Photo: James Bombales
When buying your first home, it’s expected that you’ll view a variety of houses to find the one that best fits your needs. Mortgages are no different — having an array of amortizations, rates and lenders to choose from allows you to customize your mortgage to your lifestyle. With the help of a mortgage broker, you’ll have access to the widest range of mortgage products on the market — everything you’ll need to find the best match.
A mortgage broker is a provincially-licensed professional that acts as the middleman between the borrower and the lender. A broker assists a client during the mortgage application process to determine the best payment schedules, terms and other mortgage components for their needs, including the most competitive interest rate. Independent from major banks, brokers can provide an assortment of mortgage products to their clients from both A, B and private lenders.
“I have a wide range of products and services that could possibly be more suited to the individual needs,” says Jeffrey Kioussis, a mortgage agent from Capital Lending Centre. “A bank will [exclusively] offer their products and services. I also deal with the majority of the banks and I’m able to get preferred rates.”
Despite the greater range of products available and less preferential treatment for big banks offered by mortgage brokers, less than half of first-time home buyers work with one. According to a 2018 survey by the Canada Mortgage and Housing Corporation, four out of 10 first-time and repeat buyers contacted a mortgage broker to learn about mortgage options. Jerome Trail, Broker of Record at the Toronto-based mortgage brokerage, The Mortgage Trail, attributes a larger big-bank marketing presence and a host of online discrepancies about brokers as the reasons for why new buyers may not fully understand the services of a mortgage broker.
“Because of the Bank Act in Canada, the charter banks are unbelievably protected in a variety of ways,” says Trail. “There’s no such thing as branch-to-branch competition between the six national banks.”
Considering working with a mortgage broker for the first time? Here, Trail and Kioussis answer three essential questions about working with a middleman.
What does a mortgage broker assess?
If you’re ready to make your first home purchase, it’s time to secure your mortgage financing. But, before you begin canvassing potential lenders, your broker will need to assess your financial circumstances to determine what mortgage makes sense for you.
Mortgages are not one-size-fits-all — streams of income, debt, tax benefits and assets are taken into account on a case-by-case basis. This criteria is examined in your mortgage application — the proposal your broker will put forward to lenders to determine your eligibility to borrow your preferred mortgage.
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“Not everyone fits into the same bulk bracket, whereas it’s up to me to determine where I can actually place them and who I’m able to get the best product [from] for what they’re needs are,” says Kioussis.
Federally regulated mortgage lenders are restricted on whether they can lend to you based on your debt load. A mortgage broker will therefore conduct a Debt Service Ratios Analysis to see if you meet affordability guidelines. Determining a borrower’s debt service ratios involves two calculations: Gross Debt Service, which considers your future mortgage payments, property taxes and utility expenses, and Total Debt Service, which weighs your monthly debts such as credit card bills, car loans and leases. CMHC caps GDS at 35 percent, and TDS to 42 percent per household. If your debt ratios exceed these percentages, you will have difficulty qualifying for A-lender mortgages. A Debt Service Ratios Analysis is an additional measure alongside the mortgage stress test to prevent overextending homeowners on their mortgage payments.
Financial circumstances can change, as can your debt ratio. Maternity leave, a lost job or a major housing repair can alter your household budget, so in the initial debt ratio calculation portion of the mortgage application, a broker will consider your future financial plans to ensure safe mortgage payments. Kioussis discusses his first-time buyer’s prospective financial commitments, like vacations, family-building and parental leave, in this stage of the mortgage application process.
“The responsible aspect of borrowing comes into play at this point, which is something that I need to sit down and explain to clients to make sure that they’re aware of everything that they’re going to be getting involved in,” he says.
Your mortgage broker will also take a credit check as part of the application. Unlike a bank where your credit score may be pulled multiple times, a mortgage broker will take your score once, which will be valid for a 30-day window for the same type of loan.
What happens to my mortgage application?
Once your mortgage application is complete with your personal financial information and details of the property you wish to purchase, the broker will submit the document to multiple mortgage lenders. Trail, for instance, has access to up to 30 different mortgage lenders, though he tends to stick with a dozen. Trail explains that mortgage brokers can work in their clients’ best interest by providing access to lenders who do not impose large post-rate inflated or interest-rate differential penalties.
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It is common to break your mortgage term before it ends. Within Canada’s average mortgage term of five-years, borrowers who get divorced, move or leave the property market may need to break free of their term, but it’s difficult to avoid the bank penalties for doing so.
“In Canada, there are only two ways that you’re not going to incur a penalty,” says Trail. “Either you pay your mortgage down to zero, which very few people do, or, if you sell your property and the closing date matches the maturity date of your current mortgage. Those are the only two ways that you will not incur a penalty.”
Penalties can quickly climb into the tens of thousands. As Trail works in the GTA where mortgages average in the $500,000 range, penalties could equal up to $25,000. When crafting your mortgage application, Trail explains that it’s important to consider the length of your mortgage term, as well as other lenders who will charge much smaller penalties for breaking a term.
“Your exit strategy should be first and foremost because it’s really the largest impact that you’re going to have on that financial instrument,” he says.
Included in your mortgage application are details about the property you wish to buy. Mortgage lenders, Trail warns, have varying standards about the properties they grant mortgages on. Lenders may turn down a mortgage or request mortgage conditions on a property they feel is a risk. For instance, Kitec plumbing, found in older homes, is known to corrode quickly — a mortgage lender may refuse to finance a property with Kitec plumbing. Trail emphasizes that clients and their team of mortgage brokers and realtors need to work together in order to prevent applying for catch-22 properties. Making efficient use of mortgage applications, he says, saves a whole lot of pain down the road.
“The buyers do not understand, when they place that offer and they give that deposit, to that real estate company in trust, what a pain it is to get that money back if we can’t make the deal happen,” he says.
Photo: James Bombales
Once your application has been approved by lenders and mortgage offers have been provided, Kioussis explains that a mortgage broker will outline the different aspects of the offers on the table and walk the client through the selection process. Once a lender is chosen, further negotiation may take place before the final mortgage agreement is signed.
“It’s ultimately not my responsibility to choose for the client, I’m just trying to guide them. It’ll all depend on what the client’s needs and goals are too,” he says.
How does a mortgage broker make money?
The mortgage broker profession is one based heavily on word-of-mouth. Brokers are paid through lender referral fees, so their service to clients is essential to generating future leads. Thirty-four percent of broker referrals alone come to clients from real estate agents, according to CHMC. When finding a broker, Kioussis says to look for someone who is attentive to your needs and responds within a timely fashion.
“If they reflect your same ideals and goals, if they’ve asked you the right questions, and if you feel comfortable enough to be able to disclose information, and you have enough faith in the broker that they will be able to get you the product that you’re looking for in a safe manner, I think that’s paramount in the client-customer relationship,” he says.
The mortgage application process can be a long one, so Trial emphasizes that fostering an excellent working relationship between the buyers and their realtor is crucial for brokers. As Trail works on the seventh application for one of his first-time buyer couples, he says that endurance is a requirement in today’s competitive markets.
“It’s critical for the broker to be very patient.”
