Spotlight On Mortgages: August 9, 2013

Spotlight on Mortgages

ATB Bucks Posted Rate Trend

ATB, Alberta’s largest lender, became a trailblazer this week by announcing the end of their posted mortgage rate practices. Their actions signal a renewed focus on customer awareness and mortgage guidance for the 75-year-old financial institution, and is being lauded by brokers as a step toward much-needed clarification for mortgage rate approvals.

Posted mortgage rates – the ‘as advertised’ option posted on the windows, if you will – are the banks’ best kept secret. Pumped artificially higher than the going market rate, lenders are often willing to offer consumers a lower option for mortgages – if they know enough to haggle. The idea behind posted rates is that they give the banks wiggle room to reward savvy or loyal customers with what appears to be a discounted preferred rate.

More Proof It Pays To Compare

However, the need for negotiation is lost on many consumers; not everyone is comfortable questioning their bank’s practices while others simply aren’t aware of these bait and switch tactics. As FIs claim mortgage education and guidance is part of their modus operandi, purposely misleading some consumers to spend more seems off course. According to a report from the Bank of Canada, as many as a quarter of bank consumers will be duped by the posted rate, and will pay it without asking twice. Those who knew enough to challenge the posted option saved every time – between $759 and $1, 617, to be exact.

Posted rates also place the rewarding of lower options at the discretion of individual lender mortgage specialists, creating an inconsistent and arbitrary system. It’s these “inefficient discretionary pricing models” that ATB is looking to debunk through their changes, according to Rob Bennet, ATB executive vice president of Retail Financial Services, adding that the lender’s focus has shifted to improving the quality of advice and service for consumers.

Posted Rates Lead To Penalty Confusion

Posted rates can also lead to higher penalties for consumers wishing to break or refinance their mortgage early, as they complicate the interest rate differential calculations (IRD) used by lenders when determining penalty payouts.

The IRD is the difference between the original interest rate secured by the borrower and the rates offered in the current mortgage market. Lenders use this difference to calculate how much of a loss in interest payments they would be taking on for the rest of the original mortgage term. Posted rates skew this calculation higher, forcing mortgage owners to pay larger penalties than otherwise obligated.

It was this imbalance that prompted the government to implement new clarification standards for calculating mortgage penalties this past spring. Titled the  Code of Conduct for Federally Regulated Financial Institutions – Mortgage Prepayment Information, the changes indicate that lenders are responsible for alerting borrowers to the consequences of paying off or breaking their mortgage early, and how these charges will be calculated, along with mortgage advice hotlines, calculator tools and direct access to mortgage experts.

Will Posted Rates Be A Thing Of The Past?

While ATB is setting a great precedent, it remains to be seen just how Canada’s other large lenders will react. After all, with so many of their consumers willing to pay posted rates without question, they hardly have incentive to end these profitable practices. A consumer’s best defense is to be aware of their market options, be wary of the first option presented to them by lenders, and be willing to call the bank’s bluff. After all, what do you have to lose with a little negotiating, when the alternative is thousands more paid on your mortgage over time?

Checking In With This Week’s Mortgage Market Changes

As we previously reported, consumers should be aware of a recent change implemented by the crown corporation mortgage insurer. The CMHC has limited the amount of securitized mortgage funding to mortgage lenders at $350 million per month. As these secured funds are used by FIs as a main method of mortgage funding, experts are calling for a fixed mortgage rate increase, as banks make efforts to cover these costs. While lenders have yet to make the first move, home buyers and those reaching renewal should take note of this changing market climate, as it may soon be more challenging to afford a mortgage. For more detail, stay tuned for this month’s Mortgage Rate Outlook Panel, to be released early next week.

Week In Review

Another week with no mortgage rate changes. Will next week’s Best Mortgage Rates table paint a different picture? We’ll have to wait and see how these recent CMHC limitations will resonate throughout the market.

Related Topics

Mortgage News / Mortgages

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