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 one another.
This perception is not accurate. Lenders reduce rates as the cost of funds decreases. Lenders have 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 2013 our Finance Minister advised lenders to keep rates artificially higher and, for a time, record profits on five-year fixed mortgages were generated at 2.99% and above.
The key driver of interest rates is the cost of funds, not so much the lender's desire to win your business at any cost. A lender is after all a shareholder-owned corporation with the sole goal of generating profit.
So what about this "rate war" does it exist or not?
The answer is yes and no. No, when speaking of lenders. Arguably 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 don't realize that they are running a business within a business, and adopt a "price-is-everything" mindset. They use more and more of their commission, sometimes as much as 80% of it, to "buy down" the interest rate offered by either their employer (in the case of mobile mortgage specialists) or their lender of choice (in the case of licensed mortgage brokers).
Their marketing then suggests that they alone have access to the "best" rates. In truth, 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 you get what you pay for. If you as a consumer decide to work with a discounting banker or broker, you 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 a greater or lesser extent.
A broker may not be compensated for their efforts at renewal time, two, three or five years later, but a quality one will still go to bat for their client's interests with their current lender every time. This means cutting through the noise of nonsense low-rate offerings to get down to the realistic numbers.
Allowing a broker to receive fair compensation allows them the time not only to work with you, their client, in a detailed fashion but it also allows them to continue to grow professionally, attending professional development courses and in turn allowing them to achieve and maintain designations such as AMP Accredited Mortgage Professional.
The case for using a qualified individual mortgage expert is stronger than ever. Here are just a few of the considerations:
- Information overload is everywhere, often leading to "analysis paralysis." You need an expert to help you navigate the process.
- A mortgage is typically a client's largest debt, and thus their largest fiscal concern. You need guidance and advice.
- Said debt is attached to your largest asset, with significant equity on the line. Qualified planning is vital.
Interestingly, the majority of top-producing, full-service mortgage brokers do not heavily advertise. They're not usually at the top of Google searches and they don't focus on the interest rate alone. Instead, their businesses are built through word-of-mouth (warm referrals) as opposed to rate-focused Google searches.
Mortgage financing becomes more complicated with every changing federal and provincial guideline ( a recent example). More than ever, increasingly educated buyers are aware that important questions exist beyond "What's the best rate?" Interest rate differential calculations are a prime example.
Understanding and clearly articulating factors such as differing penalty methodologies is another way good brokers prove their worth. A reasonable and balanced explanation of collateral charge mortgages is another example.
Lenders themselves usually provide little upfront guidance on these issues. And, while mortgage rate sites 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. So, rather than chasing the absolute lowest rate, consumers would instead benefit from chasing down an expert in the field. That will be the biggest win for the buyer and, in the long run, will trump interest rate alone.