On November 17 most (but not all) of the banks raised their posted 5-year fixed rates from 5.19% to 5.44%.
Then, with little fanfare, they cut them back to 5.19%.
These quiet rate reductions were led in part by RBC, the nation’s biggest mortgage lender. On November 25, RBC brought its 5-year posted rate back to 5.19%. (Despite this posted rate reduction, its actual client rates remained unchanged.)
The reduction in posted rates was quite counter-intuitive to some people. Normally when bond yields soar as they have been, posted mortgage rates go up, not down. So, to understand RBC’s thinking, we spoke with Anjel Van Damme, RBC’s Director of Pricing, Home Equity Financing Products.
Ms. Van Damme explained that the differential between posted and discount rates has been larger than in the past. (Indeed, before this move back to 5.19%, the posted-bond spread was 305 basis points, 36 basis points above the average since 1999.) Because of this, “RBC is trying to bring posted rates closer to client rates,” she said.
“People very often quote our posted rates and not our specials," Van Damme added. She said that is especially true with first-time home buyers. “First-time home buyers will often look at the posted rates and not realize just how competitive banks are.”
We feel it necessary to add a quick side note here. There are still lenders and brokers who regularly compare their deeply discounted rates to the banks’ posted rates, as if they can really save you 1.50% on your mortgage rate. It’s hard to fathom how these sorts of comparisons can be anything short of intentionally misleading.
In any event, Van Damme believes the Internet has changed the game. “Clients are becoming more and more aware of pricing. I think they shop more today.” Therefore, she says RBC intends to bring its posted rates much closer to its everyday discounted rates.
If RBC’s advertised discount rates eventually do become its posted rates, it would be significantly less confusing to consumers. That’s the way banks like ING Direct have done it for years. “We want to become more transparent,” Van Damme states. “Whether we get as close to these lenders on our posted pricing, I'm not sure."
Many will wonder why RBC keeps its posted rates at all. Van Damme says discounting off of posted rates “is a model that has worked for us in the past, but strategies can change over time.” She adds, “I'd have to look at all of our business goals” to see if a discounted rate strategy (is more effective).”
BMO, a major RBC competitor, seems to think it is more effective. BMO became overtly aggressive on pricing when it launched its “low frills” mortgage in March. As a result, it’s a sure bet that RBC has analyzed the success of BMO’s strategy very closely—as have other lenders. In fact, we wouldn’t be surprised if RBC came out with its own aggressive rate promotion(s) next year.
Van Damme does caution about one thing. Homeowners need to be very careful with some of these ultra-low rates, she says. Many of the “no-frills” rates are loaded with restrictions like pre-payment limitations, fully-closed terms, stripped-out features, or unusual penalties. “People really need to compare product to product. If they're not looking at what they’re giving up, they may regret it in the future.”
There’s also another interesting sideline to this story. If the other banks continue following RBC’s lead and bring posted rates closer to discounted rates, it could reduce the qualification rate used to approve people for variable and 1-4 year mortgages. Van Damme points out that, “Yes, that is possible. Although, it’s not something we look at when setting the posted rates. The qualification rate impacts only a small percentage of our clients.”
Rob McLister, CMT
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