Posted Rates - Why Do Banks Quote Them?
Banks are funny. They quote mortgage rates that they never expect most people to pay. They call them "posted rates."
Banks are far from dumb, however. They quote posted rates because their analysis suggests it's the most profitable strategy.
There are different reasons why. To begin with, banks want to avoid the price wars that would ensue if they started widely quoting discounted rates. This would rock their profitability and significantly accelerate the commoditization of mortgages in Canada.
Secondly, banks know they have the edge versus the customer in negotiating rates. Bank reps are far more prepared for battle then the average mortgage shopper, mostly because of all the training banks give them.
Last but not least, big banks know that many people will just blindly renew with them or accept their initial quotes. Openly quoting deep discounted rates would drastically slash banks' profit margins with these customers.
In general, it's true that if you want the best bank deal you have to negotiate...hard.
If you want the best deal period, use a professional mortgage planner. You'll find the process much more pleasurable (and economically beneficial) because success no longer depends on your negotiating tactics. Negotiating becomes the planner's job, on your behalf.
Is it any wonder only 25% of bank customers think highly enough of their bank to recommend it to others?
More...
Posted by: Canadian Mortgage | January 17, 2008 at 08:50 PM
Well, I guess they are a business and want to make money - annoying as their practices may be at times!
Mike
Posted by: Four Pillars | January 17, 2008 at 10:40 PM
Hi Mike, You're right. That's about all it boils down to.
Posted by: Canadian Mortgage | January 18, 2008 at 12:43 AM
From the chart on the upper left, it looks like bond rates are dropping off even further, but the bank rates are remaining the same (or even going up). Do they have a set spread? Or do they just increase the spread as they feel like it?
Posted by: MillionDollarJourney | January 18, 2008 at 08:04 AM
If the banks have done market research and conclude that it makes them money, then it's perfectly rational, but I know they basically disqualified themselves from my calculus.
From what I've heard in the past, this strategy has not worked particularly well for BMO, but I could be wrong.
thanks,
Al
Posted by: Al R | January 18, 2008 at 03:58 PM
Hi FT,
Banks generally set a spread that they want to earn above their cost of funds. Cost of funds have risen quite a bit since August thanks to subprime liquidity problems.
Meanwhile, bond rates have been falling because demand for their safety is high, and inflation doesn't seem to be an immediate Canadian threat.
That's why we're seeing the divergence between bonds and mortgage rates.
Have a good weekend,
Rob
Posted by: Canadian Mortgage | January 18, 2008 at 05:31 PM