There’s competition and then there’s competition with the Big Five, as a handful of Vancouver brokers point to banks and, even, credit unions now willing to eat their own substantial penalties in order to keep clients from going over to the broker channel.
“I had heard about this occurring back in the day – in the 80s or 90s – but it hadn’t ever encountered this until recently,” Jessi Johnson, president of Verico Jessi Johnson Mortgage Team, told MortgageBrokerNews.ca. “I’ve had about three or four recent cases where the banks were willing to eat the penalty in order to keep a refinancing client”
The scenario is similar to those of a handful of brokers working the increasingly competitive Vancouver market, as banks and large credit unions sharpen their elbows in order to grow and retain clients. That contest has been largely limited to rate wars. The newfound willingness of banks to assume responsibility for penalties attached to premature closing is a relatively new and disturbing addition to the battlefield, said Johnson. Other brokers suggest the tool is being applied at the branch level, and outside of any corporate-wide policy directive. The effects, regardless, are the same.
When it comes to a lender eating a penalty that is larger than the commission they’re paying brokers,” said Johnson, “we as brokers can’t compete. Thankfully, we’re seeing it used in a limited number of cases and it represents an unsustainable strategy for the banks.”
Banks, and other institutional lenders have traditionally used penalties , including an IRD – a rate equal to the difference between the original mortgage rate and the interest that the lender could charge today for the same mortgage-- to compensate themselves when a client opts to pay off a fixed-rate mortgage prior to maturity. That penalty has actually grown as lenders lower their rates to keep pace with falling bond yields. It makes the willingness of some lenders to now forfeit those charges all the more remarkable.
Todd Fralic, an industry veteran and partner at Quantus Mortgage Solutions in Calgary, has seen the approach before, although without the rate match that Johnson and others are pointing to.
“It happens,” he told MortgageBrokerNews.ca. “But usually, in our experience, the banks make it up on the back-end, with a slightly higher rate. Nothing surprises me with the banks offering deals that don’t seem to be good business.”
They’re not necessarily alone, with some brokers themselves offering to pay a prospective client’s penalty in order to get them to break an existing mortgage.
“Well I think having business is better than not having business, so in my opinion you should do whatever it takes to retain a client,” Jackson Cunningham, a broker with TMG The Mortgage Group in Vancouver, told MortgageBrokerNews. “Although I prefer to see something in writing from their bank before I will buy down a rate or pay for a penalty.” Still it's not necessarily an approach he's used, despite recently losing deals to banks that have, at least in one case, offered the eqivalent of prime minus 115 in order to retain a client.
Eating penalties may be even less sustainable for brokers than the banks, said Johnson, suggesting he’s done better by salvaging the client-broker relationship after the deal goes south…to the competition.
“I’ve lost the deal but not the client,” he told MortgageBrokerNews.ca. “I plan to actively maintain my relationship with the client in hopes of winning back their business in the future.”