Mortgage Mayhem

Last month, the Bank of Montreal made a brilliant tactical decision to promote their low rate fixed five year mortgage product at a staggeringly low rate of 2.99% – the lowest rate in Canadian history. The publicity that followed this decision must be well worth the expense of offering this “loss leading” price.

Competitors across the industry scrambled to respond. Although it seems Canada’s big six banks operate like an oligopoly (just like gasoline stations), it seems the other banks decided NOT to get into a rate war with BMO – and left the playing field wide open. Instead, they came out with promotional rates for lesser terms than five years.

And besides, the BMO rate was only good till January 25, at which time they intended to revert to their normal pricing structure for this product – good, but not the lowest rates available. (It’s now 3.49%)

Mortgage brokers across the country found themselves deluged by calls from anxious clients who figured they were missing out on something – what would the broker do to keep the client from switching to BMO?

Broker channel five year mortgage rates were already at a very respectable 3.29%, and to lower that even more was to court a price war with a sleeping giant. Mortgage broker agents responded in a number of different ways.

Some panicked and reduced the interest rate on their five year mortgage offerings at their own expense – by simply “buying down” the interest rate from the commission paid the agent by the lender.

Others tried to position their clients into one of the new low rate three or four year mortgage products – since the rate might even be lower than 2.99%, their clients would be happy, and the agent could retain the client relationship.

And some agents simply stuck to their guns, doing what they have always done – provide more than just the lowest rate to all their clients. These agents pride themselves on the totality of their services and knowledge – not just as commodity (interest rate) sales people.

And that is fair – since the mortgage industry should be about much more than just interest rates.

These agents pointed out how the BMO promotional rate mortgage would lock the client in for five years with BMO, no matter what. They warned you cannot break or change this mortgage unless you have a bona fide sales clause – very restrictive – and they advised consumers to watch out for BMO’s expensive prepayment penalty calculations (IRD) even if you do sell your house.

Several brokers reported relatively brisk demand from pre-approved and new clients. The tide of media attention BMO received over the last several weeks lifted the boats of brokers and other banks, alike. Interesting, as January is typically the slowest month in the mortgage industry.

The other chartered banks, on the other hand, seemed content to plod along – if you surfed their websites during the BMO sale, you would have found their posted five year mortgage rates were typically 5.29%, which they refer to as their “posted rate.”

RBC and TD both announced a four year offering of 2.99%. They said they would honor this rate till the end of February, yet by early February they bumped it back up to 3.39%, mumbling something about global economic concerns and poor margins.

The sad truth is the mortgage industry reminds me more and more of the car industry. Most of us need to buy a car every few years, and we approach the whole buying experience with trepidation – since there seems to be no standardized pricing. It’s survival of the smartest and best researched consumer.

Seems to me the mortgage industry is just like that – each lender has their own unique interest rate differentials calculations for payout penalties; their own auto renewal interest rate policies; differing underwriting practices, and several other unique aspects to their mortgage product offerings.

Caveat Emptor. How sad. One day there will be no such thing as an ill-informed consumer.