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7 Leverage Points When Negotiating For Better Mortgage Rates
The bank is one of the toughest players in the real estate value chain to negotiate against.
These are billion-dollar corporations who view your buying of a house, which can be the biggest purchase you make in life, as just a drop in the ocean in the context of the world they operate in.
So powerful is a lender when it comes to buying property, that it’s not surprising to feel that they are doing you a favor by granting you a mortgage loan instead of you doing them a favor by borrowing from them and committing to pay a hefty interest over decades.
Typically, in the consumer markets, customers are king.
You walk into a cafe and service staff serve you politely. Go to the supermarket and employees are trained to give you all the attention you need. Stay a night in a 5-star hotel and you would be treated like royalty.
Yet when you are buying the oldest commodity of money from a bank, you could sometimes be made to beg to be allowed to buy.
Let’s not discuss the nitty gritty of obtaining approvals for mortgages or coming to terms with rejections.
Let’s just say that you have already got past that stage. You have already obtained your loan at the desired quantum. The next step now is getting the best rates and terms.
While many home buyers and property investors feel that it is near impossible to negotiate with a bank, it not as far fetched as they think.
Lenders give in to borrowers requests all the time. They bend the rules very often. They just don’t talk about it or flat out deny it.
And here are some possible weak points you can identify to get that little extra edge over a banker or mortgage specialist.
When you understand where their concerns are, what are their fears, and where your leverage is, you might just play your cards right and get a deal that a regular borrower will never see.
1) Bankers have revenue targets
If you don’t already know, bankers in the front line work under some of the most stressful working environments known to mankind.
And the primary source of that stressful environment is down to the constant barrage of reminders to achieve revenue targets.
It’s not a surprise to find desperate bankers who fail to reach their revenue targets for two consecutive months asked to resign and leave.
Sometimes in order to help colleagues keep their jobs, bankers even pass their customer’s cases to others in order to help them hit their sales targets.
It goes without saying that when a banker’s job is on the line, he or she could be more trigger-happy to offer the best loan rates within his or her authority.
Loan officers often have a basket of loan rates that they are allowed to offer to clients. This is without having to obtain approval from their managers or product managers.
This means that if your banker is living on the edge in the office, he is more likely to offer you the best rates he is allowed to offer at his level.
You might wonder why would he hide the low rates he readily has access to?
The answer is simple.
It affects his commissions or revenue points. The lower rate he manages to sell, the lesser his commissions on the sale.
Only when he is afraid that he might lose a customer, would he reveal whatever attractive packages he really has.
What if you are greedier than that? You want something better than what he has hidden in the drawer?
I’m glad you asked.
2) Get to the product manager
To give you a sense of how much influence product managers yield in a bank, let’s use a war setting as an example.
If a team of bankers are equivalent to a platoon, then team leaders are the lieutenants, department heads are the Officers Commanding (OC). And product managers are like intelligence officers that feed intel to the OCs, which will be used for the attack or defense actions that they take.
This translate to product managers being very highly authoritative, influential, and with a load of responsibilities.
Product managers are the people behind the curtains pulling the strings of how much interest rates to charge, advertise, promote, etc.
They even have the power to sell loans at below board rates. This means… even to sell below the breakeven rate!
Every month, product managers might have a quota regarding how much loans they can disburse at below cost in order to secure clients. Once this quota is reached, they would have to refuse any requests for rate deviations no matter what.
Or face the prospect of having to answer to the CEO of that division.
This also means that if a product manager is indeed working within these restrictions, your best chances of getting the types of loans that regular borrowers will never hear about is to request for them early in the month… before that quota burst!
99% or more of mortgages never reach the table of the product manager for special rates approval.
And unless the product manager is a shark who will not compromise the standard rates under any circumstances, they usually approve better rates as long as a case manages to navigate it’s way through the channels and onto his or her table for review.
The next question is how do you get your case to the product manager?
While you have a less than 0.1% chance of reaching them directly… getting to this source of power could be as easy as demanding your banker to offer a rate below what he is authorized to offer.
Or flat out refuse the published standard rate that a banker is trying to force down your throat. This communicates to the banker that there is simply no chance of you taking a loan unless he goes beyond his authority.
Because of office politics and bureaucracy, bankers often avoid having to do it at all. Flying under the radar does have it’s perks in a bank.
But if a banker has the motivation to close as many deals as possible within a specific time frame, you are in luck.
This motivational force very often can come in the form of…
3) Banker close to hitting commission tiers
Like many sales jobs, bankers in the front line are remunerated with a basic salary and variable commissions depending on performance.
To put it into perspective, the base salary can be minute when compared to the amount of commissions they can potentially make from selling mortgages.
And their commission schedules are structured by tiers.
Let’s take this example for illustrative purposes. A banker might get 0.1% commissions if he manages to close above $1m worth of mortgages for the month, 0.2% above $3m, 0.3% above $5m, and so on.
Going into the details of this example, a banker would make $2,900 in commissions if he has customer acceptance on $2.9m of mortgage deals. If he can just close one more deal at just $100k (maybe yours?) he would more than double his take home commissions to $6,000!
Why would he not go all out to trigger the activation of this incentive?!
This is when he would be willing to do almost anything, or offer almost everything, in order to upgrade his tiers… provided your mortgage time line meets his.
In making deals with real estate buyers and sellers, a party will know that he has an edge when the other party has a deadline to meet. This can totally swing negotiations one way.
This is somewhat alike with bankers.
If you have a couple of weeks left to finalize your closing, and the banker has only a week left in the time frame before his commission month ends, you will suddenly find yourself having a huge leverage over the him.
Don’t be surprised to find him bringing you doughnuts when you are at work during office hours.
This means that you have a better chance of being in the “motivated” zone close to the end of the commission month.
Didn’t I previously mention that the product manager has a below costs quota that commence in the beginning of the month?
Keep in mind that commissions month for sales staff and performance month for product managers can start from different days of each month. It’s not impossible for them to overlap.
In fact, it’s highly probable.
Anyway, these are 2 leverage point you can evaluate. Exploiting either will be good. Hitting both would be a bonus.
How are you going to uncover these desires, needs, and motivations… will be up to your social and communication skills.
Hey! Agents, bankers, and brokers, etc, always discuss how to uncover the motivations to sell and buy of their clients.
Why can’t you follow the same line of thought and turn the tables on them?
4) Bait and hook
Following the previous point regarding bankers zooming in on you for fast closure, there is a simple method to entice them to act.
And that is the classic bait and hook negotiation tactic.
The whole process of getting a mortgage can be a tedious process from the starting point of applying for the loan, till the point of disbursement of funds.
If you don’t know how many stages are present in a lender’s internal systems and processes, it’s something like this:
- Collection of documents
- Submission of documents
- Credit evaluation
- Credit analysis
- Credit approval
- Final loan quantum approval
- Interest rate approval
- Customer acceptance
- Opening of account
This is without counting the ad-hoc tasks of following up with customers to get more income supporting documents, convincing the borrower that the interest rates on offer are attractive in the market, being chased by their supervisors about the status of the case, etc.
And then there is the embarrassing possibility of being ridiculed as a joke when colleagues find out about a closing that was so close yet so far.
All these are going on in a stressful environment, mind you.
So imagine if you had moved along nicely throughout the journey and the credit facility letter of offer is just waiting for your signature or acceptance and endorsement.
All these work have been done… just awaiting your final word… which you are not giving…
The hardest parts have already been settled. Yet without your acceptance, all that work will be for nothing.
But alas. The only way you would accept the loan is if you are given more favorable terms and/or rates.
A deadlock situation like this can send a banker into mental breakdown. Especially if he is on the verge of hitting his higher commission tier as mentioned in point #3.
At the same time his team leader (TL) will be pressuring him to close the case as soon as possible… as the TL has his own team revenue targets to hit!
This is when a team leader might personally get involved to drag the deal over the line.
Some of his possible maneuvers could be to call the applicant himself, contact the product manager for rate deviations, or even request the department head to reach out to the product manager.
And when these people get involved, things usually gets done quickly.
5) Competitor rates
This is a negotiation tactic that most buyers of real estate should instinctively know about. It’s significant and important enough to be discussed here.
I don’t know who marketers are kidding.
When every bank is essentially selling the same product (money), identifying the best interest rates from a few lenders is as easy as ABC.
Yet marketers continually broadcast advertisements trumpeting their own loan packages.
What they are really betting on is that consumers are not aware enough to investigate the market themselves. Or that loyal customers who have been with a bank for decades have already decided to go with the same bank without researching the market.
One of the things that bankers, especially product managers, really loathe is to lose out to competitors on customer acquisitions.
Sometimes, just the mere mention of you having inquired with a fierce competitor can instantly prompt counter-offers.
Just go easy on this one.
Because if a lender knows straight-up that a particular competitor’s mortgage rates are much more attractive than what it is offering, then the lender might just give up on you thinking that your decision is an ultimate no-brainer.
6) Get help from people with leverage
As an individual trying to obtain a good mortgage for a house, you cannot fault a bank for categorizing your loan as peanuts.
This can put you in an inferior negotiating position where you cannot even pivot.
Yet bear in mind that when negotiating, you are going up against a banker or loan officer… who is a single person.
You are not negotiating with the WHOLE mega billion-dollar corporation. Keep that in mind.
There are 2 parties who have immense leverage over a banker:
- Mortgage brokers
- Real estate agents
Then there are also those that have a little influence but not at the extent of the 2 listed above, like developers, brokers, business agents, etc.
These are professionals who constantly feed bankers with customers. It’s not far fetched to suggest that the livelihood of mortgage bankers deeply depend on their relationships with brokers and agents.
When the prospect for more future referral loans coming into the picture, you might find that bankers become more receptive to exploring how to help you get better rates.
Just be mindful that often times, brokers and agent will not even attempt to get better rates for you. But will imply that they will try and that they can.
These people are just a waste of precious time.
This is why should you approach them to help you negotiate a mortgage for you, make sure you hire someone who has years of experience under them.
The odds of them having built up great relationships with bankers over the years are much better than a rookie.
7) The insider offer
You might feel that the biggest competitors of banks are… other banks.
That’s right. And the pro-active presence of ferocious competitors can be a catalyst for serious play.
But remember that when dealing with bankers, you are dealing with an individual rather than a company as briefly mentioned in point #6.
For a banker, the biggest competitors are actually not the bankers of a competing lender… but the other bankers working in the same office!
If you somehow get into a situation whereby 2 bankers in different teams of the same office are fighting to acquire you as a client, get ready for fireworks.
Think about it.
Both internal parties will be rushing to see who reaches the product manager first. They might both be enlisting the help of their own team heads to fight for the acquisition of your loan. They will be contemplating within their own teams about how low the interest rates can go and how much free stuff they can giveaway. This can even lead to intervention from the department head.
Depending on the dynamics of the working environment, you could potentially be starting a war in the loan office.
So how do you get a colleague to chase you as a client?
I will leave this devious plan up to your imagination.
To close this passage, do be aware that sometimes the published mortgage rates a lender is offering to the general public are already very attractive when put into the perspective of the market as a whole.
While it might not be the best deal that you could get, what’s on offer might already be a very good loan.
I’ve seen home buyers having to walk away from great mortgages because they went in too hard when negotiating.
These events destroyed the trust of bankers. Leaving them with no breakthrough and the buyer choosing to walk away from a good lender due to his own ego. And then ending up with another lender with an inferior package.
Don’t let that person be you.
This article is an extract from a book that our chief editor is writing. Do get on out newsletter mailing list to be notified when the book goes live.