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.

  1. Great story – well positioned and thoughtful. It’s a hard reality that there is a “legion” of brokers willing to give up 1/2 their commission to sell the lowest rate. As you said, what this really is all about is, “helping identify the lowest-cost term which can impact total interest cost far more than a 10-20 bps rate discount.” Only time will tell how our industry will end up.

  2. I would not be very worried about what others are doing. There are various styles of doing business. Everyone is entitled to try their ways without causing problems to others. Some business follow ethics, some don’t. Remember giving best rate would generate not business for anyone but banks, I am sure of that. If gives prime minus 2% (just saying) then borrower with high credit score will go the XYZ bank and ask them to match that. Most of the time banks do that.
    It is our knowledge based service and referrals which generates business for us. Online presence is just to make sure that people know we are in business. Online rate advertisement will not generate very large volume business for us.

  3. Another point to keep in mind is that if XYZ lender is paying half commissions, they are getting half brokers :) less due diligence, more willing to do ‘anything to get the deal done’
    For most lenders, this won’t pay off long term, but some just can’t seem to resist a quick cash grab…

  4. At the end of the day, the only thing that really matters to me, is how much my payment is on my mortgage. Im not going to pay an extra .10 or .20 for good service.

  5. For the vast majority of people, myself included, a mortgage is a commodity and I just want the lowest price. For that 5% who do have a special situation (debt consolidation, etc) maybe the way to handle it is by not burying the cost of advice in the rate itself. Charge for the advice separately.

  6. Excellent article, Rob! It’s amazing how some brokers out there are sacrificing their commission for nothing. Do they not realize that major banks can match their rates on a discretion? Do they not realize that if lenders see that so many brokers are willing to sacrifice their commission for a minuscule rate reduction that their compensation model may end up leading to lower pay for all brokers?
    One has to wonder whether some lenders aren’t responsible for this fiasco by demanding high funding ratios. Many of the big brokerages that have thousands of agents working under them are not in a position of maintaining these funding ratios and probably never would be.
    So in the pursuit of driving up business, they have shifted their business model from an advisory role and doing what’s best for their clients (a major differentiation from the major banks) to being rate whores strictly based on volume with no consideration for their own pay, their clients’ interests (we all know that you can buy down rates only to a limited extent if you’re willing to do so and that the lower the rate, the more restrictions are placed on the mortgage), or the interest of the industry as a whole.
    I’m sure you heard of Merix’s recent side project and how it works. Don’t be surprised to see more brokers foolishly send almost every A-deal they have over there.

  7. Rob: I just checked the new website that CanEquity launched that lists the promotion discussed in the CMP article. They are going to be f**king themselves inside out with this. You do realize what’s happening here. It’s no wonder they were charging an admin fee! But that should be the least of their concerns.

  8. My particular market place (or Demographics) are particularly rate sensitive; but I found out early that it is not about rate alone! (and yes I have access to similar rates quoted, and no, I have not had a situation where I should offer them) My rates need to remain competitive or even slightly better than the Branches and every once in a while I too end up being caught up in irrational pricing. In my opinion, you have to put a price on the advise and service you are providing to your clients, and you need to sell your service to them. Simply finding the best product and ensuring a competitive rate with the odd mail out is NOT providing customer service that sets you apart from other lender’s. If we are casting ourselves as being professional, then most of us had better step up and elevate our game and find new and innovative ways of servicing our clients to provide real value… because most of us can’t compete on rate alone!

  9. May I ask where you got that “5%” figure? I’ve been in the business longer than I want to admit and almost everyone I work with has their own special situation.
    You can easily get a low rate by searching the web but, if you’re like the typical home owner, you won’t have any idea how to correctly compare terms. You also won’t have a clue about the hidden pitfalls of certain low cost lenders.
    In my experience most people can barely spell the word amortization let alone know what it means. See how much it costs you when you take the wrong product or term. You will find out the hard way that great advice is worth its weight in interest!

  10. In my experience most people can barely spell the word amortization let alone know what it means
    No offense Samantha, but it is this kind of attitude that turns me off from using certain brokers.
    As has been pointed out many times on this site, most people do not take advantage of pre-payment options, etc., and they would be better off just going for the basic no-frills mortgage with the lowest rate.

  11. Ted:
    Why do you make blanket statements such as:
    “most people do not take advantage of pre-payment options, etc., and they would be better off just going for the basic no-frills mortgage with the lowest rate.”
    90% of my clients specifically *ask* for maximum flexibility with their mortgage payments and the ability to post additional payments at any time. Once I explain the pros and cons of the “no-frills” mortgages most people are turned off by the idea. Perhaps that’s because these value mortgages aren’t quite as valuable as many people think. ;)
    For me it doesn’t make any different. A no-frills mortgage pays me the same as a regular mortgage. The issue is what works best in the interests of the client. If I can offer a client prime – .70% for a regular variable mortgage that they can get out of by paying 3 months interest at prime, why the hell would I place a client with a particular lender that’s offering prime – .75% with an IRD to get out? What if a year from now the decrement to prime drops to -1% and that client wants to refinance? Kiss the savings of the 5 bps good bye… and then some!
    Things aren’t always black and white, Ted. A mortgage broker must look at everything and not just the prepayments or the rate for that matter.

  12. While I might have expressed it a little more elegantly (no offense) Samantha does has a point. There are so many mortgages to choose from these days that even professionals have a hard time keeping up. Regular people without mortgage backgrounds can’t do the math to compare the long-term cost of different terms and conditions. That alone is reason to consult a professional IMO.

  13. From my point of view, I can’t differentiate between the good brokers from the bad ones, and I’ve already been burned once because of it. I got bad advice from a “reputable” broker when I bought my first home, and now I’m stuck with this product for another 3 years. I wish I knew now what I knew then, because if that was the case, I’d have been more inclined to consider this type of mortgage–one that a broker’s not as willing to give me because it hurts their bottom line.
    Even though we’re paying brokers (indirectly, through their choosing products based on their commissions) to find us what’s best, there’s no guarantee that they will do a good job. In my case they didn’t. So why pay them at all? Rate shopping websites and a lot of options (even ones like CanEquity’s mortgage) empower us to make more educated decisions on our own.

  14. On the topic of fees, I wouldn’t be surprised to see the industry move towards charging application fees. Lenders won’t give access to these super low rates unless the broker has high closing ratios. Charging an admin fee establishes commitment and raises the chance that a deal will close. The fee doesn’t have to be huge. It could even be something like $295 refundable at closing. This might then encourage brokers to quote lower rates because they aren’t as worried about cancellations.

  15. Jon,
    You’re right that it can be hard to know if a broker is above average. You have to either establish their creditability on your own or get a really good referral.
    Then again, it’s hard to establish if a lawyer, accountant, or financial planner is any good. That doesn’t mean that one bad experience is reflective of the whole industry. You could have just as easily had a bad experience at Royal Bank, CIBC, BMO, TD, or Scotiabank.
    The fact is, you need to do a lot of homework before you entrust anyone with your finances.

  16. Hi Ray,
    Thanks for the compliment on the site. Hopefully I can survive a few more years before being ended. ;)
    Technology most definitely has the potential to thin our ranks over time. Even so, mortgage selection leaves significant room for error…and mistakes can be very expensive. That’s why almost everyone consults a professional before committing to a mortgage.
    Technology is a fantastic way to educate consumers, but all it provides is information. People still have to spend the time and effort to absorb and weigh that information. Then they have to come to a conclusion based on their understanding of what the technology is suggesting. Picking the wrong term, failing to capitalize on pre-payments, overlooking equity strategies, and/or getting caught in overly restrictive mortgages are just a few ways that inadequate advice can come back to haunt you.
    Until there is a website that takes a complete borrower profile, accurately compares the pros and cons of every product that fits that specific profile, mathematically projects the most favourable term(s), factors in risk tolerance and financial capacity, evaluates the application against lender guidelines, and recommends client-specific interest-reduction and equity building strategies, it will be a bit early to write off the mortgage planning industry.

  17. Hi Lior,
    Appreciate your perspectives. Thank you…
    Assuming nothing changes, the lender you refer to will amass significant volume, at least for the foreseeable future. There are brokers out there who are nothing more than order takers, and this type of lender makes it much easier for them to compete in the short-run.
    When used judiciously, however, this lender does provide options where no other options may exist. It’s also a product of market forces, which are a natural and inevitable part of an industry’s evolution.
    I’ve long felt this business would become commoditized in certain respects. Cut-rate lenders will accelerate that process. All we can hope for is that consumers remain well-served as the business evolves.
    At the end of the day, significant opportunities will remain (long-term) for mortgage planners who focus on niches, cultivate relationships, and/or exploit technology to the fullest. We each have to ensure we are fulfilling a market need. Basing mortgage recommendations on total cost of ownership instead of up-front rate is the surest way to ensures that happens.

  18. Lior,
    If by “blanket statement”, you mean, “exactly what the statistics say”, then I’ll accept that I made a blanket statement.
    Not two posts ago, CMT reported on a study that only 23% of mortgage holders make prepayments
    Rob’s own conclusion was:
    The first thing we thought of when reading this was that it’s a wonder more people don’t take low-frills mortgages (those with 5-10% annual pre-payment privileges). Most people have the best intentions of making pre-payments, but relatively few actually do. As a result, many needlessly overpay for large pre-payment privileges in the form of higher mortgage rates.
    The fact is, most people only need a no-frills low cost mortgage.

  19. And speaking of “blanket statements” . . .
    “90% of my clients specifically *ask* for maximum flexibility with their mortgage payments and the ability to post additional payments at any time. “
    This is a typical “blanket statement” that confuses samples and populations. Why in the world do you think that *your clients* are representative of the population of mortgage holders as a whole. The numbers speak for themselves: only 23% of mortgage holders actually put down prepayments.
    Don’t you think, perhaps, that people who seek out a broker such as yourself are those who specifically have needs other than simply a basic mortgage?

  20. Hi Ted,
    Just to clarify my point: I do believe low-frills mortgages have real value for certain types of homeowners. It’s important, however, to make a distinction between “low-frills” and “no-frills.” The latter often have fully closed terms and zero pre-payment ability, and are unsuitable unless the rate is well below market (which is not the case at the moment).
    I would not venture to say that low-frills mortgages are suitable for the majority, however. That’s because:
    • They are often limited to five-year terms, which are not appropriate for everyone.
    • They don’t allow for readvancing capability, hybrid terms, pre-approvals, long closings, flexible amortizations, and other features that are important for many borrowers.
    • Their guidelines are somewhat restrictive and they don’t permit certain property types and borrower profiles (e.g. lower beacons, business for self, new immigrant, gifted down payments, etc.)
    Over time, low-frills mortgages may improve by addressing some of the above issues. They may then be suited to a broader audience.

  21. I don’t think the “rock-bottom” lenders will face more difficulties than anyone else. Most non-bank lenders have similar funding costs because their mortgages are all securitized.

  22. Remember anyone who is just looking for a rate will likely end up getting only what they are looking for. Usually rate shopper’s are not sure what other considerations they should be making and should you go through the potential concerns and help them discover the personal best term, it will build that relationship which leads to more referrals as less rate shoppers.

  23. Refundable application fees are fine with me as long as the broker or lender has something unique to offer and quotes the best rates in the market. On the other hand, if you are quoting 4.19% while others are at 3.99% then don’t waste people’s time with fees.

  24. “Don’t you think, perhaps, that people who seek out a broker such as yourself are those who specifically have needs other than simply a basic mortgage?”
    Yes, of course, and I’m humbled by it! And I get them a mortgage at almost the same rate as a no-frills mortgage – minus the restrictions. ;)
    Bear in mind that value mortgages don’t just cut your pre-payment facility. There are other restrictions that may be cost prohibitive to the client that effectively diminish the small rate reduction.
    Regarding the 23% who actually make use of their lender’s pre-payment facility, the question flies in the face of past Consumer Surveys conducted by CMHC. In that particular report, 70% of Canadians have indicated they would like to pay off their mortgage sooner. So if lenders are offering people the ability to pre-pay their mortgage and get rid of it sooner than the original amortization, why do only a few people actually do it? That’s the question that needs further investigation.
    I believe part of the problem stems from the fact that the personal bankers and brokers alike don’t do a decent enough job highlighting the benefits and savings especially during the first term. I suspect it’s not a lack of will on the part of homeowners but lack of awareness. If you ask the average person if they know how their pre-payment facility works, I bet you’d be surprised by their response.
    I find that sometimes people don’t prepay because they genuinely don’t have the cash flow to make any additional payments. In such cases, a value mortgage may be worth a look.

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