Did 4-year mortgages lead brokers astray?

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A Toronto broker is questioning if the industry’s wholesale shift to the four-year term last month – a defense against that extraordinary BMO offer –best served their clients.

“The fact that the industry has now moved back to the five-year fixed rate mortgage less than a month after it was focused on selling the four-year at 2.99 per cent, in order to compete with the BMO product, suggests to me that brokers need to look at why they are in the business in the first place,” Nawar Naji, with Verico The Mortgage Wellness Group, told MortgageBrokerNews.ca. “It goes back to ensuring that we tailor our mortgage solutions to what truly makes sense for the client and is in their best interest.”

The comments echo those of a handful of mortgage professionals and follow last month’s rate wars, the terms of which were set and executed by the Bank of Montreal’s rock-bottom 5-year fixed rate. The overwhelming response from broker channel lenders – and, indeed, brokers – was to compete with that no-frills mortgage by shaving one year off the term while maintaining the standard features BMO sacrificed in favour of rate.

The compromise was largely seen as the best way of meeting client demand for that well-publicized 2.99 per cent. At the same time, it allowed brokers to retain business that might otherwise have gone to BMO.

Naji did not sell any of those four-year mortgages, arguing they just didn’t jive with the best interest of specific clients at the time.

Other brokers also resisted the urge to usher clients into those shorter-term mortgage, in some cases moving them to ten-year terms.

Calgary broker Greg Williamson was one of them.

"Yes, I see that the customer may force me to compete on price alone, especially if I am not showing any additional measurable value over what my competitor has," he told MortgageBrokerNews in February, following BMO’s first go at using 2.99 to grow market share. "Instead, when I sell a different product like ...10 year fixed mortgages then I am now not competing on price I am competing on the virtue of whether I go with a five year or a ten year.  This is an argument I can win by showing them a compelling strategic reason to go with a 10 year."

  • Jim - Toronto Broker on 2012-04-17 11:20:02 AM

    When you look at the cooment as stating the best deal is the BMO 5 year at 2.99% compared to the 4 year is amazing. Being a mortgage broker\owner I saw based on othger factors of the BMO 5 year special I have always recomended the otger lenders. There is just too many restrictions that !.+ has that has made me decide to recommend other lenders to trully help my clients.

  • Vancouver Mortgage Broker on 2012-04-17 11:43:49 AM

    Clients were extremely happy and extremely generous with referrals as they wanted their friends to reap the rewards of the historically low rates.

  • David Larock on 2012-04-17 12:08:08 PM

    I respectfully disagree with Mr Naji.

    When the five-year fixed rate was offered at 3.19% and the four-year fixed rate was available at 2.99% an intelligent person could easily make the argument that giving up a year of term was worth a .20% discount. Saying that brokers “need to look at why they are in business in the first place” because they invoked a four-year promotional rate to compete with a no frills five-year rate is as silly as saying that those who didn’t tell their clients about the four-year promotions were just too lazy to adapt their stock advice.

  • Ross Taylor on 2012-04-17 6:28:15 PM

    I must admit it did ring hollow promoting the four year product during that period - four years is neither fish nor fowl, no matter how you slice it.

    I actually didn't do any -I agree with what Greg Williamson says in the article. I do think that a ten year rate of 3.99% was one of those rare 1 times in 10 that the ten year product makes sense.

    But mostly I sold five year fixed rate mortgages at the best rate I could; with a few shorter term deals thrown in for tactical reasons.

  • Jim T.. Advent Mortgage on 2012-04-18 12:52:14 AM

    I can't remember the last 5 yr or 4 yr fixed that we did. 90% of our business is the 10 yr fixed right now. A 10 yr at 3.83% is a fantastic deal right now!

  • Walter on 2012-04-18 6:55:17 AM

    Ten year deals are going to bite us when clients sell or look to sell and down the road when rates are normalized and these clients are faced with huge penalties. With the average mortgage lasting four years, why not anticipate and actually consider the nendfit of shorter term fixed rates. Have we all forgotten why we sold/variables that had no penalties? As well who said 5 year mortgages were best for a client? A bank who needs 5 years to make the deal profitable or the brokers who make the extra bps?

  • Robert Stanfield on 2012-04-18 9:17:14 AM

    When rates are at a historical low, longer terms are better for the client. When rates are higher, shorter terms are better for the client. I don't have a lot of clients taking a 10 year term, but based on the comment above, the penalty to break a 10 year term mortgage is no greater than the penalty to break a 5 year term mortgage. Or, at least with the lender I use there is no difference. It is clearly stated in their penalty clause.

  • Jim T.....Advent Mortgage on 2012-04-18 11:45:30 AM

    You are correct Robert. As per the Interest Act, the penalty to break a mortgage after the 5th anniversary is 3 months interest. Not that huge as you say Walter. Further, if rates do normalize and go up, then the IRD becomes negative or smaller than 3 months interest. Finally, if rates get back to 5.00% or higher in 4 years, your clients that took the low 10yr rate will thank you.

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