Pennying the Mortgage Competition
In the stock market, “pennying” (a.k.a. penny jumping) happens all the time.
Pennying is when a seller offers shares one cent below a competing seller in order to undercut them (and vice versa when buying).
The equivalent in the mortgage business is pricing under a rival lender or broker by one basis point. (A basis point = 1/100th of a percentage point.)
Lenders and brokers penny each other because they know that the lowest rate often generates the most inquiries. An example from this week is First Ontario’s new 4-year promo priced at 2.98%, one basis point below the big banks’ 2.99%.
This pricing relies on the same psychology that motivates people to drive two kilometres to save two cents a litre on gas. The difference is: Gas is a pure commodity. Not so with mortgage services.
Pennying in the mortgage market is nothing new, but it’s getting more frequent. It will continue to get more frequent as brokers and lenders try to position themselves ahead of online competitors.
As a homeowner sizing up the best deal, a lower rate is instinctively enticing. But the difference becomes less compelling when you fire up a calculator. The cost differential between 2.99% and 2.98% is 52 cents a month for every $100,000 of mortgage. The average mortgage is $151,000 so that “penny” saves the typical mortgage holder $9.24 a year.
You’d think that most folks would never entrust one professional over another with their biggest liability, just to save $9 a year. But it happens surprisingly often. For some folks, saving a basis point is like saving their little toe from amputation.
And God bless them. Who doesn’t like a good deal, right?
But of all the things that should sway someone when picking a mortgage, 1/100th of a percent is not one of them. The mortgage process entails continuous decisions (decisions on product options, application structuring, balancing rate with restrictions, term selection, prepayment strategies, etc.). There’s ample opportunity to overlook subtle details that can add hundreds or thousands of dollars to borrowing costs.
One way to minimize that risk is by finding a mortgage adviser who:
- Impartially compares all relevant lenders (this is admittedly somewhat rare)
- Properly judges mortgage suitability factors
- Can structure a mortgage to minimize insurance premiums, tax, and/or overall borrowing cost
- Knows their mortgage research cold
- Helps you sort out the fixed vs. variable decision
- Does not misuse rate forecasts
- Offers useful and non-obvious mortgage strategies
- Knows how the bond market impacts rates and what drives yields
- Can be trusted with your private information
- Is an expert in mortgage mathematics
- Meets high service and experience standards
- Knows when to recommend a low-frills mortgage, and when not to
- Closes quickly and efficiently, if that’s important to you
- Passes along rate drops after approval and…
- Can pinpoint the mortgage with the:
- Optimal mortgage term
- Least mortgage restrictions
- Least painful mortgage penalty calculation
- Best conversion rate (when applicable)
- Best legal fee package (when applicable)
- Right prepayment privileges
- and so on…
And of course, once you find someone like this, you should still expect them to get you a fantastic mortgage rate for the features, advice and service level you desire.
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The tip we’d depart with is this: When evaluating a great mortgage deal, compare each alternative within 10-15 basis points of the lowest rate (i.e., within $12-18 a month on a typical mortgage). Then, look at the adviser you’ll be working with to get that deal. Ask what else they bring to the party besides a few basis points in rate savings.
Nine years ago (before we were in the mortgage business) we learned something the hard way. We picked a mortgage with the lowest rate without knowing exactly how our penalty was calculated. When we broke it early, it cost us thousands versus what we could have paid a dozen other lenders.
There are certainly few areas of life where being penny wise and pound foolish can hurt as much as it does in the mortgage game.
Rob McLister, CMT
