What is a mortgage broker? What do mortgage brokers do?
In this post, we will discuss the following questions:
What is a mortgage broker or agent? What is their role in mortgages? What do mortgage brokers do?
How can mortgage brokers help with your mortgage? Benefits of using a mortgage broker.
Mortgage brokers watch-outs and need-to-knows.
What is a mortgage broker or agent? What is their role in mortgages? What do mortgage brokers do?
Mortgage brokers and agents are practicing professionals who assess a borrower’s financial goals with respect to real estate financing and after detailed analysis provides solutions to meet those goals by acting as an intermediary with the appropriate lending source. In determining the “appropriate lending source,” two facts are assumed: one, that the client is appropriate for the lender, and two, that the lender is appropriate for the client.
Therefore, by this definition, a mortgage broker/agent has two clients: the borrower and the lender.
The typical activities, among others, of a mortgage agent/broker, all of which will be discussed in detail throughout this book, include brokering both residential and commercial mortgages, including:
Brokering a new mortgage, collateral mortgage, line of credit, or other types of loan secured by real property (which is land and whatever is affixed to it)
Refinancing an existing mortgage
Arranging investing in a mortgage by one or more individuals
Providing mortgage advice and counsel, including renewal options
Mortgage brokers and agents in Canada must abide by provincial and federal laws that guide their activity and has a set of rules for meeting the interests of the borrowers. In addition, mortgage brokers and agents have a code of conduct empowered by mortgage brokerage companies that the mortgage agents and brokers must be employed by to practice in Canada.
The code and the law state that the key expectations for mortgage agents when servicing a client are:
Act in the borrower’s best interests. The borrower’s first expectation is that the mortgage agent will at all times act in the best interests of the borrower. This expectation is crucial to the borrower and is vital to the success of the transaction. Acting in the best interests of the borrower can best be defined as putting the borrower’s needs and concerns first and foremost above others involved in the transaction, limited only by ethical, moral, and legal restrictions.
Completely analyze the borrower’s needs. Taking a mortgage application and finding the right lender and product for the borrower is not possible unless the mortgage agent has detailed knowledge of a borrower’s needs and financial situation. To completely analyze a borrower’s needs requires that the mortgage agent assist the borrower in determining what those needs are.
Make appropriate recommendations based on the borrower’s needs. By completing a full analysis of their needs and being determined to do what is in their best interests, the mortgage agent will make the appropriate recommendation, provided that they have the requisite knowledge to determine what that recommendation should be.
Facilitate the transaction to its successful completion (funding). Successful mortgage agents will advise the client of all of the steps in the transaction and stay in touch with them throughout, even when the mortgage agent is no longer involved.
What is the difference between a mortgage broker and a mortgage agent?
There are two licenses that allow individuals to broker a mortgage: mortgage agent and mortgage broker. The difference between these two licenses is that a mortgage broker, in addition to being able to broker mortgages, can also be the Principal Broker of a mortgage brokerage, a role that is required to provide effective supervision of the brokerage’s mortgage agents, among other duties. Otherwise, both a mortgage agent and a broker must:
be authorized by a brokerage to deal or trade in mortgages on its behalf
have successfully completed an approved education program for mortgage agents
The difference between an agent and a broker is that a broker also must:
have been licensed as a mortgage agent for at least 24 of the 36 months after they became a mortgage agent
have successfully completed an approved education program for mortgage brokers and passed the approved qualifying exam within three years before applying for the license
How can a mortgage broker help with a mortgage?
Approximately 30% of people in the USA and Canada with mortgages use a mortgage agent every year, a number that has remained consistent for the past several years, while 50% used a bank.
There are likely a few reasons for such a low number given the many benefits of using a mortgage agent (which we will discuss later):
Most Canadians don’t understand what a good Mortgage Broker does or how that broker can save them a great deal of money.
Most people hate the idea of change and having to deal with a person they never met.
A likely misconception that mortgage agents are best suited only for those with poor credit scores.
A fear of unethical mortgage agents taking advantage (we will discuss this in more detail in mortgage agents watch-outs)
While the above 30 to 50% ratio is great news for the banks, it’s not great news for you, because it means that too many people are paying more for their mortgage than they should be paying.
Let’s go into some more detail on the pros of using a mortgage broker:
1. Access to more lenders. You can call a mortgage broker a "one-stop-shop for mortgages". If you are obtaining a mortgage through your preferred bank, you are limited to the options they have at the moment. When you work with a mortgage broker, they give you access to rates from many different lenders of different shapes and sizes: major banks, credit unions, and trust companies. If you’d prefer the security of getting a mortgage from a big bank, a mortgage broker can still set you up with one.
Also, if you struggle to obtain a mortgage from one of the big banks or have issues paying the monthly mortgage payments, mortgage agents are the ones who can help. They usually have access to secondary mortgage institutions and private investors and can help arrange for a short-term second mortgage that you would not otherwise be able to obtain through a bank to help in tough times
2. Better rates. Good mortgage brokers will receive volume discounts from major lenders. That helps them secure a mortgage rate for you that is lower than you’d be able to negotiate yourself, even from the same big bank. Also, they screen the rates from other financial market players: smaller banks, trade unions, etc., and can get you a rate no big bank provides.
3. It is free to you. Mortgage brokers and agents are compensated by a lender (bank or other financial institution) for bringing them a new client. This way, financial institutions save money on marketing and finding clients themselves. Also, a mortgage agent performs the important task of qualifying a client for this specific bank's minimum requirements. If the mortgage agent fails to do so a few times, the bank is likely to stop working with the agent.
4. You get free expert advice. Since brokers are independent and don’t work for individual lenders, they can offer advice to a broad range of lenders. Mortgage brokers are the experts at what they do and are accustomed to working with borrowers who may have unique needs, including freelancers or those with poor credit ratings.
5. They look after you and do most of the work. It is in the best interest of a mortgage broker to get you the mortgage or refinancing you need since they are only paid when you get the mortgage. Thus, they will connect you with their layers, help you collect all the papers for submission to a bank, will connect with you frequently for any outstanding items, and speed up the process of the mortgage contract creation.
Do you currently live in Ontario? Are you in the process of obtaining a new mortgage or are approaching the mortgage renewal? Feel free to reach out to discuss your specific situation. Submit the application here and receive a free consultation:
Mortgage brokers watch-outs and need-to-knows.
In a brokered transaction mortgage agents have two clients: the borrower (the individual receiving the mortgage) and the lender (the provider of the mortgage). In order to maintain a healthy market, it is imperative that the broker “marry” the borrower to the lender best suited for both. The law and the code of conduct for mortgage agents state that the borrower's needs always come first, meaning you should get the best mortgage for your needs at the best possible rate.
In most cases, mortgage agents and brokers value their reputation because in the long run it pays off in the form of references and returning customers. Given most mortgages run for 25+ years and you need to refinance them on average every 3 to 5 years, a happy client will come back to the mortgage agent 5 to 10 times; each time the mortgage agent receives compensation from a financial institution.
However, as you can imagine, being a "servant of two clients" may cause a bit of a conflict of interest. It stems from a fact that the finder's fees the banks pay to mortgage brokers may differ. The typical finder’s fee or commission paid by lenders in today’s marketplace is approximately 50 to 85 basis points (.50% to .85%). For example, if a mortgage agent found a bank a client who borrows $300,000, the bank will pay the agent 85 basis points x $300,000, or .0085 x 300,000 which equals $2,550.
In some cases, some financial institutions may offer mortgage brokers higher compensation when their interest rates may not be as good as another bank that offers lower compensation to the agent. Obviously, for an unethical agent, this creates a temptation to suggest you a mortgage from the bank with higher compensation.
Also, over the time of their career, many mortgage agents form close connections with one or two financial institutions. Often, these institutions provide volume discounts to the agents that they pass to you. However, with this, an agent may become passive and stop looking for the best rates in the market.
A solution to the above is the following:
First, research the agent. Check past references, and search the agent online to see what past clients tell about her.
Second, You are not obligated to stay with your mortgage broker. There’s nothing stopping you from speaking to a mortgage broker and reaching out directly to a few financial institutions. Because every mortgage broker has relationships with different mortgage providers, it can sometimes be worth speaking to multiple mortgage brokers as well. This way you can figure out if any of them hides anything or if the mortgage agent is just not as good. If both agents give you the same interest rate, look for other perks that the banks might be offering, such as better cancellation terms, and higher amounts for allowed lump-sum payments. Also, you can go with an agent who shows more courtesy and feels more professional.
Lastly, during your first meeting with the agent, you should ask them 3 questions:
How many clients have the agent had over the past 12 months.
How many financial institutions have the agent dealt with over the past 12 months?
Is there a single financial institution with which the agent has dealt over the past 12 months that contributed to more than 20% of all deals done?
While the agent does not have to disclose the number of clients, they are obliged to answer the last 2 questions.
Net Net: Should you use a mortgage broker?
Working with a mortgage broker has almost no downside if you do a bit of due diligence and check what else is available in the market (either by contacting directly a couple of financial institutions or reaching out to 2-3 mortgage agents). On the other hand, dealing with a mortgage agent can save you a lot of hassle, and will provide free access to the expertise of a person who lives and breathes the mortgage market and has seen a lot of complex situations for past clients. Also, they can save you money by reducing your interest rate, meaning less money you pay to the bank and more you put down to your retirement (or faster mortgage payment).