2 Out of 3 Don’t Shop at Renewal

Burning-MoneyEvery now and then we see a mortgage stat that’s a jaw-dropper.

This finding from Manulife Bank is one of them. It suggests there are a lot more people with money to burn than one might expect.

Manulife recently surveyed 1,000 Canadian homeowners between the ages of 30 to 59. Among respondents with a mortgage, two-thirds (65%) did not compare mortgages from more than one lender when they last renewed.

More specifically:

  • 20% stayed with their current lender after maturity and did not negotiate
  • 45% stayed with their current lender and tried to negotiate a good deal, but did not shop around
  • 35% compared mortgages from several lenders and choose the best overall lender and product.

The youngest group (ages 30-39) was most likely to shop around (41%), but was also most likely to
accept their current lender’s offer without negotiating (24%).

We asked Doug Conick, President & CEO of Manulife Bank, why on earth people would give so much power to their lender.

“Most people lead very busy lives and may not have the time or expertise to fully investigate their options,” he said.

“Through our debt survey we’ve found that only about 3 out of 10 Canadians work with a financial adviser to manage their debt more effectively.”

“With busy lives and a lack of advice for most, this decision often gets left until very close to the renewal date, causing borrowers to follow the path of least resistance and renew with their current lender.”

“The unfortunate thing,” he added, “is that this could end up costing them a lot of extra money and keep them in debt longer than they need to be.”

That’s for sure.

In our experience, people who auto-renew often pay 1/2%-3/4% more than necessary, or worse! In fact, we’ve seen innumerable people sign renewal letters at their bank’s “special offer” rate, which is usually well above the market. (Example: Today’s 5-year fixed “special offer” bank rates are 3.94% to 4.09%. That’s up to 80 basis points above competitive rates on the street.)

Even a 1/4% rate difference amounts to over $4,000 more in interest over five years, on a $200,000 mortgage with a 20-year amortization. That’s money that could normally go towards prepaying a fat chunk of principal.

pickpocketingIt’s hard to fathom why anyone would let a lender pick their pocket like this. At the very least, folks must find it within their strength to lift up the phone and call an independent mortgage planner.

Even if you’d rather stay with your current lender at renewal, seek out a second opinion. You absolutely owe it to yourself to keep your lender honest by surveying the market.

Of course, this all begs the question of why someone would ever want to deal exclusively with a lender that aims to maximize the interest they pay…but that’s a story for another day.

Sidebar: The report also confirmed, yet again, the various studies which show that people underutilize their prepayment privileges.

In the last year, out of respondents with a mortgage, 70% did not make any extra payments.

By far, the most common reason cited for not making an extra mortgage payment was “a lack of extra money.”

Survey Details: The Manulife Bank of Canada polled 1,000 Canadian homeowners between ages 30 to 59 with household income of more than $50,000. The survey was conducted online by Research House between October 25 and November 7, 2011. In a similarly-sized random sample survey, the margin of error would be plus or minus 3.10% at a 95% confidence level. Here’s the full survey.

Rob McLister, CMT

  1. It’s funny … some say “It’s my bank, I’m not changing it” even when they pay almost 1% up from the current market rates.
    Ignorance fills bank’s pockets well.

  2. Same is valid for all kind of services and contracts.
    There’s no cure and there’s no need to invent one :). If everyone gets too smart, no one will be :)

  3. The great debate, educate the public further
    on the importance a qualified well educated
    Mortgage Professional can play in their life, or accept that allot of people just wont listen.
    I’ve heard some say that borrowers have this need to feel like they can tangibly be engaged with the bank they already do business with, as a result do not wish to leave their primary financial institution even if the savings can amount to thousands of dollars over the term.

  4. When people don’t even understand that carrying thousands in credit card debt at 15+% is a bad idea, I’m not surprised.
    Sorry if that sounds incredibly pretentious but it really is mind boggling.
    How can we get financial education as a mandatory subject in high schools? And not just a couple special sessions, a whole semester.

  5. I couldn’t agree more. We NEED some form of financial literacy education in school. Not to say financial matters are the most important thing in the world, but I believe it is important enough to be a core subject. There are so many topics that people are ignorant of. But if these matters are left completely to people’s own self interest, we are in for a world of trouble. Ignorance is not always bliss.

  6. The main reason for this trend is complacency on the part of consumers. You can’t tell me that all lenders send out renewals with discounted rates. No way! I have seen renewals come back at posted rates!
    But I don’t necessarily buy into this whole lack of education part because to me, it’s a sad excuse. The resources are there, especially online, to help people make informed decisions. That’s why you can’t help but not feel bad for people who are taken to the cleaners in terms of mortgage rates, mutual fund management fees, etc.
    The “I don’t have the time to learn this” is unfortunately cost you a lot of $$$

  7. Not usually. Lenders generally pay for everything on switches except the discharge fee. That is $0-$300 depending on the province so it’s irrelevant if you’re saving thousands.

  8. Agreed, the cost of switching is negligible. The big chunk of that cost, often, are the prepayment penalties. This is where lenders make their money and that’s why there’s this trend to push 5-year fixed terms. With 2 out 3 homeowners refinancing their 5-year mortgage before the term expires, the penalty costs are a huge money maker for financial institutions. Even if the rate is blended and the client doesn’t pay a lump sum when the first mortgage is collapsed, the fact that the lender isn’t providing their lowest rate on a blend is a huge benefit because that way the penalty is absorbed into the new mortgage where the interest compounds again. So it’s like you’re paying interest on top of interest on top of interest. Believe it or not the same cycle often repeats itself. The amount of interest they pay over the life of the mortgage by going through this scheme is just massive.

  9. Preferably you should start to look around 60 to 90 days before the renewal date. Remember that the best rates are often short-term closing rates (45 days rate hold or less)
    I discourage people to wait until they actually get the renewal offer because some lenders like to send those out quite late.
    I had one case where the renewal arrived less than 10 days before the payout date. Suffice to say the homeowner was absolutely livid. We got the deal done for him but the last minute stress was unnecessary. The lesson is don’t wait until the last minute. Be proactive as oppose to reactive.
    If the plan is to assign the mortgage to another lender, the new lender needs at least 10 business days to complete the transfer and that’s after all the supporting documents are provided and conditions in the commitment satisfied.

  10. I think Lior made a great point: it’s not education; its attitude. The information is out there. Everyone in Canada has heard that they should get 3 quotes on everything.
    You can make an infinite amount of education available; if people don’t care or cannot be bothered, all the knowledge you provided is pointless. You have to change the attitude first.

  11. You want a teacher to educate our children about money? Have you ever looked at their financial affairs or their ability to take risks? These people are employees, living on a regular pay cheque that can’t be taken away short of murdering a child with a dozen adult witnesses. I didn’t trust them to educate my children to read. Why would I trust them to teach my children about money?
    Money is a scorecard that measures your contribution to society. Teachers don’t like the EQAO tests because it is a scorecard about their results in teaching children how to read. If they don’t like that scorecard, why would they like the bigger one?
    The vast majority of teachers are well meaning, but the business of teaching our children about life, learning and finances is far too important to leave to someone else.
    I’m not knocking the educational system, and until there is a better way to developing our children as contributors to society, we’re stuck with it. Just don’t expect too much from the system. You’ll be disappointed.

  12. Unless your mortgage is with CIBC/FLM… Their renewal/retention dept are now soliciting ALL of their existing customers 6mths prior to matuirty offering P – .10 on a VRM and waiving the penalty if the customer elects to sign the renewal now!
    I am a mtg broker with a relationship with this lender, and even my clients are being solicited. Rather than take issue with this practice, I am concentrating my efforts and cementing my relationship with these clients to ensure sure all renewal options are looked to keep CIBC/FLM on the ball!

  13. Just to make a comment….when I first got my mortgage, I actually did not pick the lowest rate. The bank that i went with turned the whole mortgage application around in 2days. The bank that I initially was going to go with had 1.5 months and they were still waffling on whether to give me the mortgage. I concede that the difference in rates was 35 points but i was willing to pay that extra for the good service that I got. I will shop and negotiate again in about a year when the mortgage is about to expire again, but I think something does have to be said about good value and good service. Thats something I don’t mind paying a little extra for….
    On the education side, the BC securities commission is starting education programs (I know thats only on the west coast). Its mostly about the stock market, but I’m sure they talk about lending and debt instruments as well. Part of the problem is they are educating highschoolers. Some might remember, but I would think most would forget by the time they are thinking of buying a house.

  14. another thing to consider is the amount of time it takes to switch your mortgage to another lender – often it is better for you to just go to work and spend your time making money, rather than trying to save $100 via a switch.

  15. Anytime anything is up for renewal, whether it be a mortgage , homeowners insurance, etc, shopping around is a smart move. But the lowest rates are not the only factor to consider. Dependability of the company or bank and quality of service also come into this equation. I do agree, however, that you owe it to yourself to fully explore all options at renewal.
    On the “Sidebar Note” – sad to think many fail to utilize the prepayment option. Even one extra payment a year can add up.

  16. some say : “I’ll pay the bare minimum only, to give them back less money, they have to wait 30 years to take all their money back from me”.
    So smart :)

  17. In regards to educating our children in finance…it begins at home. How we shop, how we look for service, etc. is important and we do pass that on to our children.
    Other than that, an internatial organization called “Junior Achievement” has a great program for educating children at all age levels. These programs run on volunteer input from the business community. People with the financial expertise can pass on their knowledge. I’ve been fortunate to be involved 2 times, and it’s a great experience. See link: http://jafoundation.cfhosting.ca/programs.cfm

  18. I agree that many people think the they owe the bank somehow???? Or that they have a deep seeded relationship with them. There are other people that don’t want to spend the time to go through the process to switch, not matter what you say. The best we can do is continue to educate.

  19. Sadly, about 20% of my mortgage renewal business fail in transferring due to worse off economic conditions and can’t qualify anymore, as well as 10% are tied to their lender as their product is registered as a collateral charge. Most importantly, once the lender gets the request for payout anyways, the banks retention department is on he phone with the client, willing to match whatever new rate they might have found elsewhere.

  20. What you said happened to me. I asked my lender for its best rate when we renewed the last time. Our bank gave us a rate that was .4% worse than what we found elsewhere, so we told them we’re leaving. We went through the entire application process including all the paperwork. Then they call us 8 days before closing to say they will match the rate from our broker. I told them not so politely to go screw themselves.
    If a bank makes you waste your time to get its best rate, my advice is to tell them the same thing. Maybe that way they will learn to be honest from the beginning.

  21. I do a healthy business but stopped focusing on renewals. it just isn’t worth the hassle:
    1) the time to renew with another lender can be 2-4 weeks. in that time the original lender gets a sniff of whats going on and kills our rate at the altar, almost 90% of the time.
    2) if a client does choose to leave it is usually because they need to refinance which then DOES get converted to an easier sell.
    although these numbers are staggering, what I find is that once the original lender finds out that client is shopping, they will give below market pricing. sure it takes a couple of calls back to them by the client BUT that’s not such a pain in the rear to do.
    i’m going to focus on sending my biz to a lender that pays on trailer fees in 2012.

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