primary mortgage originators are the branch networks of the national banks.  Despite the fact that local economics vary greatly, posted rates are set nationally with branch managers being given authority to bargain with potential clients over rates.

The study found that basically all the Big 6 Banks had identical posted rates for mortgages. These rates rarely changed and it was very uncommon for one lender to change and not immediately be followed by the others.

The study has some great insight into the role of banks in mortgage lending.

The Big 6 Banks all have their posted rates and these rates rarely change. A Branch manager has discretion to offer discounted rates to certain consumers based on a variety of factors.

Interestingly in the mid 1990s when virtual banks like ING Canada entered the marketplace and offered low no-haggle rates to all consumers the Big 6 responded not by decreasing their posted rates but actually increasing the posted rates and then offered individual-specific rates instead of offering lower rates to everyone.

As for their insight into who gets the best rates on mortgages.

1. People who use mortgage brokers  pay lower rates

  • Mortgage Brokers gather multiple rate quotes and statistics show that those with multiple rate quotes pay the lowest rates.
  • On average the study found that using a mortgage broker will reduce your rate by 17.5 basis points. That works out to $832 in savings over 5 years for every $100,000 in mortgage.

2.  People who gather multiple rate quotes

  • “Irrespectively of their characteristics or the characteristics of the local market, informed consumers will always receive a good rate from the lender.”
  • “Branch managers try to screen consumers based on their search costs, their valuation for their services, and their observable characteristics, and then evaluate the profitability of signing particular borrowers to mortgage contracts. Branch managers have an incentive to offer larger discounts to consumers who have gathered, or have the potential to gather, multiple rate quotes, and to those that are, or will be more profitable to the bank. On the other hand, negotiating larger discounts is costly for the bank and can reduce the commissions earned by branch employees.”

3. People with large mortgage amounts and new clients

  • “ Financial Institutions may have an incentive to lock-in borrowers  since few negotiate the renewal of their mortgage”
  • “Financial institutions may have an incentive to lock-in borrowers since few negotiate the renewal of their mortgage. This tendency provides lenders with an incentive to attract consumers with larger loans who have large outstanding balances at the time of renewal. Similarly, younger consumers and first-time home buyers are likely to be more profitable in the long-term for lenders.”
  • Lenders know that you probably wont think twice when your renewal comes up so giving you a low rate now is an acceptable risk knowing that they can really sink their hooks in when you come up for renewal.

4. People who have large non-mortgage business with the bank

  • “Branch managers have an incentive to offer larger discounts to consumers…that are, or will be, more profitable to the bank.”
  • This comes down to cross selling. Discounting your mortgage rate is fine if you will take out lines of credit and credit cards with that bank anyways.

The lesson to be learned here is that if you don’t want to get you the best rate then you better be prepared to haggle. Those who get the best rates are those who are willing to do a significant amount of work, known as ‘search costs.

Of course, you could use a mortgage broker to arrange your mortgage and not have to worry about negotiating for a fair rate.

Be mindful to that in the Banks mind, they are justifying your low negotiated rate by hoping you wont be so active when your renewal comes up and they can more than make up your interest costs at that point.

Any mortgage professional can speak volumes to some of the rates they see the banks offering to well qualified clients. All the more reason to utilize the benefits of an independent mortgage broker.