Mortgages are a complex product and once you start looking at all the available options including fixed vs variable rates, cash back, no frills, quick close specials, full-featured products, and the list goes on, it can be difficult to know which product is the best for you. That’s where a good mortgage broker can help. They can offer the following services:
- They work for you, not the lender
- They have access to many lenders including many major banks, specialty and mortgage-specific lenders, enabling them to find the best product for you, versus a single lender
- Can help with strategic financial planning – Are you going to want additional cash for home renovations? Are there other debts you can consolidate?
- Offer their services for free
The reason they can offer their services for free is that mortgage brokers are paid commission by the lenders once they close a deal, and work on 100% commission only (some charge for special, difficult situations or when organizing for private lending), but most only work on commission, so be wary if they want to charge you. The compensation is based on a percentage of the mortgage amount and varies for different mortgage rates, products, rate terms (i.e. a 1 year fixed versus a 10 year fixed), and even for different brokers. There are different options available on how broker’s can take their commission, such as up front or over the term of the mortgage, but we won’t get into that for now.
A few rules of thumb are:
- Fixed terms typically pay more commission then variable terms
- The longer the fixed term the more commission (ie. a 10 year fixed would pay more than a 1 year – which makes sense as the lender can predict their revenue stream for a longer period)
- Commissions can vary among brokers as larger ones receive additional bonuses based because of higher volumes
- No frills products which are “stripped down” with some features removed to provide a better rate typically offer lower commissions
- Speaking to many brokers they make an average of 0.75%
- A no frills, quick close product could offer 0.50%, while a full featured 5 year product could provide 1%
Brokers that do a lot of business, such as sourcing over $100M in mortgages annually (to put this in perspective CAAMP reports that there was $952B of residential mortgage credit outstanding October 2009), typically get better deals from lenders based on the volumes they provide and that’s how some can offer lower rates than other brokers. Additionally, if a lender has funds that become available or needs to hit their quarter/annual targets they can make a lower rate product available to a large broker and this sometimes results in special offers and deals in the market that no else has access to.
So all brokers don’t always offer the same rates or products and that’s why, as we try and provide the most comprehensive mortgage rate market comparison in Canada, we compare different brokers as well as the banks, credit unions and other lenders.
Surprisingly, mortgage broker market share is estimated at between 25-30% in Canada versus other markets such as the UK and US (before the economic collapse) where they are over 60%. Therefore there is a lot of growth available to brokers in Canada, and they offer a great service and we hope many more Canadians will consider talking to one before they take out their next mortgage. If your current bank or lender offers you a better deal, that’s great news. You can now sleep easy as you know that you’ve compared the market and increased the likelihood of getting a better deal after speaking to a broker.