Margins on commodities are paper thin. To get a better price you have to buy in quantity.
Take sugar, for example. Buy one bag and pay $2.50 a kilogram. Buy 25 kilograms and pay $1 per.
Lending also has commodity characteristics. So don’t be surprised if someday mortgages are also commonly quoted in bulk, so to speak. Just this week, in fact, ICICI Bank announced new jumbo pricing on conventional mortgages. It’s the only national lender (that we know of) that publishes special rates for extra-large mortgages. And it won’t be the last.
ICICI provides a discount of five basis points if the mortgage is $500,000 or more. This applies to uninsured refinances and switches up to 80% loan-to-value.
Jumbo pricing isn’t unprecedented, however. From time to time, FirstLine (formerly Canada’s biggest broker channel lender) used to offer jumbo mortgage discounts. FirstLine’s policy applied to a similar price point of $500,000+.
These days, jumbo mortgages aren’t as rare. Ten years ago, a $500,000 “jumbo” would have been six times the average mortgage size. Today, it’s just three times the ~$170,000 average. Yet still, that’s a succulent three times the average profit for a lender—especially since the costs of selling and underwriting a small loan are about the same as a big one.
Over time, there’s no doubt we’ll see more lenders and brokers openly discounting big mortgages. There’s already a lot of it going on behind the scenes with the “discretionary pricing” offered by banks and certain brokers.
Jumbo customers have always been coveted, not only for their mortgages, but for the cross-selling opportunities that higher-income clients present. Given unrelenting rate competition, the industry will inevitably compete even harder for these clients going forward.
Rob McLister, CMT
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