Pros & Cons of a Mortgage Broker in CanadaMarch 04, 2022
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They can offer consultations on the best mortgage products available, and can help you get the best rate possible.
Although hiring a mortgage broker may seem like a non-negotiable for some borrowers, there are a few pros and cons to consider before making your decision. For example, is it worth paying a broker's commission if you can find a lower rate on your own?
In this article, we'll take a closer look at the pros and cons of using a mortgage broker in Canada to find out whether this service is right for you. Let’s get started!
What does a mortgage broker do in Canada?
In January 2022, the average home price in Canada reached a record-breaking high of $746,439. Needless to say, there aren't many home buyers who can afford to purchase a property outright. However, buyers still want to make sure they're getting the best mortgage rates and products available to them. Enter: the mortgage broker.
A mortgage broker is a professional who helps potential home buyers find mortgages and navigate through the application process. They work with a variety of mortgage lenders, including banks, credit unions, trusts, and private lenders. Mortgage brokers can also offer advice on which type of mortgage is best for a buyer, depending on their needs and financial situation.
In Canada, mortgage brokers are regulated by the Financial Consumer Agency of Canada (FCAC), and must follow the rules and regulations set out by the FCAC. This includes disclosing all fees and charges associated with a mortgage, as well as informing buyers of their borrowing power.
Upon hiring a mortgage broker in Canada, you can expect the following services:
- Assistance in finding the best products and mortgage rates available to you, based on your needs and financial situation.
- Helping you understand the mortgage application process and paperwork involved.
- Advising you on what type of mortgage is best for you, depending on your needs and financial situation.
- Acting as a liaison between you and the lender.
- Handling all negotiations with the lender on your behalf.
- Arranging for home insurance.
Mortgage agent vs. mortgage broker: what’s the difference?
Though both mortgage agents and mortgage brokers perform many of the same tasks, there is a key difference between the two: agents (or loan officers) are employees of financial institutions, whereas brokers are self-employed. This means that brokers have more control over the products they offer and the rates they charge.
Agents are also able to lend you money directly, as they are working for a financial institution, such as your local bank. While this eradicates one step from the process, it means that you are given less options; brokers aim to give you as many options as possible, which is why they are considered the ‘middlemen’ and not the lender.
Brokers also have more experience dealing with mortgages, and they understand the various products and lenders available. This can be a real advantage when it comes time to negotiate a mortgage rate or product.
While some agents will be working in your best interests, some will make recommendations that best suit their own institution, which may or may not be the best deal for you.
Mortgage broker vs. banks
Compared to brokers, banks are required to follow stricter rules and regulations in order to offer mortgages. This can limit the products and services that banks are able to provide, as well as the interest rates they can offer; however, it does safeguard consumers.
Mortgage brokers are not beholden to the same rules as banks in Canada, so they have more flexibility in terms of products and rates they can offer. They have more experience and expertise than the average consumer when it comes to mortgages, so they can provide valuable guidance and advice when looking for a mortgage.
Brokers are also well-connected with different lenders, so they can usually find the best mortgage product for their clients. This is where banks cannot compare to brokers – they only offer their own services, albeit at regulated rates.
Remember that, while brokers are less regulated, they can negotiate on behalf of their clients. This can save you money in the long run, as brokers have access to better interest rates than the average consumer.
Is it worth getting a mortgage broker?
Mortgage brokers do not charge you for their services – they are actually paid a commission by the lender when they successfully arrange a mortgage for you.
The broker’s fee is usually paid by the borrower, but it can be financed as part of the mortgage. This means that you don’t have to pay anything out of pocket to get the benefit of a mortgage broker.
For this reason, many people believe that it is always worth using a mortgage broker when buying a home. Some would argue that the service still isn't free, since brokers can receive kickbacks from lenders for steering borrowers their way; however, there are regulations in place to prohibit such practices.
Can mortgage brokers source you a bigger mortgage?
Between 2020 and 2021, the total value of loans sourced through brokers in Canada increased by 50%; however, most Canadians still source their loans through banks. This is interesting, considering that many people believe that mortgage brokers can source you a bigger mortgage.
The reason for this belief is that brokers have access to a number of different lenders, each with their own criteria for lending. This means that a broker can find a lender who is willing to offer you a mortgage, even if your credit score is not the best, or you do not have a large down payment.
Banks and agents, on the other hand, are limited to the products that they offer – so you won't necessarily have access to the maximum amount of credit that you may be eligible for.
How mortgage brokers can rip you off
Although regulations in Canada are much tighter than they used to be in terms of how mortgage brokers are paid and the disclosure they must provide clients, there is still potential for abuse. Unfortunately, not all mortgage brokers can be trusted. Here are some of the main tactics mortgage brokers can use to rip you off:
- Inflating the cost of the mortgage. Mortgage brokers are typically paid a commission by the lender for every mortgage they sell. This commission can be as high as 2.5% of the loan amount, so there is an incentive for them to inflate the cost of the mortgage.
- Pushing you into a high-interest mortgage. Mortgage brokers may also be paid a bonus by the lender for selling you a high-interest mortgage. This can result in you paying thousands of dollars more in interest over the life of your loan.
- Bait and switch. Mortgage brokers may lure you in with a low interest rate, but then switch you to a higher rate once you’ve signed the contract.
- Enforcing a pre-payment penalty. If you want to pay off your mortgage early, you may be charged a pre-payment penalty by the mortgage broker. This can amount to thousands of dollars.
- Failing to disclose the broker’s own financial interests. Mortgage brokers are required to disclose any potential conflicts of interest, but this doesn’t always happen. For example, if the mortgage broker is also getting a commission from the lender for selling you a home equity line of credit, they may not disclose this to you.
If you’re thinking about using a mortgage broker, it’s important to be aware of these potential pitfalls. Do your research, ask lots of questions, and read the fine print.
How to avoid being ripped off by a mortgage broker
Although there are many ways for a consumer to get ripped off when borrowing money, mortgage brokers are one of the most common and costly offenders.
Fortunately, there are many ways for consumers to protect themselves from mortgage broker fraud. Here are a few tips that will help you avoid dishonest brokers and find one you can trust:
- Get everything in writing, including the interest rate, fees, and other terms of the deal.
- Beware of brokers who ask for large up-front fees. Legitimate brokers will not charge you anything until after they have found you a loan.
- Always get at least three quotes before agreeing to work with a broker.
- If you are unsure about a deal, get a second opinion.
- Choose a broker that has been licensed by relevant provincial and territorial authorities. For example, residents of BC can turn to the British Columbian Financial Services Authority (BCFSA), while Ontarians can visit the Financial Services Regulatory Authority of Ontario (FSRA).
- Ask the broker for a list of mortgages they have arranged in the past, and contact those homeowners to ask about their experience. Check online reviews (Google, Trustpilot, and Feefo).
Sum-up: pros and cons of using a mortgage broker in Canada
No matter which option you choose, a mortgage broker or going to the bank yourself, it is important to do your research and understand all the implications of taking out a mortgage.
Mortgage brokers: the Pros
- Brokers have access to a wide range of lenders, which gives you more choice and could lead to a better interest rate.
- They can help you navigate the complex mortgage process and may be able to get you a deal that the bank can't.
- They often have experience and expertise in the mortgage market, which can help you get the best deal for your needs.
- Brokers may be able to save you time and money by negotiating a better interest rate or helping you avoid costly mistakes.
Mortgage brokers: the Cons
- Brokers get paid by the lender, so they may not be as motivated to find the best deal for you.
- They may not have as much experience with self-employed or unusual income borrowers.
- Some brokers may charge a fee for their services.
- It's important to remember that the broker is working for the lender, not you, so they may not have your best interests at heart.
The bottom line:
Mortgage brokers can be a great option for finding the best mortgage deal, but it's important to do your research and understand what they offer. Remember to ask questions and read the fine print before signing anything.
Banks and lenders: the Pros
- Banks are regulated by the government, so you can be sure that they are safe and trustworthy.
- They usually have a wide range of products and services to choose from.
- Bank employees may have more experience and expertise in mortgages than mortgage brokers.
- You don't have to pay a broker's commission, so it can be cheaper in the long run.
Banks and lenders: the Cons
- Lenders may not have as much choice when it comes to mortgage products.
- They may be less likely to offer a good interest rate to someone who is self-employed or has a variable income.
- It can be more difficult to get approved for a mortgage through a bank than through a broker.
- You may have to go through a lot of paperwork and red tape to get approved.
- Banks can be slow to process mortgages, which can delay your purchase.
The bottom line:
Banks are a viable option when sourcing your home loan, but remember that they do not have access to the breadth of choices brokers often have. They can only recommend their own products, limiting your capacity to find the best deal.
Final thoughts on mortgage brokers in Canada
Though the majority of Canadians choose to work with a bank when taking out a mortgage, there is an increasing trend of Canadians turning to mortgage brokers to help them secure the best mortgage product for their needs.
There are many pros to using a mortgage broker in Canada. A good broker will have access to a wide variety of products from different lenders, which can help you find the best mortgage rates and terms available. They can also help you navigate the complicated paperwork and red tape involved in getting a mortgage.
While there are also cons to using a mortgage broker in Canada, such as the fact that they often charge a fee for their services, the cons can be mitigated through diligent research. If you’re looking for the best mortgage rates and products available in Canada, working with a mortgage broker is certainly worth your consideration.
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