When you grow up hearing advice to “establish and maintain a good credit rating,” many people think that their credit score and employment are really all that matters when applying for a mortgage.We also grow up thinking loyalty gets rewarded.The truth be told, however, that is not the case in the world of bank mortgages. A Bank of Canada “working paper” about the mortgage market released earlier this year revealed some significant facts about mortgage discrimination among banks that are important to those in the market for a mortgage.The paper highlighted two factors to explain why some borrowers get better rates than others when applying for a loan, even if both are considered creditworthy based on their paperwork.In particular, the subjective evaluation of an applicant’s “profitability of each mortgage to the lender” is one factor that can affect rate quotes. Lenders consider the likelihood for a particular borrower to stay with them rather than shopping at renewal time, and they also consider if a borrower is likely to pay off their mortgage early. A second factor that ironically costs bank borrowers in higher payments is loyalty to a particular bank or branch. The report finds that banks take advantage of many borrowers with larger mortgages who put value on their own time and, therefore, don’t spend their time to research options or to negotiate and/or those who think their loyalty will be rewarded with the lowest rates possible from that bank or branch. A summary of the Bank of Canada paper in Mortgage Economics, it found that the following consumers pay the highest rates:• Those in concentrated markets;• Homebuyers who put only the required minimum down compared to those with larger down-payments;• Those who don’t shop or use a broker to shop;• Consumers who do not renegotiate their renewals;• Wealthier households/borrowers with larger mortgages;• Those with poor credit;• First-time borrowers (and young borrowers) who don’t know how to negotiate a mortgage contract.In addition, the summary states, “The report finds that the larger the bank’s market share, the higher the rates it can charge.”It adds that consumers with higher credit scores pay less than those with a lower score, despite both being “creditworthy.” Another eye-opener in the summary focuses on renewals.It says, “Very few consumers actually negotiate the renewal rate, which is almost never the lender’s lowest discounted rate.” Their study revealed, “85 per cent of consumers don’t negotiate their renewal terms and simply stick with the lender’s original offer. As rate discrimination is quite routine with renewal offers, consumers who don’t negotiate their rate end up paying something for nothing.” With all this subjective evaluation of applicants and documented pricing differentials, consumers must become more proactive. Specifically, the report talks about the merits of working with a mortgage broker, which will save consumers time and money. It says that due to strict regulations in Canada, the broker works for the client and the “fiduciary duty” of the broker is to the client; yet the broker is usually paid by the lender underwriting the mortgage.According to Mortgage Economics, consumers who want to be proactive to ensure the best rate and terms possible and minimize the “profiling” by the larger banking institutions, should go with a broker — a choice that is growing in popularity among those who have discovered the benefits of an independent broker. With a broker (not a “bank mortgage specialist”), the report states, consumers will reduce their search time and likely get a better rate, since brokers can search a variety of lenders and may or may not find the best deal with a bank. Larger brokers also have the benefit of collective buying/negotiation power with various lenders.The report states, “Borrowers who use Mortgage Brokers not only pay lower rates than borrowers who work directly with the financial institution, but they also experience less rate discrimination based on household characteristics.”It says, “'Over the full sample, the average impact of a mortgage broker is to reduce rates by 17.5 basis points.’ That’s approximately $1,670 of interest savings on a typical $200,000 mortgage over five years.”— Invis Comox Valley
