Does my bank offer me a better rate than the dealer?
Is it always like this?
I have to say honestly that in my experience, “sometimes it’s yes and other times it’s not.”
Example of a doctor
Take as an example a situation I’ve seen this week – a client (doctor) asked me my name is better rates. In conversation, he told me that his bank (a large Canadian bank) has secured a 5-year rate at 5.25%. It surprised me, because I know that even my bank offers customers a rate of 5.10% for the same product.
It is difficult to understand, but here is information that can shed light on this phenomenon.
[Note: Every bank, every lender is different about its policy, standards and ways to serve its customers. Sometimes the branches of the same bank may act differently. So we should not generalize and allow to imply that all banks have the same policy to offer their customers higher rates. This is not true but it happens often enough that it is worth talking about.]
The objectives of the bank
There are two components that underlie this phenomenon (to offer higher interest rates to their customers).
The first component is that lenders have a mandate to make profits for shareholders of the bank. They make profits by lending money, collecting interest for this service.
Do not forget that the relationship between the lender and the customer is competitive:
|they want to make more income and
we want to pay as little as possible.
CMHC (Canada Mortgage and Housing Corporation) publishes an annual survey results they do on “consumer activity related to mortgage financing.”
In 2003, these results show that:
|58% of buyers have checked the rates on the market.
44% of buyers have contacted several lenders.
51% of buyers have shopped for several offers.
63% of first time buyers and 61% of second home buyers have used their current financial institution.
The figures show that many consumers do not check the rates of interest, and accept without negotiating the terms offered by their bank.
The banks are very aware and in hoping to make more income, they have higher interest rates than the lowest rate they can offer.
Bank policy with its employees
The second component is based on human nature for employees of the bank. Indeed, banks that wish to make a profit, to encourage their employees as an annual bonus structure.
Just yesterday I had an interesting conversation with an employee of a major Canadian chartered bank. We discuss the mortgage market when I asked him (I’ll call Mary):
Gregory – Honestly, what is the interest rate that you offer to customers who come to see you branch?
|Mary – 5.35% for a term of 5 years.
Gregory – Oh yes? But why so high a rate when I know that [bank name] is capable of offering 5.10%?
Mary – Because at that rate my points for my premium would be negative. It does not deserve for me to make a mortgage to 5.10%.
Gregory – What is the interest rate you can offer without that you do not lose nor win points?
Mary – 5.30%!
Gregory - What do you do if a client asks you to give it 5.10%?
Mary – I told him to go see a mortgage broker.
I gave him all this time my business cards I had in my possession!
I repeat again that this example reflects the attitude of a particular bank and should not be generalized. It is quite possible that some banks do not pay such premiums related to mortgage rates.
The fact remains that it happens and that these two underlying principles are logical.
- The banks encourage their employees to further the interests of the bank.
- Employees who are salaried want to increase their income with an annual premium.