Spate of buy-downs to follow BMO rate: Hugh

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Inexperienced agents will likely move to buy down their rates on a five-year fixed in order to compete with BMO’s well-publicized special, says one industry veteran, cautioning them against that move.

“It’s inevitable, but it’s a mistake,” said George Hugh, president of Taurus Mortgage Capital and former head of broker services for ING. “What they need to do is educate the consumer on the limitations of that BMO mortgage and keep their rates and explain to the client that extra value.”

Hugh is among those anticipating a bump-up in the rate wars resulting from BMO’s move earlier this month to introduce a 2.99 per cent interest rate on a closed five-year fixed. He’s also one of the many drawing attention to some of its restrictions – its 10 per cent annual limit on prepayments and its 25-year cap on amortization, to name just two.

Still, the rate itself garnered headlines across the country last week, with brokers fielding queries about a mortgage simply unavailable to the channel.

It’s that publicity that may lead agents to buy down their rates to match that offer, expiring Jan. 25. Still, other brokers are expecting to channel clients into the four-year 2.99 rate channel lender TD is now offering, rather than agree to cut their own compensation in order to match BMO’s five-year special.

But, if pressed, many agents without the know-how to re-direct clients away from the BMO no-frills mortgage will likely move to that buy-down option, says Hugh. He, like most industry veterans, won’t be one of them.

“If you’re a single, independent mortgage broker trying to buy down rate in order to keep a client from going over to a bank offering a better rate, you are competing with the bank, and you are not going to win that competition,” Ad Lakhanpal, with Mortgage Alliance in Oakville, Ont., tells “I’ve had agents agree to do it, and then they’ve gone back to the lender to get a new commitment letter to present to the client. But the process doesn’t end there: the client then goes back to the bank again, and they better that new rate. So they’ve still lost the client. I’ve never bought down rate and I never advise it.”

Fewer and fewer brokers and agents across Canada are prepared to say the same, as competition with the bank heats up and originations slow down. Some mortgage professionals are, in fact, suggesting as many as 80 per cent to 90 per cent of brokers are now prepared to sacrifice a portion of their commission in order to shave even five basis points off of a client’s interest rate.

Once dismissed as a last-ditch effort to retain customers, a growing number of brokerages are using it as a first line of defence as they ramp up online lead generation efforts, dangling rock-bottom rates on the Web to attract shoppers.

  • Kevin J. Power, President Power Mortgages Inc. on 2012-01-17 4:26:04 AM

    The business of using commission to buy down rate hurts all of us in the long run. Agents who are willing to make $400 on a deal to get the business and at least make some small dollars. This hurts all of us in the short term and more importantly in the long run.

  • David on 2012-01-17 4:26:33 AM

    I think it is time for one of our broker lenders to step up and support mortgage brokers against a rate grab from BMO. With the bond market still offering historically low yields the opportunity is there. That lender will earn my business if they can do it.

  • BobW on 2012-01-17 4:54:44 AM

    Well said David...
    With BMO's recent and very public move to promote this rate special, I wonder how they are handling existing new business clients looking for a rate drop?

  • Mike in Toronto on 2012-01-17 5:00:06 AM

    Let BMO have that business. They didn't want to pay brokers 75 bps on the 5 year, but now they are giving away 145 pbs. Now they are paying double the amount to get the business.

  • Former Specialist Now Broker on 2012-01-17 5:31:06 AM

    Its such a limited time offer that it'll get its 15min of attention and story will end. BMO wants to buy market share...I say go ahead. They get ultra rate shopper crowd that will also shop their other products aggressively if they think this is a strategy to sell them other products.

  • Mark Alltree, AMP - President, Dominion Lending Ce on 2012-01-17 7:39:54 AM

    I complement George for his comments to inexperienced agents. Inexperienced or not, however, once again, as an industry, we have to get past the rate ONLY discussion with clients and look even closer at the fine print when a clever a marketing campaign by BMO or any financial institution for that matter receives such positive media attention without regard to the fine print.

    As George mentioned, this is a "closed" mortgage, a "no frills" mortgage. In layman's terms and as per the BMO website fine print, "Full repayment before maturity can only occur if property is sold to an unrelated purchaser at fair market value or if the mortgage is renewed or refinanced into another BMO mortgage product1." This is what client's need to understand in addition to all the other terms and conditions that are not market competitive. Many consumers don't often go the full term on a 5-year mortgage for a variety of reasons. If at a future date the client makes the decision to refinance and BMO rates are not competitive, they're stuck with BMO. Clients need to know this.

    The other point I would like to raise is the BMO website advertises two additional 5-year rate specials at 4.09% and 3.69% respectively, both of which are not rate competitive as options to the restrictive fully closed ended mortgage at 2.99%.

    No two Canadian's with a mortgage have identical financial situations. Different balances, rates, months to maturity and resulting penalty amounts that can vary significantly. We should be talking to clients and telling them the answers to these questions: Is there a cost benefit to refinance to this lower rate? What is the break even rate if you were to consider refinancing? How many months will it take to break even after paying the penalty, legal fees and any other expenses. Do you understand what "fully closed ended" means? Now we're talking and educating.

    Let's be sure our clients understand the math behind their own mortgage and fully understand the terms and conditions of any competitor mortgage before they consider jumping ship to any low rate offer. I say again, let's finally get past the rate ONLY discussion with our clients. Educating our clients is what makes mortgage brokers stand out in the crowd. Let's keep doing it!

  • Mark Alltree, AMP - President, DLC - Innovation Gr on 2012-01-17 7:45:28 AM

    Title cut off on original comment. DLC - Innovation Group

  • Brokers Need to Adapt on 2012-01-17 8:10:23 AM

    In the long term, broker needs to rethink their business model. The current model is very susceptible to rate attacks when banks like BMO want to low ball rates (albeit very short term). The thing to do for brokers is to match or beat them at their own game; why not, that's how brokers have done it to banks. Now sometimes the table just gets reversed. Its a cat and mouse rate game. The broker industry has grown and done well in the last 20 years because their rates were always lower than banks. That is not the case anymore. So what do some industry vets now say...we should differentiate ourselves from the banks by offering better "value" in the form of better mortgage advice. Oh really...You didn't offer advice before? Brokers are product advisers. That's the service. There is no so called value advantage over the banks. Each bank has very similar products that can satisfied all qualified clients' mortgages needs. The only thing was their rates weren't as low as brokers. That definitely changing now. So what a broker to do. Reduce your cost of delivering this service with a biz model that can easily adapt. Prepare to earn less and work harder to survive.

  • Ron Butler on 2012-01-17 10:14:09 AM

    Thanks "Brokers Need to Adapt" for your heart felt comments. Brokers always like to hear we need to smarten up and work harder to make less.

    That being said; the truth is you are abrasive but partly correct. I doubt very nuch that big brokers in this country got zero rate oriented calls over the weekend.

    I know bankers got calls, our office got some calls and emails. People who are in the process of doing a mortgage transaction will somehow get this kind of advertised info and react to it. Facts are facts.

    I know some brokers will say their clients all love, respect and honor them and they NEVER get calls about rates. I know brokers will say its just a question of being a better educator and rate issues will fade away. I take my hat off to those brokers, they have developed a great model.

    However I also know a ton of brokers and agents who got calls and it makes me think that "Need to Adapt" is not just rubbing salt in our wounds. He has a point.

  • Jim T, Advent Mortgage on 2012-01-18 9:10:34 AM

    Guys, It is time to realize that we are in a different world. The days of us having rates lower than the banks are over. Yes, providing great service and advice is necessary however these are now table stakes and necessary just to be in the game. The sad truth is our industry and products that we offer are now a pure commodity where the lowest price wins the game. This is our new reality and if you want to be able to compete and survive you better have an efficient model. I think that if we are honest with ourselves we all agree that we are grossly overpaid for what we do. It is now time to get used to earning less. We are being squeezed by having to buy down the rates just to be competitive. I'm just surprised that it has taken this long for our industry to reach this point. On a positive side, this environment should get rid of the part timers who now have no hope in hell in competing. Tighten those belts and hold on for a wild ride!!!!!!!

  • Times have changed on 2012-01-19 7:59:17 AM

    Jim, you are bang on. Lenders have been saying brokers have been overpaid for years, yet compensation programs were not cut back. This is another method of banks making the Broker Channel profitable again...

  • Veteran Broker - Toronto on 2012-01-21 7:27:17 AM

    BMO really has nothing to do with the change in this business, it has already become a rate game whether we like it or not before the BMO 2.99% for 5 years. Yes amazing service, knowledge and professional advice are expected from brokers today, but rate has become the focus. As for mortgage features and "no frills", my professional clients say to me "why would I ever repay a low rate mortgage, I have better things to do with my money". Consumer attitudes are changing towards saving money. Buying down rates to compete has become part of the business model, Jim T you are quite correct we are being squeezed and it may only be the beginning. The banks are hiring many more dedicated mortgage sales reps and paying them smaller bps because they are after cheaper acquisition costs.

  • Jeremy on 2012-01-22 3:51:10 AM

    Some of these comments are comical. Brokers willing to suggest they are over paid, and for those whom are transactional by nature, you're right, you are over paid. The bank suggest we are over paid, so they must be right, hahaha. Laughable! Are these the same banks that take advantage of the consumers own ignorance? Come on people! In my opinion, those who are buying down rates do so because it's the path of least resistance. And let's be honest, some just have no clue.

    Based on what I've heard, I guess no one here would have a problem with me setting up an underwriting center in India or the Philippines at significantly lower costs then it would cost you today. This would allow me to buy down rates by 50 bps and make a pile of cash based on volume alone. I don't need to strategize or educate, it's simple, right? Any numbnut can pull this off. Contribute to society and leave people better than you found them, don't be a leech!

    On with the Mortgage Revolution!

  • Esquivel on 2014-07-29 5:35:45 PM

    Have you ever considered creating an ebook or guest authoring on other websites? I have a blog centered on the same ideas you discuss and would really like to have you share some stories/information. I know my readers would value your work. If you are even remotely interested, feel free to shoot me an e-mail.

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