Loyalty doesn’t pay when it comes to mortgage renewals
A Bank of Canada study found that loyal bank customers don’t get best deal when they renew mortgage. People who switch and first-time buyers do.
Everyone you deal with would like you to believe there are rewards for your loyalty.
They may offer a better price, a bundling discount, or less tangible things like superior customer service. Sometimes your loyalty is rewarded and sometimes it isn’t.
The best way to figure out which is which is to become better informed about your choices. Compare prices and features, read the fine print on contracts and keep an eye on developments in the news. In this respect, the Internet has been a great leveler. The products are all on display in the online shop window. You can poke around, ask questions, figure out where you want to spend your money and negotiate a price.
The biggest investment most of us make is in a home. So if you can shave just a little off the cost of a mortgage, you can save thousands in interest payments.
Here, you’d think that loyalty would work in your favour — the more services you have with a bank, the better the deal. But, that’s not true according to evidence in a Bank of Canada paper called Discounting in Mortgage Markets. The 2011 study by three economists looked at a sample of Canadian insured mortgages between 1999 and 2004 to figure out who got the best rates.
The economists found that people who switch banks get a better deal than existing customers, because new customers offer the banks an opportunity to sell more products. Existing customers assume they will automatically get a better deal because they’re loyal, but don’t. They don’t bother to shop around because they assume they’ll get the best rate so, lacking ammunition, the discount may not be much. Those least likely to shop around are affluent, possibly because they’re happy with the full service they get from a bank and are willing to accept higher rates in exchange.
The study also found that mortgage brokers find the best rates . Mortgage brokers are paid by the lender, not the customer, but aren’t confined to one lender’s products. Their business is very competitive, so the pressure to find the very best rates is high. The study noted that brokers “are a significant factor driving discounts,” reducing the cost of a mortgage on average by 17.5 basis points.
As a group, first-time buyers do well because they are more likely to have shopped around, have tight budgets and so fight for every basis point. They’re a higher risk group for a bank because they have so much debt, but over time the bank can sell them more services. So they get good deals.
“Lenders are more willing to offer discounts to younger borrowers in return for future expected profits,” the study says.
Jim Murphy, president of the Canadian Association of Accredited Mortgage Professionals, an industry group, isn’t surprised by the finding.
About a quarter of Canadian mortgages are done through a mortgage broker, but the portion of new buyers who use brokers is a much higher 40 per cent, he says. First-time buyers tend to be younger, more comfortable using the Internet and social media for research, and like shopping around, he says. They are also less loyal and happy to try new things — like a mortgage broker — if it gets them what they want.
“We don’t do as well with renewals,” Murphy says. “Your lender sends you something in the mail, you’ve paid off some principal, the new rate looks pretty good, so you say OK.
“But you should shop around. Just because a bank offers you a rate doesn’t mean it’s the best one.”
You remember when your mother said you should do your homework? She was right.