Mortgage Product Complexity is Intentional
In Canada’s mortgage market, navigating loan options is no small feat. For the financially savvy, finding the best mortgage may seem as simple as comparing interest rates. But Canada’s mortgage lenders often play a subtler game, using techniques in product differentiation and price obfuscation to make straightforward comparisons difficult.
Lenders know that packaging loans with various features—interest rates, fees, cash-back options, and early repayment penalties—complicates the task of evaluating the full cost. As economic theory suggests, this tactic can be likened to “product differentiation,” but if abused, it’s more accurately compared to “price obfuscation.” The more complex the pricing structures, the more likely it is that consumers make poor choices—to the lender's benefit.
Product Differentiation: Obscuring Costs with Complexity
Consider two popular approaches lenders use to differentiate their mortgage products:
Low Rates, High Fees: Some lenders draw consumers in with appealingly low interest rates while compensating with hefty back end administrative or prepayment fees, ensuring the total cost of borrowing remains high. This tactic works particularly well when the fine print is overlooked—borrowers think they’re getting a deal, when in reality, they’re paying a premium in the long run.
Cash-Back Offers: For borrowers seeking liquidity, a cash-back option can seem appealing. But the allure comes with a catch: higher long-term interest rates. The cash-back model typically increases borrowing costs by more than the cash that consumers receive upfront. It’s difficult for a consumer to calculate if $1,000 upfront is worth paying an extra 0.1% for 5 years.
Meanwhile, prepayment penalties vary widely. There are three ways to calculate the Interest Rate Differential (IRD) penalty fee and the formulas are buried in the fine print. For borrowers considering early payoff, these penalties make planning costly and complex. Indeed, if even bank employees struggle to calculate them, it’s unrealistic to expect a typical consumer to decipher them.
Price Obfuscation: Hiding True Costs in Complex Structures
Beyond merely differentiating products, Canadian lenders exploit price obfuscation to make comparisons even harder. This is a familiar tactic in sectors where products are marketed with complex pricing models:
Mixed Pricing Models: Lenders frequently advertise low “headline” rates that often come with hidden fees or restrictions (e.g., only available for insured mortgages, which carry a default insurance fee.) Borrowers attracted by the advertised rate can find themselves tied into a mortgage with limitations or penalties that elevate overall costs. Or they might be diverted into a more expensive rate than the advertised rate because the rate in the poster was intended to generate walk-in customers.
Non-Standardized Fees: Banks further complicate matters by using non-standardized rates, terms and fees. Without uniformity, comparing one lender to another requires borrowers to dig into the fine print and do calculations. (e.g., TD Mortgage Prime Rate 6.10% is 0.15% higher than the standard Prime Rate used by other banks. So when they offer TD Mortgage Prime Rate minus 0.5% you might think it's the same rate as another lender offering Prime Rate minus 0.5% when it's not)
Amortization Options: Some lenders market flexibility in amortization schedules (e.g., 30, 35 years) as a benefit, but extending amortization lengths, while they can lower monthly payments, they also inflate total long-term borrowing costs.
Decision Fatigue: Cognitive Biases and the Burden of Choice
Marketing theories emphasize how consumers facing complex choices often experience “choice overload” and “decision fatigue.” This is no different in the mortgage market, where lenders use cognitive biases to guide borrowers toward choices that serve the lender’s interest:
Framing Effects: By focusing on features like “no upfront fees” or “cash back,” lenders encourage consumers to overlook the long-term financial impact. Borrowers fixate on short-term savings while the real costs accumulate over time, particularly through higher interest rates.
Anchoring and Decoy Pricing: Lenders might present an initial, low-interest "anchor" rate or payment option, making other options look less appealing even if they are more cost-effective over time. (e.g., offering a “special deal” on a fixed five-year term to draw borrowers toward locking in long-term when they expect rates will be much lower in one year.) Some lenders also use "decoy" pricing, offering an unattractive high-cost option to make the other options seem better by comparison (e.g., TD's marketed "special rate" is 4.74%. At the same time, their "posted rate" is 6.79%. Why isn't their advertised “special” rate, available to everyone, not the same as their posted rate? Answer: The posted rate is decoy pricing.).
A Market Stacked Against the Borrower
Canadian mortgage lenders operate in a system that provides opportunities to limit direct price competition. By creating complex products, lenders reduce the likelihood that consumers can identify equivalent options, limiting the pressure to compete on price. Consequently, many borrowers make decisions based on superficial differences or apparent deals that mask higher costs.
The industry thrives on these market inefficiencies, leading to scenarios where the uninformed consumer pays a premium, and even the informed borrower is forced to wade through a labyrinth of terms to find the best choice.
Our Compare Mortgages tool offers clear, side-by-side comparisons of mortgage offers. It is critical to enable wealth managers, consumers, and other professionals to make informed, apples-to-apples comparisons. Without such tools, consumers—and especially first-time buyers—are at a distinct disadvantage.
