Mortgage Renewal Wars

mortgage-renewal-warsAlmost 9 in 10 people stay married to their existing lender when their mortgage comes up for renewal. This is a war that banks are winning hands down.

Garry Marr did a piece that touched on client retention in the Post today. Further to his story, banks have been doing an incredible job of retaining customers. The fact that retention rates remain so high in the most competitive mortgage market of all time says something about the effectiveness of bank strategy.

To clarify my quote in Marr’s article, banks have never been “stupid” in the sense of pricing optimization. Banks have always tried to set renewal interest rates at a level that maximizes profit. They price high, knowing that is a starting point (or ending point for the less informed).

This “selective pricing” tactic means that banks stick naïve, unsavvy and complacent consumers with high rates, while giving the fattest mortgage discounts to those who negotiate the hardest (and trust us, well-qualified borrowers don’t have to negotiate that hard).

Where banks are less sensible is with the insulting pricing they quote certain AAA-clients. We’re talking about highly qualified borrowers who could get auto-approved at any lender in Canada. Yet, we still see renewal rate quotes that insult these people’s intelligence. Case in point is the 5-year fixed at 4.04% that a bank quoted to one of our renewing clients last week (market rates are 3.59% or less).

People are getting tired of banks making them out as fools. Lenders need to do a better job of segmenting their clients so they don’t tick off excellent customers. Banks need to identify strong online-savvy renewal clients, sharpen their pencils and play to these people’s sense of loyalty.

Lenders are adapting though. Nowadays, banks are trying to sink their teeth into you well before anyone contacts you for renewal. Some of our customers have received calls up to 180 days before maturity. The calls are typically from lender reps making early renewal offers, and those “offers” have been getting noticeably better in recent years.

If banks want to, they can undercut competitors’ pricing by up to 30+ basis points at renewal. That’s because—among other things—most lenders don’t have to pay an originator any commission on those deals.

Be that as it may, banks are still far from upfront about their bottom line. We had one client up for renewal and the bank offered her prime – 0.60%. Once the lender heard we found that client prime – 0.90%, it matched the rate. Meanwhile, the best rate that very same lender offered to brokers for new business was 40 bps worse.

We’ll see retention teams get far more aggressive as time goes on and/or as volumes sag industry-wide. If you’re a broker or mortgage specialist with renewing clients, you’d be wise to contact them well before 120 days to renewal. And don’t pitch just rate, because you’ll win fewer and fewer rate battles vs. retention reps who are anything but pushovers.


Rob McLister, CMT

  1. I was hornswaggled I think by Scotiabank, originally I signed with them as they were my bank and was naive into thinking about brokers or other ways to get a mortgage. I got a STEP mortgage with them, and now am told it is quite diffcult and costly to leave a STEP mortgage as one would have to go through a lawyer and incur quite a bit of extra costs. Not including the penalty IRD since I am locked in another 3 yrs 9 months.

  2. Let’s not forget CIBC’s refi special, 3% cash back and P-0.5 for five years (20%/year prepayment privilege, however cashback is clawed back for breaking this early). Effectively around P-1.1~1.2 if you are sure you will keep the mortgage for five years, this is the best deal I have found recently (full disclosure: I don’t work for CIBC but I did switch over my mortgage to them from BMO, which could only go down to P-0.9)

  3. Upon renewal I tried a mortgage broker. They couldn’t do anything for me. It was easier (and less expensive) to renew with RBC.

  4. Yep. Like rob said, in the end it all comes down to rate and the banks can always beat the middlemen. The uninformed get screwed but that’s life.

  5. I think the answer lies within your comment, “They price high, knowing that is a starting point (or ending point for the less informed).” The bottom line, for 85%, it’s the ending point. They simply sign the renewal doc. Why would the banks change with those kind of stats. Hopefully the customer will eventually realize how they’re getting fleeced.

  6. Hi LS,
    If you’re referring to this Rob (me), that would be a misquote.
    Where the client has been working with a good mortgage professional, rate may very well be secondary in the end. Those include cases where the renewer’s lender:
    * Has insulted the client by not having the respect to quote him/her a competitive rate up front
    * Hasn’t offered any advice on term selection or how other lenders’ products compare
    * Has no relationship with the client (often, it’s random retention reps who call clients, not personal advisors)
    * Hasn’t kept in reasonable contact with the client
    * Hasn’t offered any value-added information throughout the term (such as trends that affect the client, interest-saving strategies, etc.); and/or,
    * Has provided subpar service via their call centre or otherwise.
    Professional mortgage planners offer so much more than low rates. Relationship, service, and money-saving advice still mean something to the majority of Canadians, as confirmed by surveys from Maritz and others.
    Speaking personally, when a lender matches the lowest rate we can find a client (and they do so only 2-3 times out of 10), the majority of those clients still renew through us. The interest rate is just one part of the equation. Term selection, for example, impacts borrowing cost far more than upfront rate, and few retention reps have any skill in making suitable term recommendations.
    There are countless mortgage professionals out there that maintain similar high retention rates, due to the essential value they provide consumers.
    Cheers…

  7. Hi Mark, From the lenders I’ve spoken with anecdotally, there are notably fewer customers rubber-stamping renewal letters today, versus ten years ago. It’s certainly far less than 85%, which means fewer people are getting totally plundered by their bank these days. That said, you’re right in that there’s still a lot of educating to go…RM

  8. How is the effective rate prime – 1.1 or whatever it is if prime fluctuates? This whole “effective rate” thing CIBC has been throwing out there is nothing but b.s.
    Also note that the 3% cash-back is available for mortgages over $400,000 and yes there’s a full claw-back if you break early which really goes against one of the most attractive features of a variable mortgage and that’s the ability to discharge relatively cheap at 3 months interest compared to a potentially costly IRD with a fixed rate mortgage.
    This product should be appropriately titled: “effective” rate AT THIS VERY MOMENT and as long as you actually used the entire cash-back amount to prepay the mortgage. Yes, that makes better sense. Even then, the logic is applicable as long as prime stays put.
    But if the homeowner spent the cash back on a new TV or a vacation in the Bahamas, you didn’t exactly get prime – 1.2%. You got prime – .50% (a pathetic spread considering what’s available out there) and a free TV or vacation.
    But of course it wasn’t exactly free if you have to pay the entire cash-back amount should you happen (or need to) discharge the mortgage before the term matures (for a myriad of different reasons).
    With all due respect but if you had any common sense you would have simply taken BMO’s prime – .90% and called it a day.

  9. Just switched from TD to CIBC for the reasons you cite: better rate and better service. I am really disappointed with TD’s lack of service to a 20-year customer. They offered an insulting rate and basically said take-it-or-leave-it. After I told them I was leaving it (via a twitter post on their feed) they tried to make amends – too late, the damage was done.
    Note to banks – if you won’t make me feel like you want to work for my business, I am gone. There are too many alternatives and it’s easy to switch (well, unless you get locked into TD’s ‘collateral’ mortgage, but that’s another story…).

  10. I was a long-time customer with TD and they couldn’t even offer me a decent rate on a mortgage. I went to a mortgage broker who got me a “great” deal with FirstLine. My loyalty is to my money, not my bank!

  11. Do tell me why so many borrowers deal with lenders who have different rates for borrowers of equal qualifications. I feel that too many brokers fuel this double standard by making their entire pitch on the basis of best rate. We need to talk more about the client’s best value not the lender’s best rate. Given that the average 5 year mortgage lasts 3.5 years. What is the cost of breaking that mortgage and when it does run the full term what guarantee does the client have that they will be automatically given the lender’s best rate at renewal? I would suggest that this should be the dialogue that occurs between a borrower and a lender or a broker but I suspect it does not. We in the brokerage industry have a massive PR job to do to make the consumer understand the true nature of what the relationship should be between the borrower and the broker.

  12. I have taken BMO’s prime – 0.9% offer as well :)
    Since I have a few houses around downtown Toronto (average loan to value about 40-50% so I have a good deal of flexibility) I don’t mind having just one mortgage term fully locked in for 5 years. The annual prepayment privilege of 20% is generous as well considering the rate.
    By the way, I used my check for $15000 (3% * 500k) to prepay another older, higher rate mortgage. But then again, I agree with you that many Canadians may not be as prudent, and spend that 3% check away, just to lose flexibility and face a potential claw-back when circumstances change (that’s exactly what CIBC is counting on!)

  13. Hi John,
    As you so correctly point out, “interest rate” and “total borrowing cost” are two different concepts.
    You’re also dead on in noting that too many lenders, bankers and brokers sidestep this distinction when “advising” clients.
    One can often find a lower rate but it’s harder to find someone who actually cares enough to ask the right questions. Only then can a mortgage professional determine the true lowest cost mortgage for the client.
    Rob

  14. Can someone explain whats wrong with Scotia STEP mortgage. I think I have one. What happens at the end of the term if you’ve this type mortgage.
    Also I am planning to leave other major bank for my rental and have another Scotia STEP mortgage due to their 3.35% 3-yr fixed rate.

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