Mortgage Renewal Time
A couple of months before your current mortgage contract is about to expire your bank will send you a renewal letter. The rates on this letter are not likely the best that your bank or another lender can offer you for renewal. Why wouldn’t your bank offer you the best rate? Your bank is a business and like any other business they want to make money, lots of money to pay for their skyscrapers.
The CAAMP current Annual State of the Residential Mortgage Market in Canada report shows that 88% of consumers renew their mortgages with their current bank. Let’s look at this from a business perspective.
You are the CEO and you know there is an 88% chance that your customer will renew with you so you send out a renewal letter with your 5 year posted rate on it at 5.49% A small percentage of your customers accept this rate without question and you have just locked in some huge profits.
A greater percentage of your customers call and ask why they were not offered the special rate of 4.19% advertised on your website. Your customer service representative’s simple response is, “Those rates are for new customers, but I can also offer it to you.” Your customer accepts that response and is happy with their rate. You have still not given your customer the best rate you can, but have locked in some more profit.
A few of your customers will still not be satisfied and will call and state that they have seen the rate of 3.99% offered on many mortgage brokers’ web pages. You may or may not meet this rate for various reasons.
Let’s look at the effect of this on your customers based on renewing a $200,000 mortgage with a 20 year amortization period. The following are the rates, monthly payments and the outstanding balance after your new 5 year term.
Rate: 5.49% Monthly PMT: $1542.52 Balance: $222,936
Rate: 4.19% Monthly PMT: $1340.93 Balance: $218,349
Rate: 3.99% Monthly PMT: $1313.70 Balance: $217,597
Of the 88% that renew with you 15% accept the posted rate, 60% are happy with your current special rate and 13% push for the rate they have found posted elsewhere. You have still retained 88% of your customers and compared to the rate of 3.99% that you could have offered all of your customers you have locked an average profit of over $5,000 per mortgage over 5 years. Multiply that by 750,000 customers and you have some big profits making shareholders very happy.
What are your experiences with mortgage renewals?
Disclaimer: The rates compared are hypothetical but reasonable based on current rates posted on the internet. The writer’s opinion is not necessarily the opinion of a bank’s CEO or any other bank employee.
