Don’t Bite!

mortgage-renewal-letterClients send us mortgage renewal letters all the time.  It’s surprising how banks continue to throw out highball rates on these letters, hoping people will bite.

In one recent case from December 2nd, the bank’s renewal letter offered our client a 5-year fixed rate of 5.59%!

Meanwhile, the bank’s website showed a “Special Offer” rate of 4.29%, for the very same mortgage. 

This is how some banks like to treat existing customers.  This is how they expect to retain client loyalty.

Apparently banks aren’t worried by the fact that people nowadays hunt the web for information voraciously—including mortgage rates.

Banks obviously feel they can make more money by catching people napping.

Well, cmon guys…show customers a modicum of respect.  At least quote the special offer rates you give freely to new customers.

If you happen to be renewing with a bank and you see one of these joke letters, call your bank and ask them why they’re trying to sell you a bad rate.  And don’t buy their “It’s just our standard rate” spiel.  (That’s what they’re trained to say.)

If you do decide to overlook the bank’s tactics and let them quote on your business, give them only one chance. Tell them to provide you their very best terms up front, with no games. 

Then call a mortgage planner and compare the benefits, advice and rates that he/she can offer. 

Reward the one that appears most concerned about your best interests.

  1. MCAP sent me a renewal offer early in 2009 quoting rates which were 2-3% higher than the open market. My reaction was, “What kind of an idiot do they think I am” and I promptly made arrangements elsewhere. I’m amazed that this insulting and underhanded tactic works at all with so much information at our finger tips.
    Happy New Year.

  2. Most nonbank lenders quote broker rates on renewals. I thought MCAP quoted best broker rates also. Am I wrong?

  3. A different perspective:
    When banks send their initial renewal letter, customers who sign back can renew without having to requalify. As such, those customers who have had a significant change in their employment status or credit rating over the initial term can avoid the risk of failing requalification. Since this profile of borrower is more likely to accept the first renewal offer, there is a significant risk of adverse selection, and that increased risk has to be priced in.
    Did you know that one-third of borrowers typically sign back that initial offer? Even if they fought tooth and nail on the original rate! These people aren’t stupid. Many renewed because they were worried they couldn’t requalify.

  4. I concur with David Larock. As an individual whose financial profile was impacted by the recession, I would likely take any renewal offer that wasn’t ridiculous on my next renewal (2011), for fear that my credit rating would be scrutinized should I make any waves.
    I imagine the banks and mortgage companies are aware that a lot of their customers are in this boat, especially right now.
    However, I would be insulted by the predatory rate, and would take my business elsewhere as soon as it became feasible.

  5. David
    Only a small fraction of borrowers would be facing this problem.
    This doesn’t seem like justification for the high renewal rates banks quote to the majority of people.

  6. Steve,
    My explanation did not justify why banks are renewing 90% of their borrowers. It addressed why one third of borrowers sign a renewal offer that is obviously above market. As people like Wendy attest, if you can’t risk having to requalify you take whatever rate you can get.

  7. Where did you get the 33% figure? Can you provide a source for that claim because it seems way out of whack.
    Are you saying that 1/3 of people have no better option than to sign a renewal letter with crazy rates?

  8. To clarify,
    When I worked in the prime lending business the acceptance rate on initial renewal offers ran about 33%, even though the rate offered was at posted. In my comment above I said that “many renewed because they were worried they couldn’t requalify.” Certainly not all of that 33%, but a material number and that’s not a point I hear made much. That’s why I offered it.

  9. Also, in years past, people would automatically renew as it was the easiest thing for them to do as they really did not have to do anything.
    The thing that I don’t understand is why the banks would not budge on their renewal rates when you call/see them to enquire about it. Their offer was a take it or leave it approach for me, so I took my business elsewhere, saved money and allowed another bank to make money.

  10. In my opinion, people go back to their bank (or ANY bank)to renew/refi. because they don’t know what mortgage brokers are or how to find one. My friend used to work in a bank doing mortgages, and she told me she would receive more ‘points’ towards her year-end bonus, the higher the rate she could sell to the unsuspecting customers. I’m a mortgage broker now, and it’s amazing the banks get away with charging what they do.

  11. You are right Karen. I think a lot of it is laziness and fear of being inconvenienced also.
    Why someone would not shop around to save thousands is beyond me.

  12. Hi David: Appreciate your point on the adverse selection problem. There is truth to that. On the other hand, given the public’s feelings towards posted rates, you’d think banks would adjust their renewal offers and strategies so as not to offend the vast majority.
    DW: Negotiation often depends on the rep you get, whether they’re a phone center person or branch rep, the assets you have with the bank, your mortgage size, repayment history, time of the month you call the branch (due to internal revenue targets), etc…
    Karen & Stephen: Lenders just love complacent renewal customers. It’s the main reason renewal rates usually aren’t as good as a lender’s “special offer” rates.

  13. Banks have a good handle on consumer behavior. Sending out renewals weeks prior to maturity leaving clients with minimal time to shop is a tactic that works for them and makes lenders VERY profitable. Consumers need to be educated and understand that they can opt for a temporary open term and buy themselves time to shop if lenders are shortchanging them with time to do their homework. Then again, if a consumer tolerates the poor appreciation their lender gives them at renewal time, what can one do? You can’t help someone who will not help themselves.
    To All Renewal Clients: Every .25% your lender overcharges you represents approximately $1,200 for every $100,000 borrowed for a five year term. Unlike Americans, our mortgages are NOT tax deductible so factor in your tax rate and find out exactly how much you need to earn to pay the additional costs your lender – at 40% tax rate = $2,000 per $100,000.
    Just do the math.
    All the best in 2010!!

  14. Hi Vince,
    Banks are masters of consumer psychology. That’s for sure. And it’s true that their practice of highballing on renewals is merely game theory (maximizing profit).
    On the other hand, there are a lot of lenders that don’t price gouge on renewal. And since our first loyalty is to the consumer, we like to let people know that.
    Eventually borrowers will catch on and this tactic won’t be as effective anymore.
    Take it easy,

  15. I know from experience that with the advent of information on the net, consumers are slowly becoming more educated about searching for more competative mortgage rates in general. It was only a few years ago that FI’s that I worked with had a 85% renewals with mailed out renewal notices that included a whopping 1/4% discount off post if you signed the mailed out renewal.
    That has now dropped to about 60% so things are changing. As to why banks do it is simple? Its all about mitigating risk while maximizing profit and that is what banking is all about.

  16. Clearly they do it because it pays.
    The other thing that bugs me is that I can’t get the same rate as an existing customer that a mortgage broker can get unless I get the mortgage broker rate first.
    I don’t play the match game – last time I used a mortgage broker I just went with their best rate.

  17. Hi FP,
    Very true. Branches love to (I’ll borrow your phrase) play the match game.
    They often couple it with the used car gambit. They’ll throw out a rate, you counter with a rate you saw online, and then they “go talk to their manager.”
    No matter who you’re dealing with (bank, broker, credit union,…), if you ask for the best rate, demand it up front. A mortgage isn’t an appliance or DVD player. It’s your biggest debt. Deal with people you can trust–people that quote the best available terms up front.
    And if a bank or broker offers to “match”, always ask, “Why didn’t you quote me that rate to begin with?”
    Have a good wknd…

  18. I had a mortage with GMAC from Calgary, they have an office in toronto, We got a letter they are no longer giving mortages to anyone, We are both on pensions and disabity, we also have a bad credit report, our mortage was due ,dec of 2009 they gave us an extension til july 2010. We have lived here over five years, always on time with our mortage, Now where I have apply so much and getting turn down, they say I have to many enquires on my credit report and being turned down. I have a grandson who I am rearing up he is seven, I wanted to keep him here, He had been trough so much, Please can you give me some advise.
    Thank you
    Hamilton Ont.

  19. Hi Belinda,
    I’m really sorry to hear about your situation. You are not alone. The credit crisis derailed the prospects of many lenders (including GMAC) and there a quite a few stranded borrowers out there.
    You’re best bet is to contact a high volume mortgage planner who specializes in alternative lending. Please drop us a note if you need further help.

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