Rent To Own done ethically

Chasing the lowest mortgage rate: A good idea or not?

mortgage application

In our Rent to Own business we work with a lot of Mortgage Agents and lenders in the Ottawa area to help families with credit challenges get into their own home. In the last year or so we have been hearing that Mortgage Agents are facing a number of challenges from banks. One example is that they do a lot of work on a particular file, get their clients a good rate and at the last minute the bank undercuts their rate by a few hundredths of a percent and scoops the client.

The world of business is an inherently competitive one. It’s not surprising to hear that banks are trying to get the upper hand when it comes to attracting clients directly into their fold for mortgages. Is there anything wrong with that practice? Yes and no.

There are scores of businesses around town who promise to beat their competitors’ prices by x% and in so doing ensure that they’ll always have the lowest price. All the client needs to do is find the cheapest guy in town, show that guy’s ad to the store with the “lowest price policy” and voila, instant savings.

This is a common practice and there’s nothing wrong with a bank doing it. The problem, really, is when the client automatically jumps at that bait. Here’s the thing: We’re not talking about a widget that costs a few hundred dollars. We’re talking about a mortgage that is typically worth six figures and that will significantly affect a person’s life by having an impact on their credit profile and their ability to borrow more money. A mortgage is a big deal and it should be undertaken with full consideration of all of the factors involved.

We see many people focus all of their attention and energy on the interest rate to the near-exclusion of other considerations. Yes, the rate matters but a few hundredths of a percent shouldn’t be a deal-breaker for a mortgage. Before someone jumps to another lender for such a small gain, they might want to consider a few things:

The early termination penalty

So you find the perfect house and you figure you’ll be there for at least five years. Perhaps you’ve even found THE house and you feel that you’ll never move again. The 5 year fixed rates are very attractive at the moment so you sign on the dotted line because you’re certain of your plans.

The only problem is that life sometimes happens and disrupts our best-laid plans. I talk about my own situation in an earlier post – Why can’t I buy there?– in which I mention that I was absolutely certain I would stay in my first house for at least ten years but I ended up having to sell when my first husband died 1.5 years after we moved in. All sorts of unexpected things happen in life to make us change our plans.

While you don’t intend to move anytime soon, you just don’t know what the next five years will bring. At the very least, it behooves you to know what you will face if you do need to break the term of your mortgage. The interest penalty will be calculated using the interest rate for the mortgage but there is sometimes a catch with banks: they use the posted rate and not their discounted rate.

For this article I spoke with Mortgage Agents from seven different companies in the Ottawa area and all were in agreement that this issue is a concern for clients. Alexia Ferdinand of Metro City Mortgages provided the following example:

“If a bank’s 5 year posted rate is 4.5% and they match or give a client a heavily discounted rate of 2.99% for a 5 year fixed term, for example, the contract rate for this client is actually 4.5% and not 2.99%. This is very important for the client to know because if the client needs to break their 5 year term before it’s over, the bank will be calculating their penalty with the contract rate as well as the rate for the term remaining in the client’s contract. The client will therefore incur a huge penalty as there is a difference of 1.51% which is called the Interest Rate Differential.

Here is an example with actual numbers: A client has a current balance of $250,000 with 24 months left on their current term with a contract rate of 4.5% (discounted to 2.99% at origination). The 2 year term rate sits at 2.79%. The client’s penalty to break this mortgage would be roughly $8,550. With a Mortgage Agent their penalty would only be $1,870 since with most of the lenders we have access to, the rate that is given to the client is the actual contract rate.”*

With those kinds of penalties on the line, you need to know the details. Read the fine print and ask many questions, even uncomfortable ones.

It’s about the relationship

When I first began investing, we had a relationship with one of Canada’s major banks so I approached them about the mortgage to see what they could do. They offered a great rate and great service so I did the deal and I kept going back. I developed an excellent relationship with my account manager and he kept offering me great rates and exceptional service. It was wonderful; I benefited in many ways and the bank got multiple mortgages out of it.

Then my account manager got promoted. What followed was a revolving chair of people taking his place who had no clue who I was and since we had no business relationship they were not particularly committed to going the extra mile for me despite the fact that I already had many mortgages and investments with their bank. They were always friendly and polite but not committed. The great deals and excellent service ended and therefore so did my allegiance to them.

So much of business and life is about developing and nurturing relationships. The concern I have with rate-hopping is that it eliminates an opportunity to develop a good, profitable relationship with one key service-provider. I’ve come across Mortgage Agents that I continue to use time and time again because I know, like and trust them. They’re professional, effective and committed to serving my needs. I don’t need them to shave a few hundredths of a percent off the bottom line; I need them to do a great job for me on an ongoing basis and to offer me competitive rates in the process. It’s not about saving $7 per month; it’s about developing a relationship with someone who will ensure that you have the very best package out there, including early termination considerations, portability, etc.

When you find someone who bends over backwards for you, stay with them! Their efforts on your behalf will pay you much larger dividends than a few dollars off the monthly rate. The bottom line is that rate-hoppers often miss the forest for the trees. Keep your eyes on the forest, the big picture. That’s where you’ll find the real benefits.

Are you a valued customer?

We hear businesses use such phrases so easily these days. It’s on voice mail (e.g. Your message is important to us) and marketing materials (e.g. Dear Valued Customer). If you’re such a valued customer, then shouldn’t you expect the best package from the beginning? If a bank, or anyone else for that matter, has a great offering to share with you, shouldn’t they bring it to you up front? If they were really concerned about adding value and ensuring great service they would come out of the gate with their best offering and not wait until they see what you get from someone else in order to adapt their pitch. The latter isn’t service, it’s a race to the bottom.

Yes, you may get a slightly better rate and save a few dollars if you use that approach but it may not serve you well in the long run. And really, wouldn’t you prefer to work with people who are willing to serve you well from the very beginning? Who’s likely to be there for you should the unforeseen happen? Good relationships make all the difference during challenging times.

It’s worth repeating: Think twice before you hop over to a “lowest price offer” and ask: Is this really in my best interests?

*The numbers used are for the purpose of illustration only. OAC.

 

9 Comments

  1. Another great post with valuable information!

  2. Lori Melanson says:

    As a Mortgage Agent myself and having worked for one of the Major Banks, I couldn’t agree more with Doris. My dedication to clients and their needs are my first priority and having happy clients makes for a Happy Mortgage Agent!!

  3. Great article Doris! In my business as a realtor, I meet people all the time who want to sell or need to sell because of changing life circumstances. They often get a nasty surprise when they learn about the penalties to get out of their existing mortgage early. Good advice.

  4. Excellent post! I absolutly agree with Doris. As a mortgage broker my job is always to make sure that my clients get the best mortgage product tailored to their unique situation along with the best rate possible . So they will not have any problem with their mortgage down the road.

  5. I really enjoyed reading this article. You are bringing some great points especially when it comes to predicting the next 5 years!

  6. Puts a new spin on you get what you pay for…you’ll get burned if you don’t read the fine print and understand what it is you are agreeing to in a mortgage as well, when buying or selling a home it is critical that as a trusted advisor we explain all the fine print to you before you sign either a mortgage or a real estate document. Thank you Doris for reminding us all how important it is to do our due diligence, and potentially save thousands of dollars.

  7. Thanks for the great information Doris.

    I often ask my clients to understand who is doing what for them and when. If a bank does try to undercut a rate you were given by a mortgage agent, ask them why they didn’t offer that rate from the start? Why did it take them almost losing a client for them to give them a better deal? Would you have received that savings if they didn’t threaten to take your mortgage business else where? You should always know that as a mortgage agent my priority is to make my prospective and existing clients happy from the very first meeting and that I will always give you the right product and lowest rate you qualify for. I always say; I negotiate for you, not with you.

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