Will my bank offer me a better rate than a broker?
by Glen Jacobs
Now here’s a good question. You might think that the bank with whom you have been doing business for years should offer you the best rate.
Is this still true?
I must honestly answer that according to my own experience, the answer is “sometimes yes and sometimes no.”
A doctor’s example |
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| For example, take a situation that I saw this week – a client (doctor) calls me to ask what my best rates are. As we converse, he tells me that his bank (a big Canadian bank) guaranteed him a 5-year rate of 5.25%. I was surprised, since I know that the same bank offers my clients a rate of 5.10% for the same product. |
Why?
It’s difficult to understand, but here’s some information that might clarify this phenomenon.
[Note: Each bank, and each lender, differs in its politics, its standards, and its fashion of serving its clients. Even individual branches of the same bank may sometimes act differently. You therefore should not generalize or believe that all banks have the policy of offering their clients higher rates. This is not true, but it happens often enough that it’s worth the trouble to talk about it.]
The bank’s objectives
This phenomenon (offering higher interest rates to their clients) is based on two factors.
The first is that lenders have the mandate to realize a profit for the stockholders of the bank. They make a profit by lending money and collecting interest for the service.
You should not forget that the relationship between lender and client is competitive:
- they want more revenues, and
- we want to pay as little as possible
The SCHL (Société canadienne d’hypothèques et de logement) publishes annually the results of their polls on “consumer activities linked to mortgage financing”.
In 2003, these results show that:
- 58% of buyers verified the market rates
- 44% of buyers contacted several lenders
- 51% of buyers shopped around to obtain several offers
- 63% of first-time buyers, and 61% of those buying their second house, used their current financial institution.
The numbers certainly demonstrate that many consumers do not verify interest rates, accepting the terms offered by their bank without negotiation.
The banks are quite aware of this, and in the hope of increasing their revenues they present interest rates higher than the lowest rate they can offer.
The policies of banks towards their employees
The second factor rests on the human nature of bank employees. In effect, banks wishing to make profits encourage their employees through the structure of annual bonuses.
Only yesterday, I had an interesting conversation with the employee of a large Canadian chartered bank. We were discussing the mortgage market when I asked her (I’ll call her Marie):
Gregory: Honestly, what interest rate do you offer clients that come to see you in a branch office?
Marie: 5.35% for a term of 5 years
Gregory: Really? But why such a high rate when I know that [the name of the bank] is capable of offering 5.10%?
Marie: Because at this rate my bonus points would be negative. It’s not worth it to me to set up a mortgage at 5.10%.
Gregory: What interest rate can you offer without losing or gaining points?
Marie: 5.30%!
Gregory: What do you do if a client asks you to give him 5.10%?
Marie: I tell him to go see a mortgage broker.
At that moment, I gave her all the business cards I had on me!
I repeat that this example reflects the attitude of one particular bank, and should not be generalized. It is highly possible that certain banks do not link their bonus structure to mortgage rates.
The fact remains that such things happen, so the following two principles make sense:
- Banks encourage their employees to act in the bank’s interests
- Employees on a fixed salary wants to increase their revenues with an annual bonus.
Conclusion: To return to our initial question “Will my bank offer me a better rate than that of a broker?”. My response remains: “Probably not.”
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