Negotiating Rates in Good Faith

While surfing the blogosphere I came across this post over at “Thicken My Wallet.”  Here’s a quote:

We went to our banker and he gave us the standard rate that his bank offered. It was 6.60% for a five year fixed term. We shopped around and found a better deal at 5.48%. I have an investment account, two bank accounts, two business accounts, a VISA account, and a line of credit with my bank and why they don’t automatically give me the best rate is a topic for another day. We wanted to keep the mortgage with our bank and our banker agreed to match the 5.48%.

This post raises a couple of interesting issues.

First, it beautifully illustrates the difference between banks and mortgage planners. Banks are pure profit machines.  Relationships come second.  If it were the other way around, a banker would never “reward” a good customer by trying to stick him with a artificially high interest rate.

With mortgage planners it’s a different world.  We rely on relationships to put food on the table.  Unless our clients trust us, and know we’re focused on their best interests, we’re dead.  Period. 

The number one tool professional mortgage planners use to build relationships is old fashioned, but it works: Honesty. One way we (personally) practice what we preach is by providing our best quoted rate upfront.  I won’t speak for the industry, but in my case, generally the only way I can go any lower is if I take the difference out of my own pocket.  Clients usually don’t ask me to do this because they respect that I have a family and need to earn a living too.  Moreover, residential client’s don’t pay a cent of my compensation regardless.

Forest-Gump In the banks’ case, it’s like a box of chocolates.  Like Forest says, “You never know what you’re gonna get.”  You can bet on one thing for darn sure, however.  You will almost never get the bank’s lowest rate up front.

For us, this point was recently driven home when a new client came to us for a $2 million mortgage.  Before contacting us he went to his bank–where he had been a customer for many years, with very large assets. 

What did the bank do to reward his valuable business?  They offered him an above market interest rate of 6.05% and  meager 10% pre-payment privileges. 

Nonetheless, believe it or not, the client was happy.  The bank’s offer was better than he thought he’d get. 

We then countered with a product that was perfectly suited to his goals.  We built a trusting relationship, explained all of his many options, created custom spreadsheets showing the math behind each option, offered much better mortgage features, secured him 25% pre-payment privileges (2.5 times more than the bank had offered), and offered our very best rate at the time, 5.69%.  That was pretty much the lowest rate you could get for the product he wanted.

Our lower rate and pre-payment flexibility meant that he could save almost $100,000 in interest over five years.

Only after we did all this did his bank decide to sharpen their pencil.  The bank proceeded to call the client repeatedly with new offers to get his business.  The bank ended up closing their rate gap–the day before he planned to sign the mortgage commitment we secured for him!

Why did the bank lower their rate in the end?  They didn’t do it because they respected and cared about the client.  They did it because we, the mortgage planner, forced their hand by working hard for the client’s business from start to finish.

Due to our efforts–and not because the client had been a large and loyal customer for years–the bank decided to give in and offer him a better rate.

That, my friends, is how many big banks do business.

In my example above, the client chose to do business with us, despite the fact that his bank eventually offered him a very competitive rate.  As he put it, “I never would have got that rate without you.”  He thought of staying with his bank for convenience, but then told us simply: “I have decided to go with you, out of principal…Thanks again for all of your hard work!”

– Melanie McLister, Editor & Mortgage Planner

  1. I’m really glad to hear that he went with you in the end.
    I find it hard to understand how people can get screwed by the banks and then after the bank matches they still want to do business with that bank.

  2. I tend to agree. It doesn’t matter if it was the bank or the broker. There is no way I’d deal with anyone that simply matched another person’s good faith offer.
    Life is busy and I hate it when people play games. More importantly I like to trust people. Why would you have tolerance for bank/broker who wastes your time in a negotiation by not putting their best foot forward from the outset? M.S.

  3. I also had a recent experience with a friend that was trying to buy a house. He was mentioning buying a house and I asked how he went about getting a mortgage. My posted reply was on that same post you linked above. I sure think his bank was trying to screw him over for cash. They ended up with his business anyway with a much lower rate. At least I know that some information that I gave him may have saved him a ton of cash . . . not 100K like the example above, but enough that it makes a large difference in his budget.
    In my own experience I went to ING, PC Financial, and a Mortgage Broker out of Halifax (not my home city, we had met previously online.). I found getting multiple requests really kept everyone honest. In the end I went with the mortgage broker because when I called he had answers. The banks always had ‘scripted responses’ rather than answers. At least that’s how they came off to me.
    The rates and conditions were pretty comparable however. I find as long as you ask for them you will get them. No ask, no get.

  4. People who go back to a bank after the bank plays games are idiots. Basically they’re admitting the bank “owns” them. Sad.

  5. Well, “idiots” may be a tad strong. :) However, it’s true that rewarding banks for playing their game (by giving them your business in these situations) will likely perpetuate the games. In the end, however, clients must do what feels right for their circumstances. It’s the disclosure that is provided by each party in the negotiation that is at issue here.
    Rob, Co-Ed. CMT

  6. Thanks for the mention. My friend use to be the assistant branch manager at a bank (not the one I use) and his general rule of thumb to me was to shave 0.5% off the list rated as a starting point because they have the discretion to do that. Anything after that, they have to ask “upstairs.”
    My one suggestion based on the experience of being self-employed is use a broker if you are not a perfect fit for the bank (i.e. you are not loaded, have all your assets in one place and have steady income).

  7. One advantage mortgage brokers have that banks don’t is to rate protect you against rate increases!
    Your bank will rate protect you for maybe 30-60 days…your friendly brokers will rate protect you 90 days plus! Always get an application in early! It costs you nothing and you save big when “Murphy’s Law” happens and rates increase just before your renewal!
    If you just follow this one point, odds are you will save!
    Brian Poncelet, CFP

  8. I was insulted by my bank (TD) when I tried to negotiate with them. I told them I was going to shop around and had a mortgage broker and was going to take the lowest rate. They quoted me a rate that was 25 bps over ING posted rate and 30 bps over what I got from my MB.
    I just can’t understand what they were thinking.

  9. To be upfront, I work for a broker and am biased because of what I know, so take this as you will….
    If someone deals from the bottom of the deck and you don’t have the self-respect to go elsewhere, it says just as much about you as it does the bank.
    If you do end up going with a bank (and I’m not sure why most people would besides fear of change) you can only imagine how the bank will treat you at renewal, given how they treated you to GET your business.

  10. While I agree with this post, been there, done that, I do want to say that is how EVERY business works
    Take appliance/furniture/mattress stores, you do NOT take their sticker listed prices for real, you NEGOTIATE, you COMPARE, you PRICE MATCH with different rep, different stores
    We had to visit 5 appliance stores recently to get the best price.
    For our 1st mortgage in 2006, we went with Mortgage Intelligence broker, got the lowest rate from Desjardins (didn’t want to bother visiting big 5 banks bak and forth)
    2nd mortgage, went to TD (b/c we were in separate cities, and TD being nationwide is easier to move mortgage around) with the lowest rate we saw in mortgage discussion forums – got it
    3rd mortgage (HELOC actually), went to TD again with offer from CIBC @ Prime – 1% for 3 months, got it with ease
    Big banks have much more power to bargain, and I really only picked it because of CONVENIENCE, not the rates. It is MUCH easier to see EVERYTHING on EasyWeb, instant transfer between TD accounts
    v.s. not knowing your balance, or going through a 3rd party

  11. I tend to dislike games as well. That’s why we bought a Saturn. There’s one price and no bologna. I’d like a broker that is honest so I don’t have to “visit 5 appliance stores” like in the comment above. I appreciate that you offer your best rate up front Melanie and will look forward to speaking with you when our mortgage is up for renewal.Nick

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