Once upon a time, we all believed that our friendly, neighbourhood bank advisor or financial planner worked for free. But like the myth of a flat Earth or the notion that retiring is easy, virtually no one believes these myths anymore.
Truth be told, nobody works for free. Financial advisors don’t work for free; your banker doesn’t work for free and mortgage brokers don’t work for free.
So, why should you care? Because there is always the potential for a conflict of interest. For that reason alone, you should understand what mortgage brokers do and how they get paid. Yet, in all the years that I’ve helped to arrange financing, very few people actually ask me how I am compensated.
To appreciate who gets paid what, and why, it’s best to define the different mortgage professional roles.
Bank branch advisor: This friendly and trusted advisor has a sales quota to hit. Yes, you heard it, they must close a certain number of transactions within a certain period of time in order to be given a positive job performance review. But it doesn’t stop there: A bank mortgage advisor’s base salary, pay increases, bonuses, and job promotions also depend on the results they produce.
Typically, bank managers and their team of advisors will have sales quotas for particular products as well as growth targets on the loan/investment portfolios. Their targets are often based on the size of their mortgage portfolio as well as the profitability of the portfolio.
Bank mortgage agent: A mortgage agent salary is typically low (or non-existent), even though they are technically employees of a particular bank. Instead, mortgage agents in Ontario and the rest of Canada earn most of their income through the commissions paid by the bank for each mortgage loan that is completed. These agents work for one bank, which means they only have access to rates and products offered by one brand. Although not as common, some agents will work for several banks, however, they’ll only be allowed to sell another bank’s products once they have met a quota for their own bank’s products or once their own bank has declined a deal.
Typically, bank mortgage agents are paid based on three criteria:
the size of the mortgage
the length of the mortgage term
- and the discount given to you, the client.
Why is it important to know this criterion? Because a mortgage agent can potentially make more money by putting you in a longer term at a higher rate.
Mortgage broker (mortgage agent): These are independent mortgage advisors that do not work for one bank or lender. As such, these professionals are independent and, theoretically, work on your behalf. A mortgage broker doesn’t earn a salary. Instead, mortgage brokers earn a fee, known as a finder’s fee, that is paid by the bank or lender that ends up providing the client with the mortgage loan.
The problem is not all banks or mortgage lenders pay the same finder’s fees for each of their mortgage products. Also, the finder’s fee will increase or decrease depending on the size of the loan and the term selected. Typically the longer the term, the bigger the commission to the mortgage broker. What does all this mean? It means a mortgage broker could earn more finding you a five-year mortgage with one lender, then a four-year mortgage with another lender. However, one competitive advantage of working with a mortgage broker — other than the fact that this person represents many lenders, not just one bank — is that brokers gain no advantage for finding a loan at a higher rate. Quite often this means a broker will competitively shop the market for the best rates at the best terms in order to win your business.
There are times when a borrower must pay a mortgage broker a fee directly. This doesn’t mean that the lender isn’t paying the broker. It just means that the broker is compensated by both the lender and the client. Why? Typically, this additional fee is charged only when the mortgage application is difficult or complicated. These extenuating circumstances will require the broker to do more work. Just like an auto-mechanic, more work means more labour and the broker should be compensated.
If this situation occurs, the broker should be upfront with you. More than likely, the broker will give you a ballpark of how much you’ll have to pay out of pocket. Then, in the final mortgage contract, you’ll have to sign a document stating you are aware of the additional fee paid, by you, to the broker. At no time, however, should a mortgage professional charge you a fee just for applying to get a loan. In fact, no mortgage broker is allowed to charge an upfront fee if they abide by the ethics and regulations of their professional association.
A mortgage is a huge financial decision. You want to find a mortgage professional that not only helps you find a great rate at great terms but can also help with strategies to manage your debt and help accumulate wealth. Most people think that they want the lowest rate – but, in fact, they actually want to save the greatest amount of money. Ask your friends for recommendations or, just like with dentists, lawyers or financial advisors, ask for client testimonials. The key is to understand how each professional works — and how they get paid — and then pick the professional that best understands your goals. Remember, before you sign on the dotted line this decision should be based on your financial situation and not on your mortgage advisor’s bank account.
No mortgage team in this country does luxury home financing or borrowing for wealth creation than our team. We have the business track record and formal education to support your plan and to help you achieve your financial goals. Volatile markets always create opportunities. Call our office today to discuss how we can help at 1-855-410-9905 or email ClientCare@MortgageManagement.ca.