A common economic theory states that “there ain’t no such thing as a free lunch”. Seriously, it does.
Its a simple way of presenting the idea that nothing is free, that everything is paid for even if the costs are hidden.
Here are some services that appear free but in fact, are not:
You may have seen ads for a free chequing account at your local financial institution, may have even signed up for one. You may indeed have a chequing account free of monthly fee but its never free. There may be a requirement to keep a minimum balance in your account, which is in its own way, a monthly fee. Even if there’s no minimum required, you’ll probably be confronted with loan application fees, investment account fees and the like, which replace the revenue the institution has given up by not charging you a monthly fee.
Zero percent vehicle financing.
Many of us are attracted to Manufacturers financing when we’re on the car lot. If we don’t need to pay interest for 5, 6 or 7 years why not? But really, how can the manufacturer afford to offer that? How do they cover the cost? Well, it’s a simple numbers game. The manufacturer thinks they’ll sell, for example, 100,000 “go faster stripes” models of their most popular car. Of that, they calculate that 10,000 people will apply and qualify for the financing and that the financing will cost the manufacturer 60 million dollars. To cover the cost, they add $750 to the purchase price of each vehicle sold. By doing so they turn a 60 Million dollar cost into a 15 million dollar profit.
No Cost Mortgage Financing.
When you use the services of a mortgage broker such as myself, you may have been told that most times, there is no cost to you. This is only partially correct. In fact, there is an indirect cost, in the form of commissions paid by the lender and perhaps also by the insurance provider to us, (if we refer you to an insurance provider if you believe you need insurance). Many lenders, lacking the resources to have an internal sales staff, rely on the Broker network for new business. The cost of those commissions are built into, you guessed it, your mortgage. Well, I hear you saying, what if I go directly to a bank or other lender, can I save that way?
In fact, the actual costs are pretty much the same, although better hidden. The bank pays its internal sales staff a commission or a “variable compensation” at a lower rate, but their office costs are the same, so costs turn out to be very similar. This is why the “best rate” is often widely available and why it’s really important to get advice on the best mortgage terms available as well.
Why are we having this conversation? Well, our regulator, the Financial Institutions Commission ( FICOM ) has made changes to make sure your mortgage broker does a better job of disclosing to you what and how we’re paid. I am telling you a little about it now, because I thought we should talk about it before the changes take place. After all, my job is to give you advice and make you aware of what’s going on. Now, hopefully, you’ll also be a little more aware of how I make my living.
If you want to read more about FICOM and its role in BC’s Financial Markets, you can go here.