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Banks Try More Up-front Pricing

rates-discountingDespite all the 2.99% five-year fixed offers in the market, there are still lenders playing people for fools by advertising “special offers” of 3.99%+.

The good news is, there are now fewer of them.

More and more, banks have been advertising in-the-ballpark rates up front, as opposed to the phony “special offers” they’ve been posting for years.

TD Canada Trust is one such example. Despite the uptrend in bond yields over the past six weeks, TD has trimmed its online 5-year rate to 3.19%, a spread of just 165 basis points above bonds. Historically speaking, that’s a thin margin for TD’s advertised 5-year pricing.

TD is also offering a decent 2.79% three-year rate and a 2.99% four-year rate that matches levels seen during the winter of 2012 “rate wars.”

RBC is another example. At 3.29%, its advertised pricing is noticeably better than normal on 5-year money. It has also just extended its “special offer pricing” by another month (to Feb. 28, 2013, barring rate increases).

BMO-BankMeanwhile, BMO continues to break ranks and feature the lowest Big 6-advertised 5-year fixed rate in Canada at 3.09%, albeit for a restricted product. (RBC and TD are content to price 10-20 basis points above BMO, knowing that many pay more for flexibility.)

Scotiabank has also been advertising reasonable rates for selected terms, like 2.79% for a three-year fixed. That’s despite its not-so-“special offer” 3.99% five-year fixed.

Eventually, CIBC and National Bank will also come around.

It’s in the Big 6’s interest to end the madness of artificially high advertised rates, regardless of their long-proven discretionary pricing strategy. Today’s most desirable mortgage consumers are more informed than ever. The abundance of online data makes it child’s play to benchmark a bank’s advertised rate against its competitors.

Moreover, the advent of rate comparison sites are making consumers increasingly jaded towards lenders who post 3.99% when the real market is at 2.99%. You have to be either gullible or weakly qualified to pay 3.99%, and seemingly everyone knows it. Promoting inflated rates therefore hurts bank credibility and creates a needlessly adversarial mindset in consumers.

Cut-Mortgage-RatesOnce all the majors move to reasonable up-front pricing, it will become a different market. Their displayed rates will be closer to brokers and discount lenders, and customer negotiations will begin at a lower rate. (Banks rate-match all the time, but this discussion is solely about advertised rates.)

There’s no telling how long it will take before all banks offer everyday low rates. TD tried it in 2002-2004, as did BMO from 2005-2006, but those were short-lived experiments. They also pre-dated the dawn of mainstream rate comparison sites.

Today’s rate discounting may prove to be merely a pre-spring fling for the banks—leaving us disappointed when they go back to frivolous “special offers.” Or, maybe it won’t. We’ll have to watch their follow-through in the next few months. Long term, however, we’re absolutely certain that banks will both position themselves as, and be, more competitive.

Rob McLister, CMT