If you’re looking for a mortgage on a home purchase — or to renew one on a home you already own — is a mortgage broker or a bank your best option?
The main difference is a bank mortgage officer represents only the products their institution offers, while a mortgage broker is an intermediary who works with multiple lenders and is paid a referral fee by the lenders. Mortgage brokers are regulated in Ontario by the Financial Services Commission and require a licence.
While traditional banks still are used for mortgages by the majority of homeowners, “use of brokers is trending upward,” notes Monica Guido, manager of client relations with Canada Mortgage and Housing Corp. “It’s higher among first-time buyers. Finding a deal, or the desire to get the best rate, is the key reason people use a broker.”
Because mortgage brokers work with many lenders, including major banks, small lenders, insurance and trust companies, and private funds, they often have access to a better rate.
In 2017, 39 per cent of homeowners used a broker to arrange their mortgage, up from 33 per cent in 2016, according to CMHC. On average, consumers consult with 4.5 mortgage professionals when seeking a home loan, including 2.4 lenders and 2.1 mortgage brokers.
“There have been an awful lot of changes in the last 24 months with mortgage regulations and the interest rate environment, and it’s getting more complicated,” says Paul Taylor, the CEO and president of Mortgage Professionals Canada, a national mortgage industry association. “There’s greater need for expert or independent advice, and that’s why more people are coming to mortgage brokers.”
He also finds most broker clients are first-time buyers; he says it may be because they have less reverence for large institutions than their parents do. It may also have to do with how mortgage services are being marketed: Guido says that 59 per cent of mortgage brokers are leveraging technology and social media to reach clients, which appeals to younger consumers, while only 17 per cent of conventional lenders are.
Some of the advantages for both banks and brokers:
- Customer may already have a relationship with a bank and its staff.
- Can supply a wider financial view and give information about a range of financial products — but a bank loans officer might not have specialized mortgage knowledge.
- May offer some efficiencies of the approval process since the bank may already know a client’s account balances, credit card history, investments, etc.
- Can provide peace of mind that the institution is large and stable enough to weather periods of financial instability. Banks are required to meet federal underwriting guidelines.
- Offers a one-stop shop; clients fill out one application and don’t seek out multiple lenders’ quotes themselves.
- Often are able to get better rates than offered by major banks.
- Are mortgage specialists and are knowledgeable about what different lenders have to offer.
- May be able to arrange a mortgage for those having trouble getting approved by a bank, such as self-employed people and those with poor credit histories.
Whether you deal with a bank or with a mortgage broker, the down payment rules are the same: a 5 per cent down payment for a house priced less than $500,000. If the purchase price is $500,000 to $999,999, you’ll need 5 per cent for the first $500,000 and 10 per cent for any amount over $500,000. If buying a property of $1 million or more, you’ll need 20 per cent down. For all down payments of less than 20 per cent, you’ll need mortgage loan insurance, offered by providers such as CMHC.
Taylor says a mortgage broker should discuss with you your personal financial and lifestyle situation, whether you plan to stay in a house for a long time or may have to move in a few years (in that case, you may want a mortgage that is portable). The broker should provide details on various lenders, discuss pros and cons of fixed versus variable rates and point out any cancellation or pre-payment policies.
“Make sure the individual is licensed in the respective province you are in,” advises Taylor. “Each province has its own registry and standard of education.”
While credit unions and small lenders are not federally regulated and not required to adhere to some of the underwriting guidelines, Taylor says most of the time they are forced to comply anyway. Many smaller lenders or “monolines” that only do mortgages often sell their portfolios to larger institutions that exercise significant oversight.
CMHC’s Guido notes that the current, cooler housing market in Ontario and the GTA is giving homebuyers more breathing room.
“There is less urgency for prospective buyers to act hastily,” Guido says. “There’s an opportunity to ask around and do research. Ask your real estate agent or lawyer for their references and recommendations.
“Consumers are looking for options and like to receive offers from brokers and financial institutions,” she adds.