Whether you’re a first-time homebuyer or you’re renewing the mortgage on your existing home, you have a very important decision you’ll need to make when buying your home: where to get the best deal on your mortgage.
For most Canadians, the default options is to get their first mortgage from their local bank branch, then just keep renewing it with the same bank every five years. Sure, this approach is fairly easy, but it has some major flaws that could end up costing you tens or even hundreds of thousands of dollars over your lifetime.
A popular alternative is to use a mortgage broker.
Mortgage brokers do not work for the bank. Instead, he or she works for a mortgage brokerage that has access to many lenders, including banks, credit unions, and dedicated mortgage lending companies. The role of your broker is to shop around, finding the absolute best mortgage for your situation from all of the available options.
When you use a mortgage broker, there’s still a chance you’ll end up with a mortgage from one of the big banks – but only if they have something great to offer you. Your broker will help you sift through all the options and help you decide.
Here are some of the advantages of working with a mortgage broker:
Working with the banks directly can be a huge time commitment. If you’re busy with work, family, and a social life, you likely lack the free time needed to sit down with the mortgage specialist at your local bank. And if you wanted to comparison shop with two or three other banks, you’re now talking about even more of a time commitment.
We’re only talking about the in-person meetings with each one of those individuals. One of the bigger challenges involves comparing all the features, benefits and fine print of the various lenders – trust me, it gets confusing quickly.
A mortgage broker will do all the shopping and comparing for you. You’ll be presented with an option or two that make the most sense, and you’ll have someone who can explain all the ins and outs so you can make a decision without needing a Ph.D. in personal finance.
There’s a lot of misleading advertising from lenders trying to bait people with low-interest rates. A mortgage broker can help you figure out what’s what and, in many cases, will be more successful in finding and negotiating the best rate for you.
While the interest rate is very important, it’s not the only factor you’ll need to consider in the overall cost of a mortgage. For example, different lenders have different rules about how much you can prepay and when, or what happens if you need to skip a payment.
Even more significant are mortgage breakage fees. Life happens, and a great number of people end up breaking their mortgage before the maturity date. If you have a variable rate mortgage, the breakage penalty might be a few thousand dollars. If you have certain varieties of fixed rate mortgage, the penalty could be in the tens of thousands of dollars. A good mortgage broker will make sure you understand all of these details before you sign.
When you’ve started the home-buying process, nothing’s worse than needing a mortgage but running into trouble qualifying for one. The major Canadian banks typically have the least lenient lending policies and can be especially befuddled by people with non-standard situations, such as those who are self-employed or those who are financing an investment property.
This is another area where mortgage brokers can help. With access to smaller, more specialized lenders on top of the big banks, your broker has a lot more options to get you the financing you need. Sometimes people find they can start with a short-term mortgage from a specialized lender then switch to a mainstream bank once they are more established. Mortgage brokers can make this type of scenario possible.
Purchasing a home (whether it’s your first or not) is likely to be the largest financial decision of your life, and a mortgage is a huge financial commitment. That’s why it’s generally a mistake to “jump the gun” and accept the very first offer that comes your way. There is zero risk in exploring a wider range of options outside of your local bank, and that often involves the aid of a mortgage broker.
Keep in mind that mortgage brokers work on commission which is generally close to 1% of the value of your mortgage. So, for example, a $400,000 mortgage comes with a $4,000 commission cheque for the broker. This creates an incentive for them to get you the biggest mortgage they can.