Last week, the Bank of Canada (BoC) cut their overnight rate by 0.25%. The move surprised all the so-called ‘Financial Experts’… (well, not me… As I had suggested rates were likely to drop in the previous week’s article and also in the previous month).
Our BIG SIX BANKS had their own surprise for us. Instead of passing along the usual rate cut to consumers, they sat on their hands and did nothing. In fact, TD Bank felt good about it and made public statements about how their Bank Prime rate wasn’t fully influenced by the BOC rate. (That’s such a load of bull, you can almost smell it coming out of your screens!)
And also last week, the Banks immediately cut the rate they pay you on your savings by that same 0.25%.
Is everyone getting this? The Banks were given a lower cost of funds by the BOC, with the intent of passing that along to consumers and businesses to stimulate the economy. But the Banks pocketed the savings.
THE BANKS AREN’T SO BAD… ARE THEY?
But hold on… The BIG SIX BANKS have caved in to the pressure… well, a little. They just cut the prime rate by 0.15% to 2.85%... not the full 0.25% to match the BOC rate. Talk about a slap in the face to the BOC and Canadians. I wonder how many consumers still think the BANKS are their friends? The BIG SIX are called the BIG SIX because they dominate our financial banking system. And because we see them on every corner, on every TV channel, TV program, hockey game, sporting event, concert, newspaper, radio, internet advertisement. The BANKS spend $$billions on advertising each year…we can’t escape their presence… but we don’t have to be fooled by it.
DOES THIS CLIENT SOUND LIKE YOU OR SOMEONE YOU KNOW?
I recently had a client that is like most Canadians. Tell me if this sounds familiar. She’s had an account with her bank forever. She gets her pay deposited there, she pays her bills from her account, she puts a little into a bank RRSP and has a mortgage with the BANK.
Well, around 3 years ago, she ran into some financial difficulties. A series of unexpected expenses had crept up. A major car repair forced her to repair or buy a newer one….she had a plumbing failure which forced her to rip out most of the bathroom and ceiling below.
She went to her bank for advice. The Banker told her she could get an unsecured line of credit… but the minimum payments were too much for her to handle.. or, she could refinance and increase her mortgage. Her balance at the time was $230,000 and she had 3 yrs remaining on her term @ 4.00%. The penalty to get out of that mortgage was gonna cost her over $12,000.. !! She could blend the penalty into the rate but that would just hide the cost.. (TIP.. Never accept a blended rate. It’s almost always better to take a new term) She would still be paying that $12,000.
(By the way, had she originally gone with me for her mortgage, her product would be different, the rate lower, and her penalty would only be $1700).
This client found me through another client. After careful review, we decided the best course of action was a private 2nd mortgage for $28,000. The rate on 2nd mortgages are higher… in this case it was 12%, but she would avoid that penalty and the payments were more manageable.. just $289/mth….and this worked out to be much cheaper. Her interest costs for the next 3 years would be $10,000… That’s less then the BANK’s $12,000 penalty!
And when her 1st mortgage came up for renewal, we would get her out of that BANK mortgage with the unfair prepayment penalty calculation, combine her remaining 2nd mortgage balance with her 1st mortgage into one mortgage… NO PENALTIES! A true success story, right?
STILL BELIEVING THE BANKS AFTER ALL THAT….
So here’s the part that puzzles me… Today, we discussed current rates and products and combing her 1st and 2nd mortgage. I was surprised when the client tells me she is speaking with her banker ‘friend’ about products, rates and advice.. Yes, it’s true! She is actually forgetting about that $12,000 fiasco and considering going back to this BANK.!
This isn’t that unusual. I’ve had many clients that got burned with penalties or paid higher rates than what I had to offer, or were directed into the wrong product (long-term fixed vs variable or short term fixed.. check out my historical recommendations) that ended up costing them $$thousands more….yet they still seem to go back to their BANKS.
I’m happy to say that this client is following my advice and cutting mortgage ties with her BANK… and she won’t regret it, I will make sure of that. I’m also happy to say that this trend is slowly changing… the key word is ‘slowly’.
Events like this past week are going to hurt the BIG SIX BANK’s image. Social media, internet.. it’s getting harder to hide the truth..
Your best interest is my only interest. I reply to all questions and I welcome your comments. Like this article? Share with a friend.
Steve Garganis 416 224 0114 firstname.lastname@example.org