People show exceptional loyalty to their financial institutions in North America. The working paper – published by Bank of Canada suggests that about 80% of the consumers search for a mortgage rate quote from their own home branch. Although some do manage to get external quotes but most of them end up getting a loan from their own bank.
Despite of having access to various research options customers remain loyal to their banks and in turn often face price discrimination. Fortunately, this report studies the borrowers who did not talk to a broker.
Note: This report is based on data between 1999 and 2001
WHY?
There are two costs responsible for this behaviour.
It requires effort to gather multiple quotes:
Apparently to a consumer it is not very easy to collect few quotes. There are thousands of mortgage agents and brokers offering free advices on-line or off-line – all to the vain. A consumer still thinks that it is much easier to ask the bank for a rate.
As potential borrowers fail to shop around, lenders take advantage of this psychology and offer higher rate. The cost of the whole process could be somewhere between $1,000.00 to $1,500.00
Imaginary cost of switching:
When a person has all his accounts with one bank and the bank present him with an elusive idea of bundled savings then it becomes more difficult for a client to seek another institution just for one product. The report found that a client may be willing to shell out $759 to $1,617 to avoid switching lenders.
It is all about profit:
When a person is not willing to do a proper search – the lenders mark-up on his product will be 4.1% versus 1.9% for a person who does his due diligence.
The paper looked at data from persons negotiated their own mortgage with a bank, i.e., without the help of a third party (e.g., a broker). Also these were all insured mortgage
The Big 8:
There are eight institutions which currently controls more than 80% Canadian Mortgage Market. Apart from big six the other two are – Desjardins and ATB Financial.
Posted Rate:
Between 1999 and 2001 about 25% of the borrowers took posted rate – go figure.
Broker Effect:
Persons who are shopping individually – 73% of them remain loyal to their branch. Once they start to deal with a broker – loyalty dries up to 35% only.
Although the paper has a lot of frightening mathematical expressions but it is overall a good read.
