ATB Dumps Posted Mortgage Rates

ATB-Financial-MortgagesAlberta’s largest financial institution, ATB Financial, is departing from the long-standing practice of displaying artificially high “posted” mortgage rates.

It’s a big move for the 75-year-old institution. ATB has used posted rates for decades.

Last week, for example, it was displaying a 5.14% five-year fixed on its rate pages. Now, all the rates you see are the rates “you can expect to pay,” says EVP of Retail Financial Services, Rob Bennett.

Posted rates were traditionally a means for banks to recognize “loyalty and good customers” through discounting, says Bennett. But they’ve evolved and led to “inefficient discretionary pricing models and complicated interest rate differential (i.e., penalty) calculations. It’s come to the point where our team thinks the practice is unnecessary.”

“We now need to compete on service and the quality of advice,” he says. “We no longer gain an earnings advantage on our IRD calculation.”

ATB-FinancialAs with many non-bank lenders, ATB’s penalties will now fairly compensate for losses that result when a customer breaks his or her mortgage contract.

By contrast, all of the major banks still use posted rates, and it’s one of the biggest disadvantages of their mortgages.

One criticism is that posted mortgage rates facilitate a form of price discrimination. As Bennett puts it, “The price that people pay can become dependent on their negotiation skills.”

That’s an arguable downside, however, since negotiation is a life skill that benefits those who are good at it. The bigger problem for consumers is that posted rates are less transparent, resulting in research inefficiency when hunting for a good mortgage rate.

Worse than that, posted rates lead to extreme IRD charges (a.k.a. prepayment penalties). Interest rate differentials are supposed to offset a lender’s loss when a customer backs out of an interest rate that’s higher than the rate a lender can charge today.

But big banks take it to another level by calculating IRD with inflated posted rates. That creates bigger differentials between a customer’s rate and current rates. That often leads to IRD charges that are greater than the lender’s actual lost interest.

Rob_BennettBennett says, with ATB, “IRD is simply the customer rate minus the advertised rate for the existing term, multiplied by the outstanding balance and remaining term.”

The debate over egregious IRD penalties won’t go away, but it remains to be seen whether any of the Big 6 banks follow ATB’s lead. With three quarters of the mortgage market, they don’t need to make knee-jerk decisions.

But there is a first mover advantage to doing the right thing. Advertising no-haggle rates “creates so much less confusion for customers,” Bennett argues. “Doing something (like this) ahead of the curve…creates significant goodwill.”

Sidebar:  In our interview, ATB restated its commitment to mortgage brokers. Bennett notes: “We have really great mortgage (broker) partners. We are not changing our relationship in any way with those partners.”

Rob McLister, CMT

  1. BMO got loads of free advertising flogging 2.99%. Imagine how much media coverage a bank would get by becoming the first to end posted rates.

  2. If you pay now fixed 5% and want to switch to fixed 2.64%,or to a variable 2.1%, then you will understand why and how big the prepayment charge is when a BIG bank uses posted rates and “fake discounts” in the calculation.
    For people that don’t break their term for any reason, the BIG banks are saints :)

  3. Great news for borrowers! Would like to think this will put pressure on the big banks to follow suit…but not going to hold my breath…

  4. You might
    > Need more money and not like your lender’s offer
    > Want to break the mortgage and extend your term
    > Want different mortgage features
    > Get divorced and need to refinance
    > Want to refinance to lower your payment

  5. Too bad ATB didn’t do this last year when we sold our place and got dinged 14,000$ IRD penalties and wouldn’t wave any of it even though we were going to, half a year later, bring a 700,000$ mortgage back to them.
    Maybe this is to in part help out their mortgage “specialists” who didn’t seem to know what was going on most of the time. Once I even had to tell their specialist what their posted rate was because she didn’t know…

  6. but that is a crappy experience you would have experienced anyway with any other bank, sans the specialist with limited knowledge, atleast this bank has taken the initiative to do good .. I do empathise with your timing though.

  7. How will ATB treat customers looking for an IRD calculation who are in a current mortgage but obtained their existing rate back when they used posted and discounted rates?
    For example I tried to get a quote last year on penalties if we moved; by my calcs I should have been paying just the 3mo interest based on diff between our 3.5% rate and the equivalent of remaining term out there which was greater than 3.5, but they claimed that the calc should be based on the (artificial) 5+% posted rate from back when we signed even though the posted rate is nowhere in our contract.

  8. I imagine you’d be subject to ATB’s old penalty policy, unless you signed updated paperwork with the new clauses.

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