Introduction
Navigating the world of mortgages can be a daunting task. With a myriad of mortgage products, rates, and terms to choose from, it's easy to feel overwhelmed. This is where mortgage brokers come in.
As experts in the field, they can guide you through the process, helping you find the best mortgage product for your needs. In this article, we’ll aim to demystify the role of mortgage brokers and help you understand their advantages, disadvantages, and alternatives.
Key Takeaways:
- All mortgage brokers in Canada are licensed and regulated by provincial authorities
- A mortgage broker can offer you access to better products and lower interest rates at no extra cost to you
- Select a mortgage broker based on TrustPilot reviews, the quality of their website, their lender relationships, their communication style and professionalism
- Communicate openly with your broker so they can meet your expectations and manage your issues up-front with the lender
Understanding Mortgage Brokers
A mortgage broker is a licensed professional who acts as an intermediary between borrowers and mortgage lenders. Mortgage brokers help people get mortgages to buy a home, deal with mortgage renewals, as well as arrange mortgage loans to consolidate debt. They have a deep understanding of the mortgage market and can provide expert advice on the best mortgage products to suit your financial situation.
In Canada, mortgage brokers are regulated by provincial bodies to ensure they adhere to high standards of professionalism, education and ethics. In Ontario, for example, mortgage brokers are regulated by the Financial Services Regulatory Authority (FSRA).
These authorities deal with licensing, compliance, as well as consumer complaints. They commonly provide a public registry so consumers can confirm the license status of any mortgage broker they are dealing with.
How Does a Mortgage Broker Get Paid?
Typically, mortgage brokers get paid by the lender, not the borrower. Their compensation comes in the form of a commission, which is a percentage of the loan amount.
The commission is paid when the home loan is funded and depending on the lender, may also include trailer fees (paid to the mortgage broker whenever a homeowner renews their existing mortgage with the lender).
A Myth About Mortgage Brokers
Borrowers sometimes believe they will pay a higher interest rate if they use a mortgage broker. This is not true.
A lender does not charge a higher interest when dealing with a mortgage broker and, in fact, will typically give a lower interest rate on variable rate mortgages and fixed rate mortgages that are arranged through a mortgage broker. Lenders do this to encourage mortgage brokers to send them more transactions and are willing to make less profit in exchange for the higher volume of the broker’s business.
Using a Mortgage Broker to Buy a Home
Mortgage brokers play a crucial role in your home buying journey and should be involved before you make an offer to purchase. They start by assessing your financial situation, including your income, debts, credit score, and savings. This information allows them to determine your borrowing capacity and identify the mortgage products that best fit your needs.
Overall, they will help you decide how much of a monthly payment you can afford and still pay off your mortgage as quickly and comfortably as possible. Once they have a clear understanding of your financial situation, they will search the market for the most suitable mortgage product.
They have access to a wide range of lenders, including banks, credit unions, and private lenders, which allows them to find competitive rates and terms. Negotiating with lenders is another key role of a mortgage broker. They use their expertise and industry relationships to negotiate better rates, a better mortgage amount, a better amortization period and an overall better mortgage contract on your behalf.
Once the negotiation of the mortgage agreement and its terms and conditions is complete, they manage the documentation collection process, as the lender will require a lot of documents (such as employment letters and property tax statements) to verify the information in your application. The mortgage broker will make sure all paperwork is completed accurately and submitted on time.
Your mortgage broker will work closely with the lender and your lawyer to ensure your mortgage is completed and funded on time with as little stress to you as possible. Even after your mortgage is funded, your broker should continue to provide support, answering any questions you may have and ensuring that you are happy and comfortable with your mortgage.
Eventually, they should help you deal with the renewal of the loan at the end of its mortgage term.
Why Use a Mortgage Broker?
Clearly, there are several advantages to using a mortgage broker. First, they provide access to a wide range of lenders, some of which you may not have considered or even known about. This broad access increases your chances of finding a mortgage product that fits your needs.
Second, mortgage brokers have a deep understanding of the mortgage market. They can provide expert advice on different mortgage products, interest rates, and terms, helping you make an informed decision.
Third, using a mortgage broker can save you time and effort. Instead of contacting multiple lenders and comparing their mortgage products, your broker will do the work for you.
Fourth, a mortgage broker may be able to secure better rates and mortgage terms and conditions than you could on your own. Their relationships with lenders and knowledge of the market allow them to negotiate effectively on your behalf.
Finally, using a mortgage broker typically will not cost you anything. Why wouldn’t you use the service of a mortgage professional for free?
Potential Drawbacks of Using a Mortgage Broker
While there are many benefits to using a mortgage broker, we admit there can be some potential drawbacks. Some brokers may charge fees for their services, although this is not common in Canada if you have good credit. However, if you have poor credit and require an “alternative” mortgage or a private mortgage, then mortgage brokers will typically charge fees for their services.
Additionally, while brokers have access to a wide range of lenders, they may not work with all lenders, which could limit your options. Avoiding this issue is simple though, just work with an experienced mortgage broker who can demonstrate they do a large variety of business with different lenders that offer products you are looking for.
Finally, there is a potential for conflicts of interest, as brokers are paid by lenders. However, reputable brokers prioritize their clients' needs and are transparent about their compensation.
In fact, all mortgage brokers are required to provide very detailed disclosure documents to borrowers before the mortgage paperwork is signed so homeowners fully understand how the broker is being paid.
How to Choose the Right Mortgage Broker
Choosing the right mortgage broker is crucial. Most people start looking for a mortgage broker by doing online research. Searching for “best mortgage broker”, “mortgage broker near me”, or just “mortgage broker” will send you an overwhelming amount of information to sort through.
Start checking out mortgage broker websites to cut down on your list of options. You should work with a mortgage broker that has a professional, custom website with resources that are updated regularly. If you visit their mortgage brokerage, make sure it appears to be a professional office. You can consider online reviews but take most of them with a grain of salt. Fake Google reviews are common and should play a small role in choosing a mortgage broker. TrustPilot is a much more reliable review platform that is trusted even by Google, and can give you a short-list of mortgage brokers to contact.
Referrals from friends and family should also be considered. In our experience though, we find that many borrowers prefer to keep their financial affairs private and do not like to work with a mortgage broker who knows family or friends. Regardless of which methods you use, once you have a shortlist of 2-3 mortgage brokers, make sure you interview them! Reputable mortgage brokers should not have an issue having a preliminary discussion with you—it’s probably a warning sign if you feel pressured to work with them from the beginning.
During these discussions, consider their communication style and whether they take the time to understand your needs and answer your questions. In the end, you will be sharing all of your financial information with this person, you need to feel comfortable with their approach!
Tips for Working with a Mortgage Broker
When working with a mortgage broker, be open and honest about your financial situation, and clearly communicate your needs and goals. If you hide information, the mortgage broker will still find out most of the details you are not sharing. The mortgage approval process is very detailed and the lender will want answers to all of their questions.
It’s just best to share all of your details so the mortgage broker can address them up-front with the lender in the best way possible. And if you don’t clearly communicate your needs and goals, you run the risk of there being an avoidable misunderstanding. Ultimately this misunderstanding will hurt your interests, so you should communicate openly with your mortgage broker.
Alternatives to Mortgage Brokers
While mortgage brokers can provide valuable services, they are not the only option. You can also approach banks and credit unions directly. While this may limit your options on products and mortgage broker pricing, you may benefit from a pre-existing relationship with the institution. In our experience, unless you are an extremely high-net worth individual, your relationship will not give you any advantage versus working with a broker.
Online mortgage comparison tools are another alternative. They allow you to compare rates and terms from multiple lenders at once. However, they may not provide personalized advice and require a lot of time and effort to review all of the material. In our view, these mortgage comparison tools should just be a starting point in your research. Inevitably, clicking the button the website will simply connect you to lenders or mortgage brokers who compete on price. You should consider if that type of business model suits your needs.
Finally, you can work with mortgage specialists at financial institutions. They have in-depth knowledge of their institution's products, but they can only offer you products from their bank.
Frequently Asked Questions
Q. How are Mortgage Brokers Paid?
A. Mortgage brokers are typically paid by lenders, not borrowers. Their compensation is usually a percentage of the loan amount.
Q. Can a Mortgage Broker Guarantee the Best Rate?
A. While brokers can often secure competitive rates due to their access to multiple lenders, they cannot guarantee the best rate as rates are influenced by various factors, including market conditions and your financial situation.
Q. What is the Difference Between a Mortgage Broker and a Mortgage Specialist?
A. A mortgage broker works with multiple lenders, while a mortgage specialist works for a single bank and can only offer that bank's products.
