Welcome to Mortgage Rundown, a quick take on Canada’s home financing landscape from mortgage strategist Robert McLister.
Most consumers aren’t mortgage experts, they rely on professional guidance. The problem is, not all mortgage brokers are created equal.
So how can you sidestep the ones that’ll cost you money with inferior advice or mismanagement of your application?
By asking a lot of screening questions, said Huston Loke, executive vice-president of market conduct at the Financial Services Regulatory Authority of Ontario (FSRA). Here are four key queries that he suggests, with my comments underneath:
“What types of mortgages do you have experience handling?”
An FSRA survey, released Wednesday, found only 52 per cent of respondents asked the broker what kinds of mortgages they had experience with. Suppose, for example, you are self-employed without salaried income, buying your sixth rental property or have a credit score under 600. If your broker hasn’t closed at least 15 per cent to 25 per cent of their mortgages for clients like you, they may not be experienced enough to get you approved, let alone get you the lowest overall borrowing cost.
“How many lenders do you work with?”
Mr. Loke said there’s no firm rule here. But if you’re well qualified and looking for the lowest possible borrowing cost, and the broker says they send most of their business to only one lender, that’s a red flag. The broker may claim to get “volume discounts” and better service by favouring one lender, and that may be true. But operating that way sacrifices comparison shopping. No single lender has the best deals all the time. In my own experience, well-qualified borrowers are best served by brokerages that send at least 5 per cent of their volume to at least six to 10 prime lenders. And you want brokers with “status pricing” – preferred pricing that is volume-based – at most of these lenders. That way, the agent is more likely to have access to the lowest broker rates.
“What’s the process I can expect when working with you?”
If you’ve got a tight closing date or atypical needs, make sure the broker’s process is able not only to get you approved, but to close your mortgage on time.
“How do you get compensated?”
Or better yet, “How does compensation affect the recommendations you’ll give me?” A minority of brokers will steer you to a particular lender mainly to build their status or earn volume-based compensation. FSRA’s survey found that only 31 per cent of respondents asked how their mortgage broker was compensated.
Other warning signs
In my personal experience, alarm bells should also go off if:
1. The broker quickly quotes a rate without taking time to understand your financial circumstances, qualifications, risk tolerance and five-year housing plan.
2. The broker has been in the business less than two years, is not full-time and/or closes fewer than one mortgage a month, on average. That raises the chances they’ll make mistakes, even if they have supervision. I’ve been in this business for 14 years and there are still things I learn every week. Brokers who don’t know what they don’t know are your biggest enemy.
3. The broker doesn’t specialize in the financing you need. If you need a non-prime mortgage because you can’t prove income in a traditional manner or have credit issues, steer clear of brokers who do 95 per cent of their volume with traditional prime lenders. When you’re not a bankable client, you need a non-prime specialist, and non-prime lenders have very different rates, products, procedures and risks.
4. The broker badmouths lenders they don’t have access to, for no good reason. Mr. Loke confirmed that while brokers must recommend suitable mortgages, that doesn’t technically mean the most suitable mortgage in the country. No professional will have knowledge of all mortgages, he said, and many lenders don’t deal with brokers at all.
Looking out for you
Provinces such as Ontario don’t require mortgage brokers to operate as a fiduciary in a strict legal sense. That means there’s no obligation for a broker or banker to act in your full best interest.
Albeit, brokers must “take reasonable steps to present products suitable to the client,” Mr. Loke said. FSRA is serious about this, although I think it could enforce this more.
Brokers also have obligations “in terms of disclosing material information and conflicts of interest,” such as compensation and fee conflicts.
Mr. Loke cited an example where you tell the broker you might have to move or increase your mortgage before your five-year term is up. In that case, if the broker recommended a five-year fixed mortgage with costly prepayment penalties and inferior portability and refinance features, they might be violating regulations.
Mr. Loke said he’d look for three things in a mortgage broker if he were getting a mortgage himself: 1) assurance the broker could get the mortgage approved and closed on time, 2) a firm grasp of which suitable options offer the lowest cost, and 3) someone who can clearly overview the features and risks of different mortgages.
“More than three quarters of those with a mortgage trust the person/company they deal with to get their mortgage,” the FSRA survey found, so most brokers do a great job of looking out for their clients. But you’ve got to avoid the bad apples, and this goes for bank mortgage advisers too.
Mortgage rates climb
“Rate normalization” continued this week with the lowest widely available five-year fixed jumping 10 basis points from last week. The lowest comparable variable rate edged four basis points higher as funding costs, proxied by bankers’ acceptance yields, ticked higher ahead of coming Bank of Canada rate hikes. (There are 100 basis points in a percentage point.) The biggest boost to variable rates will likely come next week or in March, when the Bank of Canada is expected to hike its key lending rate.
Rates in the accompanying table are as of Wednesday, from providers that lend in at least nine provinces and advertise rates on their websites. Insured rates apply to those buying with a down payment of less than 20 per cent, or those switching a pre-existing insured mortgage to a new lender. Uninsured rates apply to refinances and purchases of more than $1-million and may include applicable lender rate premiums.
This & that
- Some economists, such as Scotia Economics, suggest the Bank of Canada is behind the curve on inflation. Not coincidentally, bond traders are pricing in an 86-per-cent probability of a rate hike at next Wednesday’s Bank of Canada meeting.
- Inflation hawks would love to see a 50-bps rate hike, but a hike that big is less than a 1-per-cent probability, RBC Dominion Securities said in a report Wednesday. The last 50-bps hike was in 2000.
Robert McLister is an interest rate analyst, mortgage planner and columnist. You can follow him on Twitter at @RobMcLister.