Re-posting and edited from a piece written for www.rew.ca
Short Version;
Yes, a certain lender or Broker may offer a rate .05% lower than another. But what is the true cost?
The client may save $4.31 per month per 100K of Mortgage balance. ($250.20 over 5 years) but what have they given up in the fine print in the name of ‘rate-is-all’.
Rate deserves respect, but a clients personal wants & needs drive an overall strategy and plans which deserve greater attention up front than say $4.31 per month.
Long Version;
Buyer Beware the ‘lowest’ Rate in “Mortgage Wars”
Much has been made over the past weeks, months and even years now, about so-called “mortgage wars” – a term that implies lenders are cutting rates ever more dramatically in an effort to win business. Recently, sub-3 per cent rates have been hitting the headlines as lenders apparently do battle with on another.
This perception is not entirely accurate. Lenders offer reduced interest rates as the cost of funds decreases. Lenders have in fact maintained their profit margins during periods of sub-3 per cent interest rates and many have actually done better than the days of 6 per cent interest rates. In March of 2013 our Finance Minister advised lenders to keep rates artificially higher and, for a time, record profits on 5yr fixed mortgages were generated at 2.99% and above.
The key driver of interest rates is the cost of funds. Less so the lenders desire to ‘win your business at any cost’. A Lender is by definition ‘a shareholder owned corporation with the primary focus of increasing shareholder value via generating profits’.
So what about this “rate war” – does it exist or not?
The answer is no when speaking of Lenders. Although perhaps yes when speaking of individual representatives of banks vs. credit unions vs. licensed mortgage brokers.
Such professionals often fail, as many of us do, to apply business logic to their own personal income and expenses. Many in the industry fail to realize that they too are running a small business within a business and mistakenly adopt a ‘price-is-everything’ mindset. It is possible to sacrifice commission, sometimes as much as 80% of it, to ‘buy down’ the interest rate offered by either their employer (mobile mortgage specialists) or their lender of choice (Licensed Mortgage Brokers).
The Mortgage Specialists marketing suggests that they alone have access to the “best” rates. In reality they have access to standard rates and are simply choosing to work for reduced compensation, or perhaps none at all.
The unavoidable reality in this equation is that the client gets what the client pays for. If the consumer decides to work with a discounting banker or Broker, they will find that the deeply detailed planning and handling of the mortgage approval, the expert management throughout the term, and the subsequent servicing at renewal time (almost no lenders offer compensation at renewal to their reps or outside brokers) are all inevitably compromised to some extent.
A Broker may not be compensated for their efforts at renewal time, two, three or five years later, yet a quality Broker will always go to bat for their clients interests even with the clients current lender. This means cutting through the noise of ‘low-rate’ offerings to get down to the realistic numbers and more importantly confirming that the plan, the strategy, are still intact.
Allowing a Broker to receive fair compensation in turn allows the Broker the time not only to work with their clients in a detailed fashion it also allows them to continue to grow professionally, achieving & maintain designations such as the AMP Accredited Mortgage Professional. Ultimately offering an up to date educated experience whenever you interact.
The case for considering a qualified individual Mortgage Broker remains stronger than ever.
- Information overload is everywhere, often leading to “analysis paralysis.” Enlist an Expert to help you navigate the process.
- A mortgage is typically a client’s largest debt, and thus their largest fiscal concern. Enlist and Expert for guidance and advice.
- Said debt is attached to their largest asset, with significant equity on the line. Qualified planning is vital.
These reasons, among others, drive the demand for expert guidance from licensed, educated, Accredited Mortgage Professionals.
Interestingly, the majority of top-producing, full-service Mortgage Brokers rarely advertise. They’re not necessarily at the top of a Google search, and they do not focus on the interest rate alone. Instead, their businesses are built through word-of-mouth (warm referrals) and detailed, individualised, strategic mortgage planning for their clients.
Mortgage financing becomes more complicated with ever changing federal and provincial guidelines (a recent example). More than ever, increasingly educated buyers are aware that important questions exist beyond “What’s the best rate?” Interest rate differential prepayment penalty calculations are a prime example.
Understanding and clearly articulating things like the differing penalty methodologies from product to product and lender to lender is how a quality Mortgage Broker proves their worth. A reasonable and balanced explanation of collateral charge mortgages is another example.
These are just two of many topics that the lenders themselves provide little clear upfront guidance on, long before the client puts pen to paper. And, while mortgage rate-sites may post pages of links and reference text on these topics, most clients prefer the assistance of a live person to explain the subtle nuances in clear language.
Buyers don’t want their lives to be “no-frills” – especially not when making the biggest investment of their lives. Most of us willingly pay a modest premium for flexibility, options, quality and, most of all, expert advice.
Rather than chasing the absolute lowest rate, consumers would instead benefit from chasing down an absolute expert in the field. It is the professional who possesses the clearest understanding of;
- mortgage products
- mortgage policies
- lenders varying guidelines
- market forces
- risks and opportunity
- etc.
This will be the biggest win for a client and which in the long run will trump interest rate alone as a selector.
Choose quality.
Thank you,