The two lenders that sell the most mortgages through brokers have recently cut their commissions after years of rising compensation for brokers, a sign of a significant shift in the industry.
The cuts come after Canadian Imperial Bank of Commerce, once the largest lender in the broker channel, decided last summer to stop using brokers, which gave the remaining players more clout.
But executives at First National Financial Corp. and Bank of Nova Scotia, which collectively provide more than one-third of all mortgages sold by brokers, say their decisions to reduce the so-called "finder fees" brokers receive was based on the rising costs and crimped profit margins.
"I think all lenders are looking at the same charts, saying 'There has to be ways we can eke a little more out,' " David Stafford, managing director of real estate secured lending at Scotiabank, said in an interview.
The bank sent a letter to brokers last week notifying them of the fee reductions. It last changed the fees about four years ago – by raising them. "We don't make these changes easily," Mr. Stafford said.
The fee reductions have angered some brokers. But Jim Murphy, head of the Canadian Association of Accredited Mortgage Professionals, which represents brokers, said a similar shift occurred in Australia, where brokers proved their value and ultimately held on to their clout. Australian brokers "responded by saying, We're going to show the lenders that we provide a benefit, that we're professional and well-educated and provide a service to consumers on the largest purchase that they made, and that the advice and expertise and knowledge we provide is worth something," he said.
Mr. Murphy noted that about 25 per cent of Canadian mortgages are currently sold through brokers. "The mortgage broker channel is still a great distribution channel for lenders, including banks," he said.
Banks do not disclose their profit margins on mortgages, but analysts suggest that while the margins shrank significantly after the financial crisis, they have been somewhat healthier over the past year or so. One analyst estimated that the spread on five-year, fixed-rate mortgages is likely around one to 1.25 percentage points if it is sold through a branch. Broker fees would eat into that.
Scotiabank is cutting its finder fees on five-year mortgages to 0.75 points from 0.80. The bank sells more than 60 per cent of its mortgages through its branches, rather than through brokers, and it knows it is taking a risk with the cuts because other lenders have not reduced their fees.
"Brokers could vote with their feet if they decide they want to favour somebody else who hasn't moved yet, and some others might see this as a growth opportunity for them," Mr. Stafford said. "So we'll just have to wait and see."
First National cut its fees about two months ago. "We're generally facing increased costs," Stephen Smith, head of First National, said in an interview. One major cost resulted from Ottawa's decision to curtail the growth of Canada Mortgage and Housing Corp.'s portfolio. CMHC is rationing the amount of bulk insurance it sells to lenders, who say they are now paying more for that insurance, which they use to insure large portfolios of loans that they then securitize.