A RateHub.ca user reached out to me recently with a question about her upcoming mortgage renewal. She and her husband had visited the bank branch near their home where they originally got their mortgage from to get a quote. On a whim, they then checked with a different branch of the same bank and were quoted a different rate for the exact same mortgage.
“It seems unfair with the varying rates for the same bank at different points of inquiry,” she complained. How does this phenomenon happen?
When you’re shopping for a mortgage you’d expect to be quoted different rates from different lenders, but you would think a bank would offer you the same rate for the same mortgage regardless of how you reach out to them. Why would there be a difference? There are a few reasons this could happen, the most important of which is the way mortgages are sold. Even though they’re not really tangible, mortgages are sold like products. More precisely, mortgages are sold in much the same way as new cars.
If you’re shopping for a new car, you’ll find all the biggest brands offer pretty much the same thing. One model might have a bigger engine and another more leg room. But they’re all similar vehicles with similar features and price points. Replace fuel economy with prepayment privileges and trade safety ratings with refinance penalties, and you’ve got yourself a mortgage. In each category, most lenders have offerings that are fairly comparable with a few slight differences. Any of the available choices will likely suit your needs, but you might find for whatever reason that one meets your needs better than the others.
To extend the comparison, if you’ve ever looked for a new car you’ll know the advertised price is the manufacturer’s suggested retail price (MSRP). If you’ve ever seen an ad for a new car on TV, you’ll know that in most cases, “the dealer may sell for less.” And dealers do sell for less. In fact, most people know it’d be foolish to pay the sticker price for a new car. The same can be said about mortgages. The posted mortgage rate is much higher than most customers expect to pay. In reality, posted mortgage rates are just there to give customers the impression they’re getting a discount and to inflate penalties for those who have to break their mortgages early.
With both cars and mortgages, the discount you can get from the advertised price depends on a number of factors. Think of a bank branch as being like a car dealership. Dealerships that sell a lot of cars might get better pricing from the factory than ones that sell fewer. Dealerships in rural areas can afford more land and keep more cars on the lot. Some might pay their sales staff more and others could have an inflated budget for helium balloons (pun intended). When you combine the variables together, it makes sense that two dealerships will quote you two different prices for the exact same vehicle. Each has their own unique reasons for arriving at that price, and each has a certain amount of room to negotiate.
Mortgage specialists at bank branches contend with similar variables like sales targets, incentives (or lack thereof), and the costs of keeping the lights on. One might be able to offer a lower interest rate while another can’t afford to, or simply isn’t willing, thus explaining the discrepancy our user experienced.
There’s another way to shop for mortgage rates that could yield another different result: using a mortgage broker. Mortgage brokers offer a free service and shop for the best mortgage rates on your behalf (imagine having someone to go car shopping for you). Unlike a mortgage specialist at a bank, who has access to only one set of products from a single lender, mortgage brokers have access to numerous mortgage products from multiple lenders.
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Brokers can also often access lower mortgage rates than you can get on your own. That’s partially because they can quickly compare multiple mortgage products and know what the best rates are, and partially because they’re able to get volume discounts and other incentives from mortgage lenders that aren’t available directly to consumers. It’s entirely possible you could get two different mortgage rates from two different branches of the same bank and get a third, different rate from the same bank through a mortgage broker.
With all these options out there, how do you make sure you’re getting the best possible mortgage rate? Start by shopping around. Feel free to call the bank you usually do business with, but understand they might not be able to give you the best rate even if you’ve been a customer for a long time. A better option is to work with a licensed mortgage broker. Not only can a mortgage broker probably get you a lower rate, but he/she can also give you advice about your situation. For example, if you’re likely to sell your house before your term is up, or if you think you might convert it into a rental property, a mortgage broker can recommend mortgage products that meet your specific needs.
Just like when you’re shopping for a car, do your research online first and be prepared no matter who you’re talking to. The more you know about the options available and what you want, the more likely you are to get a mortgage rate that you’ll be happy with.
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Flickr: Chris Tyler