What’s the trick to a better mortgage rate?
That’s what folks at the Bank of Canada (BoC) wanted to know.
It led them to undertake an extensive study on mortgage discounting. A draft of that study was released this month and below are its conclusions.
All quotes that follow originate from the paper’s authors: Jason Allen, Robert Clark and Jean-François Houde.
According to their research, the Canadians who get the best mortgage rates are those who:
- Research proves that bank profits “are significantly higher in haggle environments.” As a result, banks prefer not to put all of their cards on the table.
- This leads to “price discrimination” whereby banks give better deals to skilled negotiators and well-informed borrowers, and stick it to people who don’t watch out for themselves.
2. Have larger mortgages
- “…since few negotiate the renewal of their mortgage…(this) provides lenders with an incentive to attract consumers with larger loans who have large outstanding balances at the time of renewal.”
3. Use a broker
- The report states that brokers lower the “search costs” of getting multiple quotes. Multiple quotes (lower search costs) are strongly correlated with lower rates.
- “Over the full sample the average impact of a mortgage broker is to reduce rates by 17.5 basis points.” That’s ~$1,670 of interest savings on a typical $200,000 mortgage over five years.
- Bank “mortgage specialists offer convenience to consumers, although they do not reduce search costs. This is because they work for one lender only.”
4. Do significant non-mortgage business with a lender.
- “Branch managers have an incentive to offer larger discounts to consumers…that are, or will be, more profitable to the bank.”
5. Have more equity
- Those who put the minimum down (e.g., 5%) “pay higher rates than other borrowers—about 12 basis points more” than those with LTVs below 85%.
6. Are new clients
- “…new clients receive larger discounts than existing clients, on the order of 10 basis points.”
- The authors state that research by Oxford professor, Paul Klemperer, suggests that “consumer switching costs” (i.e., the time, uncertainty and expense of changing lenders) provide banks with “market power” over existing customers.
7. Use smaller lenders
- “We conclude that the larger a bank’s market share, the higher are the rates that it can charge to borrowers.”
- “…Borrowers who are new clients at one of the Big 8 banks receive less of a discount than borrowers who are new clients elsewhere.”
8. Are financially capable
- BoC: “…poorer borrowers may face greater levels of price discrimination when bargaining in person at the branch than they do when transacting through a broker.”
9. Have better credit
- “Financial institutions…offer better rates to high credit score consumers.”
There are, of course, other factors that impact one’s mortgage rate. Moreover, there are exceptions to the findings above. As one example, not all bank reps are uncompetitive. We know some excellent mortgage specialists that are highly competitive—meaning they’re within 10 basis points of the best industry rate most of the time. (Mind you, as this Bank of Canada report concludes, that is not typical.)
If you’d like to read more, here’s the full study: Discounting in Mortgage Markets. (The BoC has published it as research in progress to invite technical feedback before journal publication.)
Rob McLister, CMT