When you start looking for a lender, you will find plenty of different options from the big banks to smaller alternative lenders and everything in between. Choosing the right mortgage is not an easy decision, but it’s a very important one.
Many buyers choose to work with a mortgage broker in order to know they are making the right decision. Mortgage brokers can be incredibly helpful in your mortgage process, but you may have some questions about how it all works. One of the biggest questions is how mortgage brokers get paid. If you are looking to get the best deal, you probably don't want to end up paying a lot extra for a mortgage broker. The reality is that you may not have to pay at all while still reaping the rewards.
In this article, we will explain how working with a mortgage broker works, how they get paid, and more, to help you decide whether working with a broker is right for you.
What is a mortgage broker?
The most basic question you need to answer before working with a mortgage broker is just who they are and what they can do for you. A mortgage broker (not to be confused with a real estate broker) is a professional who is trained and certified to work with mortgages.
This means they can provide home buyers with in-depth knowledge of the field to help them find the best deal. Mortgage brokers are highly trained and regulated in Ontario, providing a high standard of service to consumers.
A licensed mortgage broker will work with you to find and compare multiple lenders within your budget in order to determine where you can get the best deal. Mortgage brokers know a lot of different sources for financing and can help you find options for financial institutions beyond the big banks. Your mortgage broker may even be able to negotiate exclusive deals that you would not be able to find on your own.
Why should you work with a mortgage broker?
There are many reasons why people choose to work with mortgage brokers when buying a home. Because most people aren’t regularly working with mortgages, mortgage brokers are far more experienced in the area than the average person. This not only provides you with the opportunity for the best deal which can mean thousands of dollars in savings but also provides you with peace of mind knowing that a qualified professional is working in your best interest to make sure your mortgage is suitable.
How does a mortgage broker compare to a bank's own mortgage advisor? For one, the fact that your broker works in your interest is crucial. Lenders may offer you mortgage advice and may even have their own mortgage advisors, but they ultimately work for the lender themselves. This means that in any case, they will attempt to make a deal that benefits them more than it benefits you.
By working with a mortgage broker, you can level the playing field a lot more than if you do it alone. Your broker will have the skills and knowledge to be able to negotiate better terms for your mortgage. Mortgage brokers are also trained in the field to the extent that they can answer any questions you have. Just because they tell you a certain mortgage may be a better deal, you may still not understand exactly why that is the case. If you find yourself in this position, just ask! Your broker will be willing and able to help you understand all the nuances of different mortgage terms and the process involved which can help you better evaluate your options.
You might even have already made a choice for what lender you think you will go with. A mortgage broker can still help you in this case with a quick review of your mortgage just to make sure everything seems in order before you finalize financing.
It’s also great to work with a mortgage broker if, for various reasons, you have difficulty getting a traditional mortgage. For example, things like being self-employed, having a low credit score, having high debt, or being a newcomer to Canada can all make the already complicated mortgage process even more complex.
For all of the aforementioned groups, there are various different options that a mortgage broker can help you to explore to find something that works for you. Even if you think you can't get a mortgage, it may be worth asking a broker – you never know what they may be able to do for you!
How much does a mortgage broker cost?
Now that you know the benefits of working with a mortgage broker, you may feel like it’s a great idea. But, the next question you may be asking is: just how much will it cost to get those benefits? You might be surprised to find out that you may not have to pay your mortgage broker at all.
That doesn't mean that mortgage brokers work for free. Rather, it’s usually the lender that you decide to go with who will pay your broker's fee. This commission is also known as the finder's fee.
Why banks pay brokers' fees
Essentially, your bank wants new customers, and though they are lending you money, they will end up profiting from your mortgage over time. By working with mortgage brokers, banks can quickly get qualified and serious buyers without having to reach these clients themselves. Though they spend money on the broker's commissions, they can also save money through this relationship on things like marketing.
How much are mortgage broker commissions?
In general, your broker will be paid a commission based on the percentage of your overall mortgage amount (the amount you borrow, not the price of your home). This amount will vary between different lenders and different mortgages but is usually in the range of 0.5% to 1.2%.
That means if you were approved for a mortgage amount of $500,000 and your broker took home a 1% commission, they would make $5,000. However, brokers may also have a commission split with their brokerage, so they may not bank the entire value of the commission.
Other ways mortgage brokers get paid
The basic commission is usually paid once you sign on your mortgage, but mortgage brokers may also make additional income over time in the form of trailer fees and renewal fees.
A trailer fee is a fee that is paid out over time as long as the borrower stays with the lender. This may be in exchange for a lower commission upfront and is used to encourage borrower retention, though switching lenders is ultimately up to the borrower. For the broker, this means a more steady stream of income rather than a lump sum.
A renewal fee is similar to a trailer fee but is paid when a borrower renews with the same lender. Again, this is meant to encourage a borrower to stay with the same lender.
Be aware that sometimes you may need to pay
There are some cases, unfortunately, when you may need to pay for some or all of your mortgage broker's fees. This may happen if you choose to work with an alternative lender who is not willing to cover the commission or charges a lender fee. It may also occur if the lender offers you a discounted mortgage rate, in which case they may do so in exchange for not covering the broker's commission.
Ultimately, however, your mortgage broker will inform you if this is the case so you will not be surprised with broker feed or be obligated to pay more than you were expecting. Your broker is required to tell you how they are paid so feel free to ask if anything is not clear. It’s also important to note that a mortgage broker only gets paid once the mortgage is actually approved. This can also help you when you are looking for the right mortgage broker. Every broker will work differently and may offer you different mortgage options so it’s best to interview them as you would interview a real estate agent before deciding to work with the right one.
There is no obligation to proceed with signing on a mortgage just because your broker has found it for you. If you aren't happy with the broker you started to work with, there are plenty of others who will be happy to help you.
Is a mortgage broker right for me?
All things considered, there are actually many great benefits to working with someone who has so much experience with mortgages. They can help you get a much better deal on your mortgage by negotiating with the bank and help you understand how your mortgage works so you can make an informed decision. Plus, they work in your best interest rather than for the mortgage lender. On top of all that, in most cases, their services are entirely free to the borrower.
When looking for a mortgage broker, try to find one with positive reviews and who has a lot of experience as this translates to good working relationships with mortgage lenders. Also, make sure they are someone who you get along with and who understands your needs and concerns well.
Finally, always ensure that you are working with a licensed mortgage brokerage to ensure the high quality of service that comes with such certifications. Avoid any supposed brokers who may not be licensed as they are not truly brokers at all and could lead you down the wrong path or lose you money.
by Corben Grant from Canadian Real Estate Wealth
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