Getting a mortgage can feel complicated. Once you start looking at all the options – fixed rates, variable rates, cash back mortgages, no frills mortgages, full-featured mortgages, quick close specials – deciding on the right mortgage can seem overwhelming.
That’s where a good mortgage broker can help. Especially when you’re a first-time home buyer, going to your bank for financing may seem like the obvious choice. But working with a mortgage broker has advantages. Among them:
- You pay nothing out of pocket for their services, assuming you’re an average qualified borrower (brokers are paid by the lender unless you have a “non-prime” mortgage —i.e., you have bad credit, unprovable income, etc.)
- Brokers have access to rates from dozens of mortgage finance companies and banks, which increases your chances of finding the best product.
- They can help you with strategic financial planning if, for example, you want additional cash for home renovations, or you have other debts you want to consolidate.
What is a Mortgage Broker?
A mortgage broker’s job is to look at your finances to determine the mortgage product that nets you the lowest overall borrowing cost.
They do that by comparing mortgages on your behalf, negotiating rates and terms when necessary. Once a suitable product is selected, they then help gather all the paperwork and submit it to the lender for approval.
Throughout the process, the broker liaises with the lender regarding any administrative steps. Finally, they guide you along the process, helping explain the application requirements and answering questions you may have regarding your mortgage contract.
Mortgage brokerages and their brokers are subject to a series of regulatory requirements. The Financial Services Commission of Ontario (FSCO), a regulatory body that licenses mortgage brokers, states, “Mortgage brokers and agents are licensed professionals who work for a licensed mortgage brokerage and it is with the brokerage that you enter into a legal relationship.”
Depending on your province, brokers are allowed to represent the borrower, the lender or both. FSCO suggests, “A borrower shopping for the best mortgage should first confirm with their prospective broker or agent that their role will be to act on their behalf. A licensed broker or agent is required by law to provide written disclosure to you about their relationship so that you can decide.”
The Process of Using a Mortgage Broker
Your mortgage broker needs access to your financial information. That helps them better understand your financial situation and match you with appropriate lenders.
Qualifying for a Mortgage
When qualifying for a mortgage, your broker may request:
- A letter of employment and/or tax returns (confirmation of income)
- Bank statements
- Proof of assets or investments
- Details of your other debts and monthly obligations
- The amount of down payment you have
- Information about the property you wish to purchase (usually an MLS listing)
This list is far from comprehensive, but it gives you an idea. For a full list of requirements, check with your broker.
Mortgage Options to Choose From
When selecting a mortgage, your broker should provide you with options that fit your circumstances.
“The mortgage broker will also explain his or her rationale for the option(s) that have been identified, provide you with information that will assist you in determining whether you can afford the mortgage and give you material information on the nature, costs and the particular risks of the mortgage option(s) identified for you,” the FSCO clarifies.
Understanding the risk associated with getting a mortgage is key when considering how much debt you can comfortably take on.
Some financial considerations are:
- Your current debt load (before and after the mortgage)
- Your employment stability (are you salaried, is your income based on commissions, are you returning to school, will you be going on maternity leave, etc.)
- The total cost of owning a home (property taxes, utilities, condo fees, maintenance, etc.)
- Other planned expenses (buying a car, doing major renovations, paying your kid’s university costs, etc.)
- Unexpected expenses (increases in interest rates, family illness, etc.)
Submitting the Application for Approval
It is your mortgage broker’s responsibility to provide the lender with information that accurately reflects your circumstances. They must submit it in a timely manner so that the lender can make an appropriate decision regarding your approval and meet any financing deadlines.
Once the lender has agreed to advance the loan, your broker will fulfil the lender’s documentation conditions, arrange the appraisal (if applicable) and coordinate the closing with your lawyer or closing agent.
Before signing on the dotted line, make sure you fully understand all the terms and conditions of your mortgage contract. Answering such questions is a broker’s most important function given that restrictive terms can cost you after closing.
Are Mortgage Brokers Actually Free?
For normally qualified borrowers, mortgage brokers offer their services for “free.” That’s because they solely work on commission (finders’ fees), which is paid by the lender once they mortgage closes.
Compensation from the lender is generally a percentage of the mortgage amount (like 1 percent). It varies based on the mortgage rate and term length. Depending on the lender, a broker can earn a finder’s fee, volume bonus, efficiency bonuses and/or trailer fees paid over the term of the mortgage.
For special or more difficult financing (like higher-risk private lending), brokers typically charge a percentage or flat fee for their services. In such cases, the amount of fees they receive can impact the total cost of your mortgage.
Understanding How Much Commission Mortgage Brokers Make
There is no flat-rate commission across the board for mortgage brokers. There are multiple variables that affect how much they are paid out. For example:
- The longer the fixed term, the more commission the mortgage broker may make
- Fixed terms sometimes pay a bit more commission then variable terms
- Larger brokerages may receive additional bonuses (and lower rates) because they produce a higher volume of deals
It’s important to remember that compensation and lender perks can sometimes sway a broker’s advice. That’s why brokering isn’t always “free.” Despite regulators’ efforts to curb this behaviour, it’s almost impossible for a layperson to know when it is happening. The main thing you can do is ask your broker candidly, “Are there any products in the broker market that offer you less compensation or perks that would save me more money in the long run?”
And keep in mind, the mortgage with the true lowest cost of borrowing may be available only to borrowers who deal directly with the lender (i.e., non-broker rates).
How do Mortgage Brokers Get Better Rates?
Brokers don’t all offer the same financing. Those that do a lot of business, like brokers sourcing over $150 million in mortgages annually, typically get better deals from lenders due to the volume of clients they bring in. Exclusive lender promotions are often made solely to larger brokers. This is one reason why some brokers offer lower rates than others.
That’s why we try to provide the most comprehensive mortgage rate comparison in Canada. By juxtaposing offers from various brokers, banks, credit unions and other lenders—without bias—you’re more likely to see the best available deal.
This post has been updated.