If you want to buy a home and are researching getting a mortgage, then you’ve undoubtedly been keeping track of mortgage interest rates and comparing the best rates offered by a variety of lenders. These lenders will undoubtedly include banks and credit unions, which often advertise a set rate known as the ‘posted rate’, but they may also advertise a ‘special’, ‘feature’, or ‘discounted’ rate. If you’re starting the process on your own and don’t have a mortgage broker yet, it can be tough to make sense of the different rates and what they mean.
Scott Westlake is a mortgage agent, founding partner and owner of Denova Group, and was formerly a mortgage specialist with RBC. He says that there could be several reasons for the different rates posted by bigger lending institutions and the rock bottom rates posted by mortgage-only lenders, and one of the most obvious reasons is how the different lenders attract clients.
“Most of the large banks have bricks and motor locations, very visible to consumers. Monoline lenders don't have these bricks and motor locations and therefore are not as visible and do not have that way of getting consumers to use them,” he says, meaning that they rely on other ways to get customers in the door. “They use the broker channel for a significant amount of their business generation. They use rates and terms to compete with the big banks and also brokers or mortgage agents to educate consumers on choice.”
When it comes to banks, there are not only differences between the rates available to clients as advertised on their websites, but differences between the rates offered to a walk-in client and the rates offered to a mortgage broker. “As a broker we get their best rates they offer versus anything that is posted on their websites,” says Cheryl Wilkes, a mortgage broker in Edmonton. “To be honest, I'm not quite sure why they even waste the time of putting up posted rates when anyone with Google knows those tend to be horrible versus what mortgage brokerages post.”
Some people speculate that the difference in the posted rates and discounted rate has to do with the high penalties that banks tend to charge when people break their mortgages. For a five-year fixed rate mortgage, for example, some lenders use an interest rate differential (IRD) to calculate the penalty, which is expensive when based on a posted rate. Some monoline lenders, on the other hand, will only have a discounted interest rate, so then the IRD is a lot lower. Westlake agrees that this may be a reason why banks post a higher rate than what many clients receive, although he mentions that it’s not his area of expertise. But, he adds, “different lenders have different ways to calculate penalties . . . Mortgages are not just about rates but about the terms and what’s right for the clients current circumstances.”
By posting rates on the higher end of the spectrum as well as the lower end of the spectrum, the expectation then shifts to the clients to negotiate the rate themselves.
“Sometimes I think the expectation is to go into your home lender – which might not be a bank – and they’re going to get you the best deal. But a lot of times that’s not the case. They kind of feel like they already have you, and it’s kind of up to you to come back to them and say, ‘I can get this [somewhere else],’” Westlake says.
Some people are great negotiators and relish the thought of being able to score a deal. For these people, there’s something gratifying in directly being able to affect how much you end up paying for your mortgage as opposed to being told what you’re going to pay. But it can be tricky. Some lenders will reward consumers for their loyalty and owning multiple products with them. Other lenders won’t work as hard to give current clients their lowest rates because they figure that the client would rather take the slightly higher rate than take the effort to look around and find another lending institution – and they’re generally correct. A 2015 report titled “A Profile of Home Buying in Canada” by the Canadian Association of Accredited Mortgage Professionals (CAAMP) found that “buyers report doing relatively little shopping when they chose their real estate and mortgage professionals.” 52 percent of new mortgages were from banks.
That loyalty doesn’t stop there. When it comes time to mortgage renewals, 81 per cent of borrowers stayed with their current lender according to the 2016 Canada Mortgage and Housing Corporation (CMHC) Mortgage Consumer Survey. That could mean that people were able to negotiate a better interest rate without having to change lenders, but given a 2011 Manulife Bank survey where 20 per cent of respondents with a mortgage stayed with their current lender without negotiating at the time of renewal and 45 per cent of respondents stayed with their current lender but negotiated a new rate at the time of renewal – in other words, 65 per cent of mortgage-holders did not compare mortgages from more than one lender when they last renewed their mortgage – chances are that more people stayed with their current lender without looking at other options.
Apart from loyalty and convenience, consumers aren’t always in the clear when they go to a lender or even when they use a broker. Although you want to know the lowest mortgage rate available, the downside to chasing after the lowest or the most discounted rate is that those rates don’t tell the whole story. So even when you search a rate comparison site and find the lowest mortgage rate on the market, don’t start celebrating just yet.
“A lot of times it is the best rate but a lot of times you don’t actually qualify for it, so it’s a way to generate a lead but not necessarily get what you’re looking for,” Westlake says – not unlike the 50 per cent discount that’s advertised on a store flyer to get you through the door, but once you get inside you find out that you have to buy $75 worth of items first.
It can be difficult to see past the advertising and muddle through the various rates, but it’s important to know what you’re getting and why you are or aren’t eligible for certain advertised rates. “The best thing for a consumer to do is to do is to ask questions,” Westlake advises. Go in knowing how strong of a borrower you are, whether or not you have a good credit rating, and how much leverage you have when it comes to taking your business elsewhere. At the end of the day, all lenders want to get you – and keep you – as a customer, so if you’re a low-risk borrower, you have plenty of options. When it comes to your interest rate, however, you probably won’t get the lowest that you see advertised, or the highest that you see posted. The truth, as with many things, lies somewhere in the middle.
“When a lender doesn't offer the best rate it is more because of timing, the market, what they are focusing on. . . . Maybe they can't offer the best rate at the time, maybe they can and chose not to. It’s again about choice and if you go to one lender you get one rate and one set of terms; if you talk to a broker or mortgage agent you get choice, lots of rates, lots of terms,” Westlake says.
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