Hat tip to Mortgages by Liz for pointing out some pretty sad facts in the Bank of Canada’s most recent Canadian mortgage industry competition report.

Most Victorians believe that if they ‘build a good relationship’ with their local banker, they’ll be rewarded when it comes time to take out a first mortgage or refinance.  The evidence however bears out that it’s still best to shop around, as that loyalty doesn’t appear to rewarded according to the latest bank of Canada mortgage report.  Some gems from the report:

• The premium you pay as a loyal, longtime bank customer vs. brand new big bank customers:

Banks also offer larger discounts to new clients than to existing clients. Consumers willing to switch financial institutions when shopping for their mortgage will see, on average, an additional discount of 7 basis points from the posted rate. The results also indicate that borrowers who use a mortgage broker pay less, on average, than borrowers who negotiate with lenders directly. This average dis- count is about an additional 19 basis points.

• Paradoxically, younger buyers pay lower rates than older, more established buyers as they represent a longer “lifetime customer value” to the big banks:

The results show that the youngest borrowers receive the largest rate discount. This is consistent with the larger literature on price discrimination (e.g., Goldberg 1996) since banks, like most firms, try hard to attract new, younger customers because they can potentially lock them in for a long period.

• Higher-income mortgage customers tend to get slapped with higher rates because they’re less likely to do due diligence on their rates:

The results also indicate that, ceteris paribus, higher- income households pay higher rates, on average, than lower-income households. High-income households are likely less inclined to spend the time shopping for and negotiating a mortgage.

• Even the Bank of Canada says you should shop around (perhaps even using a broker that has access to multiple non-Big-Bank lenders) to leverage your ability to negotiate better rates:

Overall, the findings are consistent with a model where consumers have different preferences and skills when shopping and bargaining for a mort- gage and where lenders maximize profits based on observing these preferences and skills. The results indicate that high-income borrowers pay more for their mortgages, as do loyal consumers, consumers who search less, and those that value large branch networks. Unobserved bargaining ability also appears to play an important role in determining mortgage rates.

Loyalty in business relationships in general is of course a good thing, but at the end of the day, everyone, including – *shock* the big Canadian banks – aren’t running a nepotistic charity, they need to skim as much as possible off a high volume of transactions, be they new mortgages or refinances.  As always, be sure and check out how much mortgage you can afford in reality as well.

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