The banks used to pass along rate cuts by the Bank of Canada right away. But lately, they’ve been dragging their feet. I wrote about this last October.
Central banks are slashing interest rates to encourage banks to do more lending. When banks come up with excuses why they can’t pass along the full rate cut, the whole exercise is counter-productive.
This week, a couple of Manulife One mortgage customers told me they’re furious at what they think is deceptive advertising. Dan sent me his email correspondence with Manulife.
Bottom line is Manulife sold M1 to all clients, including us, as a “prime rate” product, and your marketing materials, advertising, and advisors presented it as such. You have conveniently changed your practices due to market conditions.
Until October 2008, M1 rate at prime.
From October to December 2008, M1 rate at prime plus 0.5%.
After Dec. 9, 2008, M1 rate at prime plus 0.75%.
There is absolutely no protection for an M1 customer. Manulife can, and is obviously prepared to, set the rate wherever you see fit.
To state that the M1 rate is “not linked in any way” to prime is an outright lie. The M1 rate followed prime from the time you introduced the program!!
Dan was responding to an email from a customer service rep who said the following:
Itâ€™s a common misperception that the Bank of Canada supplies the funds for Canadaâ€™s banks to lend out. The Bank of Canada rate is used within the banking industry for a number of purposes but funds are not actually available from the Bank of Canada at that rate.
A bank uses the deposits it receives to fund loans and mortgages. With the Bank of Canadaâ€™s recent efforts to lower borrowing rates, enormous pressure has been placed on banks regarding rate setting decisions in light of the squeeze between what they pay out for deposits and what they charge for loans and mortgages.
Once credit conditions do ease, it is true Manulife One rate will most likly have a closer relationship to Prime, although it is not linked in any way. Bank Of Canada officially announced yesterday that Canada is now in recession, clearly the market conditions are not improving and as a result rate changes are occurring as they are.
Since customers were pushing hard for rate cuts, Manulife One had to post a notice at its log-in page, explaining why this wasn’t going to happen.
As of October 10, 2008, we were unable to reduce the Manulife One Base Rate in unison with the Manulife Bank Prime Rate. We want to ensure that all Manulife Bank customers understand that the Manulife One Base Rate is no longer at the same level as the Manulife Bank Prime Rate. The Manulife One Base Rate is a distinct rate of interest, separate from the Manulife Bank Prime Rate and is based on competitive conditions in the marketplace, cost of funding Manulife One accounts, and the overall value of the product.
And here’s Dan’s response:
Bottom line is you have misled your customers and engaged in a “bait and switch” practice here. The Manulife One program was sold as following prime and ALWAYS did from the time it started. Your decision here puts Manulife in the same light the big banks that will “nickel and dime” or rip customers off wherever possible. If the rate drops again at next B of C meeting, and M1 stays the same, we will looking to move our business elsewhere.
Borrowers are a captive market, since they can’t move their mortgages elsewhere until the renewal date. Manulife One customers are even more tightly bound, since they do all their banking there and use the float in their accounts to pay off their mortgages more quickly.
All-in-one plans, such as those offered by Manulife and Canadian Tire Bank, offer flexibility and savings. But there’s a drawback: your mortgage has no finite term. It never expires, unless you or the bank decides to end it, and then you pay discharge fees.
You can find lots of discussion about Manulife One here at the Red Flag Deals forum. The product was introduced in 1999.
What will it take to get Canadian banks to pass on the central bank’s rate cuts to borrowers? If you have any suggestions, please let me know.