May 9, 2009, 5:00 am

A New Type of Marketing Aroused In The Banking Industry; Beware!

by: The Financial Blogger    Category: Banks and You,Credit Rating & Credit Bureau
email this postEmail This Post Print This PostPrint This Post Post a CommentPost a Comment

You have already seen 24 and 36 payments without any interest when buying furniture. Even better, you can pay next year and you don’t have to pay any interest. We now have the similar type of marketing with cars with 0% over 5 years (I bought my Mazda Tribute with a 0.4% interest rate over 6 years!). And now, I just saw a shocking mortgage offer: fixed term 5 years fro 2.99% on new condos.



To put everybody in perspective, in Canada, the best deal around for a 5 years fixed rate mortgage is 3.85% as of late April. You would probably not even be able to get it from your bank but from a mortgage broker. So if the best deal possible on a fixed mortgage is 3.85%, how come they can offer 2.99%???? And the answer is….

A powerful marketing system!

The mortgage business is changing drastically in Canada due to the very low rate, poor economy and the rise of cost of funds for banks. For the very first time, it seems that some banks saw what is coming and realized that a blue suit and a red tie was not enough to sell mortgages anymore. The business has changed; it’s not an oligopoly anymore as more and more new players are working in the same industry. What happens when an oligopoly breaks? Each company needs a solid marketing plan to take advantage of this new open market.

But this doesn’t tell how they can offer 2.99% on new properties?

They are simply playing with the numbers:

Choice #1: The bank is willing to drop to 3.85% for those mortgages in order to still make money. It makes a deal with the contractor that he pays back the difference on a 5 year term mortgage at 2.99% and 3.85%. The contractor takes it from his profit and sells his condos much faster.

Choice #2: We have the same situation with the bank. The difference is that the contractor slightly increases his price in order to cover most of the gap between 2.99% and 3.85%. So the client end-up financing a higher mortgage rate without knowing… This is exactly as he does when he buys furniture at 0% for 24 or 36 months. The interest rate lies within the product! When the contractor asks 212K instead of 207K, nobody really notices as it is always harder to compare prices for a new construction. He can always bring some “builder bullshit” such as “the condo was made with higher quality materials” ;-).

This is also why you will see this kind of offering on new construction and not in your branch for a regular purchase.

I think it is a smart way to present things. However, potential buyers must keep in mind that their mortgage rate will go much higher upon renewal. Therefore, they are better off calculating their budget with a 4.5% or 5% interest rate on their mortgage in order to not get caught off guard at renewal.

As I previously said: there are no free lunch in finance!

Similar Posts:

You Want More? Sign-up! ->
TFB VIP Newsletter


If you liked this articles, you might want to sign for my FULL RSS FEEDS. If you prefer to receive the posts in your email, subscribe CLICK HERE


Comments

“TANSTAAFL” Term coined or popularized by science fiction author Robert Heinlein.
(There Ain’t No Such Thing As A Free Lunch). I just have to learn how the acronym would be pronounced….. Tan’-staaf-l seems most likely.

DAvid