When it comes to mortgages, most people don’t have the time or know-how to ensure they are getting the best possible mortgage product and rate available to them. However, they also do not want to have to pay someone in order to get their mortgage in place. There is a common misconception that all mortgage brokers charge fees to the client for their services, when in fact almost all major and reputable brokerages do not, except for in a couple of unique scenarios. It’s important to understand the difference between using a broker and simply going to your bank, as well as how they get paid on each type of mortgage transaction.
The Benefits of using a Mortgage Broker
About 1 in 3 Canadian’s are now getting their mortgages via a broker, and that number is continually rising year after year. The reasons range from better service to better rates and mortgage products than what are typically offered at the bank. The reason being that if you go to the bank for a loan, your only choice will be mortgage products and offers carried by that independent institution, and as a result of this, its loan options may be limited and/or may not be the best deal on the market.
However, if you were to use a mortgage broker, he or she should have a variety of loan options available from various lenders. The broker will assess your individual needs then shop the market for the best offer available using up to a few dozen different institutional lenders at their disposal, including the major banks. Should the banks have the best rates, then the broker can still place your mortgage there. It’s truly a win-win situation for the client.
Mortgage Brokers don’t work for any individual institution, but rather act like an Expedia of the mortgage industry. If searching for a flight, you wouldn’t just go to Air Canada and book whatever they were offering you – you’d go to Expedia to make sure you were getting the best deal available. That’s exactly how mortgage brokers work – they search the entire landscape of the Canadian mortgage industry and find you the best deal available for your situation. Because every mortgage qualification is different depending on each individual’s profile, you need the expertise of a mortgage broker to walk you through all of these options and give you an informed opinion on what mortgage product and lender to use for your mortgage.
How Do Mortgage Brokers Get Paid?
In the majority of residential real estate transactions, mortgage brokering services should be completely free of charge to the client. If you have good credit, are able to provide full income verification, and you qualify through an institutional lender, there should be absolutely no cost to you. Mortgage Brokers are compensated via a finder’s fee from the lender based on the mortgage amount and term of the mortgage.
In most cases, a mortgage broker earns a one-time commission from the lender. The amount can vary from 0.50% up to 1.25%, depending on the type of mortgage sold and what that specific lender is offering. As an example, a lender would compensate a broker more on a 7 year term in comparison to a 5 year term because this product would both have a higher rate, and provide the insurance of having a loan on their books for a longer period of time. As a result, typically the longer the term, the higher the mortgage broker is compensated.
When is a broker fee warranted?
- Private Mortgages: When all institutional avenues are exhausted and have all turned down a borrower, private financing is the only option that remains. Like commercial lenders, private lenders don’t typically pay finder’s fees. In these cases, broker fees are charged to the client to compensate the broker for their services, as well as for access to their network of private funds.
- Commercial Mortgages: Unlike residential lenders, commercial lenders usually do not pay the broker finder’s fees, therefore the broker must charge the borrower directly for his services. Additionally, commercial deals take a huge amount of time, often without ever closing, resulting in the broker not being compensated at all. Typically, a broker can close about 5 residential mortgages in the time it takes to complete a single commercial deal.
- ‘B’ Lenders: These are institutional lenders that may still advance you a mortgage at a rate between 1-2% higher than the ‘A’ lenders (when the borrower has already been turned down), but still much lower than private financing. The broker may not be compensated very well from some of these lenders in comparison to ‘A’ lenders, sometimes resulting in a small fee to the borrower.
- Small Loans: An example of this would be a $40,000 second mortgage. Although these types of deals take as much time, and sometimes more, than a mortgage for say $400,000, they compensate the broker very little, resulting in a small fee to the borrower.
Other Important Information
In Ontario, it is illegal for a mortgage broker to ask for any fees up front on residential mortgages under $200,000. For mortgages over $200,000, borrowers should ensure that they get, in writing, assurance that any advance fees will be refunded if suitable financing is not delivered. Brokers must disclose all fees up front, and are not allowed to charge anything in addition to that disclosed amount without an additional executed disclosure. In general, a mortgage broker should never charge a fee on a residential mortgage transaction, with the exception of the above noted scenarios. If they do, look for another broker, as this should be a big red flag.
Please contact MortgageMeister.com for all your financing needs. You’ll find the service impeccable, and we never charge any broker fees other than the noted possible scenarios listed above. Have any questions? Contact us today at 416-635-1010 or fill out a ‘Contact Us’ form, and we’ll get back to you right away.