Mortgage advisors know that a great rate and a great mortgage are not synonymous. Regular interest expense is only one component of total borrowing cost.
But how do you convince consumers of this when rates are the only thing they can easily compare? How do you convey that avoiding potential costs (like high mortgage penalties, refinance restrictions, etc.) often justifies paying more up front?
VERICO Financial Group recently tackled this question by asking some of its top brokers to weigh in. Here’s what they said about judging a good mortgage rate:
Rate is the main factor her clients know. But Macpherson carefully explains many facets that they don’t consider. “I discuss (things like) the differences between a collateral charge and a standard charge, and the impact a collateral charge may have on their ability to shop for the best mortgage rate at time of renewal. I show my clients how a penalty calculated by one of the Big 5 Banks can be thousands of dollars more than a mortgage offered by one of my [other] lenders, [ones] that provided the same interest rate at the time… Life insurance can also be a huge factor. The bank’s mortgage life insurance offerings are not portable to other properties a client may purchase in the future.”
“I have a table topper sitting on my desk that compares the BMO prepayment penalty to that of our monoline lenders, showing (in one example) a $12,480 penalty for BMO and $2,472 from our lender. It also states ‘63% of mortgages are broken prior to renewal.’ So this helps clients understand that breaking mortgage terms is more common than they think.”
“Choosing a mortgage on rate alone is like gambling. But what’s worse is many clients don’t even know what they’ve put on the table; and how much they could potentially lose if they break one of the many conditions that are usually part of a no-frills, rock-bottom rate product. I ask my clients, ‘If I told you that by looking at rate only it could potentially cost you thousands in the future, would you believe me?’ The answer is usually no. My job is to always be on their side, not the lenders.’ My job is to ensure they get no surprises later on.”
“In today’s marketplace, each lender — although offering basically the ‘same price point’ — has different components to their mortgage products. Interest rate differentials, prepayment options, portability, flexibility are just some of the components to carefully consider. Interest rate should be the last consideration.”
“It’s been my experience that most people think they want the lowest rate when in fact what they actually want to do is save the greatest amount of money over time. Unfortunately, they get caught up in a lot of predatory lending games and they don’t have the experience or expertise to know the questions to ask.”
For obvious reasons, people are compelled to minimize their interest rate. But doing so usually involves trade-offs. It’s essential to understand when the expected cost of those trade-offs (i.e., fees, lost mortgage flexibility, inferior mortgage planning and so on) can outweigh up-front rate savings.
Excerpts in this story were reprinted with permission from the October issue of VERICO NAC Insights.
Rob McLister, CMT
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