What is the “Best Mortgage Rate” ?

Comparing-best-mortgage-ratesIt’s not synonymous with the “lowest mortgage rate.”

The best mortgage rate corresponds to the mortgage and advice that saves (and in some cases makes) you the most amount of money long-term.

Mortgage professionals routinely advise, “It’s not all about the rate.” To some, that sounds like evil sales-speak meant to boost commissions. The reality is that mortgage flexibility, contract restrictions and advice all have a definitive impact on borrowing costs. And most people don’t discover how much impact until after their mortgage closes.

That said, consumers are obliged to negotiate the very best deal they can. Three years ago, we asked ourselves, what kind of mortgage comparison website would we want if we were shopping for a mortgage ourselves? We thought up RateSpy.com.

RateSpy-com-400pxRateSpy’s edge is data, lots and lots of rate data — more so than most other Canadian rate comparison sites combined.

Now, why on earth would someone need access to 3,000 mortgage rates and 300+ lenders, you ask? It boils down to probability.

At any given time, different mortgage providers are motivated to offer more heavily discounted rates. They may have:

  • Surplus liquidity (e.g., a credit union with excess deposits),
  • A need to replace assets in securitization programs (which is why we see big discounts on mortgages with odd terms, like 3.4 years), or
  • Internal volume targets that haven’t been met, thus encouraging more competitive pricing.

By definition, the more lenders and brokers one has to compare, the higher the probability of finding a lender motivated to discount below the market.

Of course, once you find a low-rate provider, that doesn’t mean its rate entails the lowest borrowing costs. Asking the right questions is mandatory to ensure the mortgage balances renewal risk with interest savings, and lets you make changes down the road—penalty free. This mortgage rate & features checklist can serve as a guide in that respect.

trap,  catchFor these reasons, the interest rate alone can be a misleading number. If your lender or mortgage broker is quoting you a rate 10-15 basis points higher than what you’ve found online, it means nothing until you compare the features, restrictions and speed/quality of service from both providers

Our responsibility

Mortgage shoppers are, and will continue, flocking to rate comparison websites. But the information on these sites is vastly inadequate at the moment. Why, for example, don’t rate comparison sites speak to the penalty facing consumers if they break the mortgage early? Variations in penalty calculations can, and do, cost borrowers thousands more than small rate differences.

We have a responsibility to help consumers find the best overall deal, not just the best rate. The best deal factors in things like term selection, penalty cost, refinance restrictions, porting flexibility, advice on properly structuring an application, advice on building equity and so on.

Every Canadian rate comparison site I’ve seen underperforms in these areas. Even ours…for now. Our mission is to address these information deficiencies so consumers can identify the right combination of rate savings, flexibility and advice in an objective forum with no sales pressure.

Thereafter, we have to make it easier for folks to find competent mortgage professionals for a second opinion. Think about it. If you don’t have a trusted referral, where do you look to find a great broker or banker? How do you know the person you’re calling has the tenure, experience, qualifications and competitiveness to serve you best? Most existing advisor directories help you screen by little more than company, province or city.

Expect mortgage comparison sites to significantly evolve along these lines in 2014.

Sidebar: Rate comparison sites, in their present form, cater only to AAA fully-qualifying clients. Subprime, business-for-self and investor clients are a whole different conversation. There is currently no good mortgage comparison site for these customers, making knowledgeable mortgage advisors even more essential.

Rob McLister, CMT

  1. Hi Rob,
    Love ratespy. I had a question however. Is it safe to say that credit unions only lend in their own province? Would a credit union in Manitoba ever give someone a mortgage in Ontario?
    Thanks a lot

  2. All credit unions are currently provincially regulated and limited to lending within the province they are regulated by. The federal government has recently passed legislation allowing credit unions to apply to be federally regulated and then lend in other provinces but this is still new.

  3. I’ve sent this to a few friends who are looking to buy a house. They keep obsessing over the “lowest rates” and its hard for them to understand the big picture.

  4. Factually, the mortgage brokers (ourselves included) who consistently advertise their offerings on rate sites are aiming their rates almost exclusively at triple A mortgage borrowers. Folks who have plain vanilla, salaried jobs with great credit scores and the properties being mortgaged are owner occupied, residential homes.
    That being said, the products we offer all tend to have very strong contract provisions with great pre-payment options, full portability and very standard penalty terms. If you are that triple A borrower the products offered on rate sites are contractually as good or better than those offered by big banks or any other mortgage brokers and the rates offers are better 99% of the time.
    For those borrowers who qualify the next question revolves around whether the mortgage is for a home purchase or refinance / renewal of a property because often the very best rate offers focus on home purchase specials.
    As far as “who are the brokers who are on these rate sites” overwhelmingly they represent some of the most efficient and service oriented brokers in Canada (I am not afraid to put my company in that group). The fact is the majority of customers contacting brokers featured on these sites are getting fast, effective, professional service and good advice. Not every time; because I don’t claim to know every broker who is ever featured on a rate site but I know a lot of them.
    When we as brokers focus on the minutiae of penalty provisions we forget that the biggest percentage of mortgages in Canada that need a change are ported and blended or have SLOCS added to them to effect refinance within the mortgage term, these mortgages are not broken. Mortgage brokers tend to focus on breaking mortgages because that is often how they make the most money but statistically most mortgage changes involve, porting, blending and other refinance options that do not involve breaking a mortgage.
    If a mortgage needs to be broken and a penalty paid those features need to be balanced against a rate offer. The problem I see is that focusing on the penalty projects into an unknowable future and depends on an occurrence that may never happen and although it’s useful to mention penalty it is hardly the deciding factor in a mortgage transaction.
    My belief is the rate sites have simply been a benefit to consumers. Although advertised mortgage discounters represent only about 1.50% of total broker origination recently 3 different lender and network executives have told me that in the GTA and the Lower Mainland of BC: broker bought down mortgages represent 20% of all deals. Two years ago bought down mortgage rates were so few as to be negligible. Certainly competition from banks road reps and bank advertised rates is a big factor but the simple truth is the consumer knows more about mortgage rates now than two years ago and two years from now far more consumers will know more about rates than today.
    The future looks like more discounted rates to me.

  5. I think what Rob and co. are doing is providing a means for the average mortgage-seeker to negotiate the complicated world of “who can I trust?” to give me the proper advice on how my mortgage fits into my overall financial goals.
    And to provide that, the professional that touches the client first – – be it the mortgage, real estate, insurance, legal, or accounting professional – – that pro needs to assess not only the immediate need, but who to refer the client to next to continue where he stops.
    When a patient goes to his GP, the GP is that quarterback, and he is obligated to refer the patient to the specialists required to maintain good physical and mental health. The financial professional is that GP but for financial needs.
    If we look at desiring good rates like a symptom, the mortgage professional will help determine the direction the client needs to be sent in. While rates got him there, it will surely not be the tell-tale result by the time a good team of advice-givers are brought to solve the much bigger issue of financial well-being.
    What Rob’s mandate will provide is the means to properly assess the client by first awareness of the bigger picture, and then in assistance to get the client to whom he needs to see first.
    As a mortgage professional Ron, you will benefit from this awareness campaign, as the broker community as a whole will be bolstered, and brought back to the top of the table, where rate-only comparison sites (to this point) have failed miserably.

  6. So Ron, the broker who cuts his commission but makes it up on volume will effectively set the tone for lower wages in the mortgage community, and those brokers will buy up the majority of leads from the rate comparison sites.
    How long will it be before that treatments leaves the banks and the discount brokers and nobody else?
    And when thhe banks channel all the business to themselves with a deal with the rate sites, the discount brokers will have effectively done the banks bidding by destroying all competitors who added value to the mortgage buying public.
    No need to paint the picture any farther. It is a good thing people still need relationships and are seeking good old fashioned advice.
    The time is right for professionals everywhere to stand up and take notice. Work together to prove to the public that rate alone is not going to shape a mortgage or financial plan, nor are rates alone going to protect a family’s wealth.

  7. Hi Ron: Thanks for the post. Agree on several counts. Where we deviate is on the value of certain mortgage attributes.
    Let’s take penalties, since you mentioned them. Penalty calculations and costs can be anything but standard, as we know. Lenders can base them on discounted rates, bond yields, posted rates (even on 3-month interest penalties!), 12 months interest, 3% of principal, you name it. Granted, only a minority borrowers discharge early and pay a penalty. But many times, the people who do not break early stick with their mortgage because of obstacles like penalty costs. At the very least, if there is a material probability of early termination, and the rate difference between a harsh penalty and reasonable penalty is minor, that must be factored into the rate comparison.
    Naturally, penalties are just one issue. Other considerations are the ability to:
    * Refinance without restrictions
    * Blend a rate with best discounted rates
    * Blend and extend
    * Get the best discounted rates when converting from a variable
    * Port (some popular mortgages do not allow porting at all, or have lending area restrictions)
    * Port with a sufficient gap between the old sale and new purchase
    * Port with no accrued interest
    * Early renew with no penalty
    * And so on….
    Depending on some of these factors, a consumer might be forced to pay a higher rate after closing (to avoid the penalty) or break early (and pay the penalty).
    There are too many scenarios to cover here, but suffice it to say, mortgage professionals owe it to their clients to prepare them for “an unknowable future,” if I may borrower your term. That’s our job. Consumers expect us to compare a wide array of mortgages, weigh their unique personal circumstances and identify the option with the lowest likely (total) borrowing cost. I fully expect that regulators (e.g., FSCO) will do suitability audits at some point. Brokers should always be prepared to justify their recommendations and “I gave my client the lowest rate” is not sufficient justification.
    Hi Craig: Couldn’t agree more with your last sentence. That said, discounting will significantly reduce broker compensation in coming years. No broker wants that, and there will be exceptions for brokers with unique value propositions and niches, but this trend is a freight train that won’t be derailed. Any industry attempts to limit buydowns will prove utterly futile.
    And by the way, you’re point about lenders going direct to consumer via rates sites could not be more prescient.

  8. And so, the line in the sand is drawn. We must battle the forces that result in less relationship and more transactions; less advice and more order-taking; less concern for fellow-man and more cold, calculated profit-taking.
    I am impressed with the “game-changer”. How a new, more salient rate comparison site keying in on the importance of putting rates in their appropriate place as one of many variables, and as a negotiating chip the mortgage broker can use to the client’s advantage is brilliant.
    When brokers realize their value as relationship builders competing against the transaction oriented banks, everyone will be better off.
    Maybe you are right Rob. The freight train of discounters will always be on the rails with the lure of market share an perceived profit-taking, but the industry will step up to counter that. It just depends on who wakes up quick enough to remain in the battle.

  9. Discounting fees, and rates and charges is rampant in every industry. When I as a real estate broker receiving 50% of the commission earned from my agents, and heard of some remax coming in offering 80% or more to the agent, I and many other seasoned brokers knew that they would not survive. But not only did new real estate brokers create new efficiencies, they also changed the services being offered to their clients( ie the agents in my case) because the agents ( my consumers) were prepared to (demanded) to be dealt with in a different manner. The secret is not to drop your commissions expecting to get huge volumes; it is tailoring new services to the needs or desires of your consumer, and creating systems that allow you to be profitable and able to grow in the long run. Not every real estate broker demands 100% commission with a desk fee today, but to ignore the fact that the consumers want changed is to sit on the sidelines and watch the world go by. Discounting fees and working on large volumes is not my thing, so I better find a better mousetrap or ill miss out on all the cheese
    ps the realtors of today are saying the same thing we used to say, that brokers cant survive on less than 5% commission. Some will sit on the sidelines over the next 5 years while others will creatively develop services that are being demanded by the new buying and selling consumer in a dramatically different manner than they do today…… then watch fees drop !!

  10. ‘A’ mortgages are a commodity. A 10 second internet search yields 20 or so brokers who will give me a rate of 2.50% on a variable or 3.5% on a 5 year fixed (take your pick on the term and product, the results are similar).

  11. I was debating whether I should seem like a post hog, but realize when an idea whose time has come is on the table, it’s time to stand on the rooftops and shout it’s merits.
    For this reason I will make an observation. If Rob McLister and his group have not made it obvious this launch has been carefully planned over lots of collaboration and thinking, I would suggest the reader give his head a shake.
    Rob’s well thought out comment above proves understanding of the situation is thorough. One must ask, “why take the chance and stick your neck out to become just another rate site?”. With that comes risk, and the need to defend oneself. There will be those that don’t look deeply enough into the deep thinking that brought the idea to this point. There is risk, and perhaps the reward will be in knowing how right it is – – that despite some brokers looking at this like just another rate site, the process will educate the consumer who lacks trust to gain trust.
    I am not a mortgage broker, but I feel your pain. You have something of value to give the world, but collectively you have done a really bad job of educating people. The rate sites thrive on becoming authorities and the “one people can trust”. Like a good, warm referral source, these content driven rate sites that are not run by professionals in the business like you are, are taking the internet shopper and making them trust them. And, they do not have 1/20th the knowledge you have.
    If you don’t believe me take a look. Articles written by schoolteachers on what life insurance policy you need. A fireman may be giving mortgage advice. An author in a mortgage column who never sold a mortgage in his life is saying what mortgage you need, and what features make sense.
    Does it make sense? This is your competition until you put this in it’s place.
    A site run by someone who knows mortgages and the value of the mortgage professional should be embraced in comparison.

  12. Yes Rick, but only very few brokers at 2.40% on a 5 – yr Variable and 3.29% on a 5 – yr fixed. And you are right “A” mortgages are a commodity.

  13. I don’t understand the relevance of Rick’s response but I might be missing something.
    Aren’t 80% of these 2.50% variable rate products from brokers who use the same lender? I get the sense that other Rick’s comment might be relevant if I were looking at a bank.

  14. It’s hard to disagree with any of you guys, I really appreciate the quality of the discussions (and articles) on this blog. Just wanted to say, as an outsider to the industry, I find it interesting that a service hasn’t yet appeared that cuts out any middleman (whether broker or bank rep) and offers the signing bonus directly to the borrower instead. Maybe document submission and validation will have to be sufficiently automated to make that worthwhile for banks.
    However, the comparison with GPs seem slightly off, because you’re not offering the core product – first-line (medical) care directly from the source – but rather refer to other organisations that provide the actual product. Your value is not in the product but in the referral, and on top of that your profession doesn’t have a governmental monopoly on being that first-choice channel that everybody has to go through.
    In that sense, you’re more like financial advisors. Maybe the margins don’t seem high enough to warrant turning it into a fee-only service, on the other hand the cutthroat market makes sure that you don’t usually rip off clients like trailer-fee-compensated financial advisors do with expensive mutual funds.
    But in the end, you’re still the middleman. Given enough time, most middlemen will get cut out and replaced by scalable digital services. Vanguard and ETFs have cut into high-margin mutual funds, all that’s left for financial advisors is people who care purely about the advice aspect (represented by fee-only advisors who don’t take a cut of the mortgage, erm, I mean investment product) as well as people who are easily lured into products that are designed to extract their money in disingenious ways. That, and some very few companies (Vanguard, Blackrock, plus a handful more) whose volume is high enough that they can justify the low margins. The same is happening to your industry, and it seems to me that in the long run you’ll have to pick between either of the two advisor extremes or be a product company rather than an advisor.
    Rob realized this early on and is clearly trying to get on the side of becoming scalable and self-sufficient even with low margins. If his Ratespy website catches on and doesn’t sell to bigger players first, I wouldn’t be surprised if it eventually took on more vertical integration, i.e. offering more than just the advice/referral and taking on more of its origination/underwriting pipeline or part of the mortgage product itself. I’ll be interested to see where it goes, sensing that Rob is not just a good analyst but also morally upright.
    As for all of you other brokers, good luck! You’ll need it! I’m cheering for you! :D

  15. Oh, and in terms of usability, the filters (in particular, I tried out the year filter) don’t update the list unless you change the mortgage value or one of those user-supplied text fields and unfocus that text field. My test case goes like this: Change from default settings to 5-year terms and wait for the list to update without doing anything else (it’s not happening).
    That’s something you should fix, or you’ll need a big “Update with current filters” kind of button where you have the “Help” icon and link right now.

  16. More potential usability issues:
    * People might be more comfortable with entering how much of a downpayment they have, rather than calculating the mortgage value through (home price – downpayment)
    * …and also, as irrelevant as it might be from a financial point of view, it might be nice to include a switch between monthly and bi-weekly payments. (Is bi-monthly an option even? Not that I personally care about that case much.)
    * Personally, I think that with a bit less skeuomorphism and graphics that emphasize the textual content, the site might be easier to grasp visually. The filter box area looks great but the lender list has way too many lines of different, contrasting colours and feels like visual overload to me.

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