Does Your Bank really have your best interest at heart?
We think that our banks are there to help us and guide us through what is likely the biggest decision in our lives. But is this often the case? With record profits being made every single quarter, as well as CEO’s and Vice Presidents being quoted and openly stating that their obligation is first and foremost to their shareholders, not their customers.
I was pondering this question of whether a bank really had the interest of their customers at heart this morning on my newly implemented- and what i am striving to make my daily walk.
So on this morning’s walk I was listening to a podcast, and I was also thinking about some clients that i was introduced to by a realtor partner of mine earlier this year.
In the podcast the person being interviewed was asked about what he felt the main difference was in this day and age working with a mortgage broker versus going into the bank on your own, as a client.
There was a list of things that he mentioned, but what caught my focus in particular is how he compared going to the bank and asking them for advice on obtaining the best mortgage would be the equivalent of going to a Ford Dealer and asking them for advice on the best car to buy.
That comparison really resonated with me. What are the chances that the Ford Dealer is going to tell you to buy a Honda because its price point and specs meet your needs and goals?
So, these clients that I was introduced to. A really nice couple who bought their first home a little over 5 years ago. They were newlyweds at the time and both pretty new into the work force just starting their career paths. The two bedroom condo that they purchased as a pre-sale was perfect for them.
Flash forward a little over 5 years and they are now starting to grow their family with already one child and another on the way later this year (congratulations again by the way!!). The two bedroom condo no longer meets their needs, they need something a with a little more room, and by little I mean a lot. Now, when we first chatted, it was uncertain whether or not they were going to be buying a new place, or if they would be inheriting a property, or if they would be moving in with their relatives, who happen to have a big place with plenty of space.
Going back to when they first purchased their lovely condo, they were pretty much brand new to the entire process, and came across a mortgage broker who helped them finance their new home. They were not savvy enough to know what they wanted, and in their words “didnt really even realize the things that we should have been getting when working with a mortgage broker”.
So their mortgage was placed with the bank lender, they were given a fixed rate mortgage for 5 years – a variable option or other terms were never discussed with them. In fact, according to them they did not even know that they could increase their payments or make lump sum payments etc.
When their mortgage was up for renewal 5 years later, they decided to go at it themselves. They contacted their bank, in advance. Now, it was around this time that the clients started talking about selling their current place. They concluded, and advised the person they were dealing at the bank that definitely within a year and most likely within the next 6 months they would be selling their home and would appreciate the flexibility of not being tied into a mortgage term going forward. They wanted this flexibility as mentioned above it was not for certain that they would be purchasing again, as there was a chance that they would inherit a property, or be staying with relatives for a period of time.
The bank – who many of us feel should have our best interest at heart because we give them all our business, and have been loyal to them. They tell us how much they appreciate us, and show us how much they appreciate us once a month by having free coffee and cookies out for us – we expect advice that is relevant and in our best interest.
The bank, in this instance, was more concerned with having the clients transfer over their bank accounts and RRSPs during the conversation, it appears, as they spent more time seeking the transfer of this business, and only spent a few minutes on the mortgage. They gave the clients a 5 year fixed rate mortgage (again), even though the clients planned to sell within a year and wanted flexibility. They were told “oh, no problem, we can port your mortgage when you sell, it will be fine”.
What the heck does that mean? That is probably what the majority of Canadians are thinking right now, they don’t know what porting a mortgage means. Was this “advice” given by the bank really in the best interest of clients who are looking to sell?
All that we know for sure is that the clients were looking at selling. Giving them a 5 year fixed term, put them in a position to have to pay a potentially large amount in penalty costs to break their mortgage, when it was virtually a foregone conclusion that this would be the ultimate outcome.
Again, we knew at the time for sure that the clients were looking to sell, we did not know for sure whether they were going to purchase another property. The porting solution would only help if they found another property to port their mortgage over to immediately, otherwise they would have to pay the penalty anyways, and if they found another property within 6 months of paying off their mortgage, then they would be able to port the mortgage “without incurring a penalty”.
Why the quotations around “without incurring a penalty”? Well, it isnt exactly the case that there is not a penalty, what is essentially happening is the rate at the time would be blended with the current mortgage rate, and the term would be extended- this is virtually what a port is- a blend and extend.
So what happened flash forward to now? Well the clients have sold their place, and they have 6 months to find another place, or they are out almost $9,000 (the amount in penalties it is going to cost them to pay off the mortgage when it their sale completes)
One, the penalty costs would be upwards of 3 times lower at another institution even if they took the same 5 year fixed term (that is another story for another time).
Two, why were they not offered an open mortgage option, at this bank the open variable mortgage rate is Prime plus 0.8%.
Three, why were they not offered a 6 month open even. While the interest rate on this product is high at 6.5%, it should still have been offered.
Four the penalty would likely be closer 4or5 times less if they were offered a variable rate closed option.
So, why would the bank not even offer anything else but a 5 year fixed closed mortgage term? Who’s interests were they really looking out for, my clients or their own bottom line……