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Marketing Low Rates

Canadian Mortgage Professional (CMP) ran a story last week that caused quite a stir.

Rate-Advertising The article was about a new low-rate promotion from CanEquity. Brokers commenting on the story criticized CanEquity for claiming to have the “Lowest Mortgage Rate in Canada,” not advertising the actual rate, and not fully explaining the fees that applied to the offer.

CMP was also taken to task for running the story, which some commenters felt was inappropriate due to the nature of CanEquity’s promotion. (Here’s CMP’s response.)

All this hubbub ended up raising a number of points. Among them:

  1. Advertising the “lowest rate in Canada” isn’t the world’s best idea. In particular, it can put you on the wrong side of regulators (and the industry)—unless you can actually prove there are no lower rates in the entire country.
  2. If you’re going to charge an administration fee, it’s a good idea to explicitly describe how it’s calculated (Following CMP’s story, CanEquity withdrew the admin fee that applied to its rate promotion)
  3. There’s a contingent of brokers who decry competitors that centre their marketing around rock-bottom rates. They feel it cheapens the mortgage planning profession.
  4. Many brokers are critical of lenders for offering ultra-low rates and cutting broker commissions in the process.

Points 1 and 2 are self-explanatory. Points 3 and 4 are where the debate heats up, presenting us with two central questions: is there anything wrong with advertising ultra-low rates, and what should we make of lenders who pay brokers less in return for lower rates?

Is there anything wrong with advertising ultra-low rates?

Most would say no, as long as it’s done honestly.

The downside is that the value of a mortgage planner (his or her advice and service) is often obscured in our quest for the lowest rate. Instead of choosing the most skilled advisor, consumers are being conditioned by the Internet to first call the broker with the lowest advertised rates.

As a result, it’s easy to see why Internet brokers are so eager to compete on rates.  Rate comparison sites are putting a lot of pressure on brokers nowadays. Anthony Almeida, CEO of CanEquity (one of the biggest Internet mortgage brokers in the country) says, “We're an online business and you can draw a parallel to other competitive businesses online. Our job is to always try to evolve…Five years ago, it might have been advice that people sought when visiting our website. Today, it's a more rate-sensitive business and we need to stay ahead of the curve."

The side effect, as time goes on, is that most brokers will find it harder to compete unless they are web-savvy and aggressive on rates.

Note the word “most” in that last sentence. Some of the most successful brokers in the country never advertise rates. These brokers will continue to thrive because of their service, skill, and referral networks. But even the truest professionals will lose some business at the margin as the next generation gravitates to low-rate providers.

What should we make of lenders who pay brokers less in return for lower rates?

If you’re a homeowner, you’re probably saying, “Who cares. Give me the lowest rate!” If you’re a mortgage planner, you’re a bit worried right now, even if you’d rather not admit it.

In our view, we’re at a major turning point in the industry.  Over the next few years some brokers could take a 25-45% pay cut because of the legion of brokers willing to give up 1/2 their commission to advertise lower rates. Are deep discount lenders propagating this trend? Absolutely, but free-market pricing can’t be restrained.

Consumers may indeed get the lower rates they crave in the end, but it won’t be without a cost. The quality of advice and personal service could deteriorate over time as brokers’ reward for devoting time to a deal and honing their craft may no longer be as enticing.


Sidebar:  A good mortgage planner adds value beyond the interest rate by:

  • Helping identify the lowest-cost term (which can impact total interest cost far more than a 10-20 bps rate discount)
  • Comparing numerous lenders to find the best combination of features and rate
  • Properly structuring difficult applications for the greatest chance of approval
  • Structuring debt to help homeowners accumulate assets.

Good advice always comes at a price. The exception is when technology advancements deliver that advice more efficiently. That hasn’t fully happened yet in the mortgage planning business, but the future may bring what we haven’t yet envisioned.