When choosing the best path to securing a mortgage lender in Canada, homebuyers often find themselves weighing the options between working with a mortgage broker or directly engaging with a bank.
I have always used a mortgage broker myself, as I do find they can acquire lower rates of interest. However, I’ve also known people who have had nightmare situations when it comes to mortgage brokers, so it is not a cut-and-dry situation.
Mortgage brokers vs banks – What’s the better option?
If you can find a mortgage broker that is reliable, trustworthy and has a history of delivering for clients, they’re likely to be a stronger option than a bank. Let’s explain.
Banks are established financial institutions that offer their customers mortgages, amongst other banking products. On the other hand, mortgage brokers are licensed professionals who specialize in finding and negotiating mortgages on behalf of their clients.
Brokers are not tied to any one financial institution and can access mortgage products from a variety of lenders. This means they can often find better rates and terms that are tailored to an individual’s unique financial situation.
A major bank, on the other hand, usually has a strong presence and reputation and, for many customers, represents a one-stop shop for all their financial services. However, they typically only offer their own mortgage products, which limits the rate you’ll get.
In the end, a good mortgage broker works for you, while a bank employee works for the bank.
However, there is much more to the decision than this. The decision between using a mortgage broker versus a bank will depend on a multitude of factors, including the buyer’s financial circumstances, the level of personal attention they require, and the complexity of their mortgage needs.
So, let’s dive even further into the subject.
Roles and responsibilities of a mortgage broker and a bank
A broker
Mortgage brokers act as intermediaries, connecting borrowers to a variety of lenders. Think of a mortgage broker as someone who seeks out the best rates from the banks and delivers them to you.
They navigate through offers from banks, credit unions, trust companies, B lenders, and private lenders, aiming to find suitable mortgage options for their clients.
Main responsibilities of mortgage brokers:
- Assess the borrower’s financial situation.
- Research and propose mortgages from multiple lenders to get the best rates.
- Negotiate and be somewhat of the middleman for the client and the lender.
A bank
Banks are more so direct lenders. When you deal with a broker, they will be dealing with the banks, among other mortgage providers.
Simply put, they provide mortgages directly to borrowers. Canada’s top banks, like RBC, TD Bank, Scotiabank, BMO, and CIBC, are traditional options for mortgages among many Canadians.
Main responsibilities of the banks:
- Evaluate mortgage applications based on their criteria.
- Offer only their mortgage products and rates.
- Manage the mortgage process until closing.
Where can I get a mortgage from?
Canadian borrowers have access to several types of lenders, all with different requirements.
- Financial Institutions: These include banks and credit unions. These are typically the strictest lenders you’ll find in the country, as they are heavily regulated.
- Trust Companies: They often provide more flexible mortgage solutions, catering to a varied clientele, including those with unique borrowing needs.
- B Lenders: These are institutions that are more willing to assume higher risks, serving borrowers with less-than-perfect credit histories. They typically don’t follow the strict lending policies that the banks do. However, they often can operate at lower spreads and give more attractive rates due to less overhead than the major institutions.
- Private Lenders: These are individuals or companies that can provide unconventional mortgage options, typically at higher rates. Often, people head here when they cannot get a mortgage through the other institutions.
Mortgage brokers approach these lenders for you
Mortgage Brokers can approach all these entities to secure mortgages on behalf of their clients, whereas banks offer mortgages only from their portfolio.
Each financial institution sets its lender criteria, interest rates, and product offerings, and it’s crucial for borrowers to understand these differences.
A solid mortgage broker can help you do this and has many more tools in their arsenal, whereas a mortgage advisor at a bank will simply sell you that bank’s product.
Pros and cons of mortgage brokers Vs. banks
The pros of using a mortgage broker
1. Variety of Mortgage Products: Brokers have access to multiple different lenders, meaning they can offer a broader selection of mortgage products and terms that can be structured to a borrower’s specific needs, getting them the best deal.
2. More Flexibility for Borrowers: Especially beneficial for those with poor credit, brokers may be able to negotiate with various lenders to find a more favourable rate and terms than a borrower might get on their own, especially with a major institution.
3. Potential for Lower Rates: Mortgage brokers often have the ability to obtain competitive mortgage rates by comparing offers from various lenders.
The pros of using a bank
1. Convenience: For borrowers who already have banking relationships, securing a mortgage through their bank can be more convenient and may allow for easier management of all financial products in one place.
2. Potential for Discounts: Banking institutions may offer discounts or favourable terms to existing customers as an incentive to keep all banking and borrowing within the same institution.
3. Personalized Customer Service: Some borrowers may prefer the face-to-face service that comes with a local bank branch. You won’t really get this with a mortgage broker.
The cons of a mortgage broker
1. Fee structure: Mortgage brokers are often given a finders fee by the lender. The lender can structure these fees to incentivize a mortgage broker to sell particular mortgages. A bad mortgage broker could get you into a mortgage that isn’t necessarily the best for you. This is why it’s very important you have a broker you can trust.
2. Lack of attention: Although I’ve worked with some very good mortgage brokers, the traditional banks will often give you more of a personalized experience.
The cons of using a bank
1. Higher rates: Although you can sometimes get a lower rate from a major institution, this is going to be a rarity. In my entire home ownership period, I have never had a single time where I could get a more attractive rate at a brick-and-mortar bank versus a broker finding an alternative lender for me.
2. Lower variety of products: You’re restricted to a single bank when you deal with that bank. So, you’ll be unable to access the plethora of mortgages a broker could get you. These can range from mortgages with different buyout penalties, terms, promotional rates, and more.
Situations where a broker makes sense almost all the time
Depending on your personal situation, the decision to go to a broker over a bank can be a no-brainer. Let’s look at a few situations.
If you’re a first-time home buyer
First-time home buyers often benefit from the extensive options a mortgage broker can provide.
Brokers have access to more lenders and may help secure better rates that are more favourable than those a bank could offer for someone who is a first-time buyer.
They provide a personalized approach to meet the unique requirements of individuals purchasing their first home, which might include finding a lender with more flexible credit score requirements or offering guidance on government incentives for first-time buyers.
If you’re self-employed
For self-employed individuals with a unique financial situation, securing a mortgage through a bank can be challenging, as banks typically require a consistent income history.
This was the case in my situation. Although I did go through a broker, the broker still reached out to the major institutions for rates. Hardly any of them would offer me anything because of my self-employment status, and if they did offer me something, the rate was absurd.
Alternatively, my broker was able to get me a mortgage from a lender who is comfortable working with self-employed people, and it came at a much better rate than the traditional banks had listed anyway.
Low-income, high-debt, or poor-credit borrowers
Borrowers with low income, a high amount of debt, or poor credit face strict lending criteria from banks. In fact, it’s very likely they just turn you away.
This demographic might find more success with a mortgage broker who can leverage a broad network to find more lenient terms. Brokers can often advocate on behalf of the borrower to secure approval.
How to spot a bad mortgage broker
A bad mortgage broker is one who lacks professionalism or transparency during the mortgage process. They often display a range of negative attributes:
- Lack of Communication: They fail to keep clients informed, causing confusion and delays.
- Poor Advice: They provide guidance that does not align with the client’s best interests. This can be due to a limited understanding of the market or a focus on earning the most commissions possible.
- Hidden Fees: They may not disclose all costs upfront, resulting in unexpected expenses for the client.
- Limited Options: Providing too few mortgage options suggests they might not be adequately exploring or explaining all available opportunities.
If your broker is doing any of the following:
- Unwillingness to answer questions
- Inadequate credentials or references
- Pushing a single lender or type of mortgage without justification
- Making guarantees about rates or approvals
It may be wise to go out and find a new one.
In my opinion, most will be better suited to use a mortgage broker
Although you certainly need to do your research, look at reviews, and get comfortable with your prospective mortgage broker before deciding to move forward with them, I’d say the vast majority of Canadians will be better off utilizing one of them over going to a bank.
The reasons are quite simple:
- Access to Multiple Lenders:
- Mortgage brokers have relationships with a variety of lenders, which means they can offer their clients a wide range of products. Banks only offer their own mortgages.
- Potentially Better Rates:
- By comparing different offers, a mortgage broker could help a client secure a more competitive interest rate, which can save money over the life of the mortgage. This is much the same as an insurance broker, who is constantly looking at different insurance companies to find you the best value for your buck.
- Personalized Service:
- Brokers can provide personalized service, taking the time to understand a client’s financial situation and tailoring their search to the buyer’s specific needs. A bank mortgage specialist is ultimately limited to what products they provide.
- Expert Advice:
- Brokers often (but not always) have a deep understanding of the mortgage process and can offer valuable advice on various mortgage products and terms.
