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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