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decoding the mortgage market

You're probably used to seeing cancellation fees from hotels, airlines and cellphone providers, but not when you're getting a mortgage.

Such fees are slowly becoming more common as a small but growing number of discount mortgage brokers are tying cancellation fees to rock-bottom rates. Here's why.

Many Canadians use mortgage brokers, who have access to multiple lenders, to get the lowest possible mortgage rate. To get the best terms, lenders require brokers to maintain high "closing ratios." That means brokers must generally complete three out of four mortgages that they get approvals for.

But as mortgage shoppers become more informed and more rate sensitive, many become less loyal. And that is leading to an increase in costly cancellations, as borrowers use one lender's approval to get a better deal with another lender or broker.

One may rightly ask, "What's wrong with that?" Consumers should shop aggressively for the best mortgage deal around, and pitting lenders and brokers against one another is a sound financial strategy.

The issue, say some in the business, is that consumers can enjoy the same benefit simply by shopping around their rate quotes. It's when they take the extra step of asking for a full approval, and then cancelling that approval, that the problem arises.

In order to stem these cancellations and preserve lender relationships, more brokers are instituting cancellation fees.

A case study
True North Mortgage is one of the nation's largest brokerages, having closed almost $700-million worth of mortgages in 2012. Earlier this year, it started charging a 1 per cent cancellation fee in cases where:

a. A client asks True North to obtain a firm lender approval
b. True North arranges that approval at the client's requested lender
c. The client then asks another lender to match True North's rate, and
d. The client cancels his or her True North application.

Simply asking a broker to shop for rates entails no fees. And if it does, you should find another broker. Cancellation fees like the one outlined above usually apply only if a client has already received a quote and says, "Yes, I want you to approve me," – and then abandons that approval to go with another lender.

"If a client pulls out for legitimate reasons, or if it's for a better rate, then we understand," says True North CEO Dan Eisner. For example, if the client cancels because of circumstances beyond their control, like a purchase falling through, the fee would not apply. But if the person uses True North's low rates and approval solely as leverage to get a rate match from their bank, a cancellation fee may apply. Mr. Eisner estimates less than 1 in 10 approved applicants cancel because of the rate.

Consumer and industry reaction
Anything that restricts consumer options is bound to be criticized and there are undoubtedly some people who will view these charges as another fee grab.

So far, however, the fee isn't scaring off True North's customers. Despite introducing it this year, the company's volume has risen 50 per cent. "A client who doesn't sign [our borrower agreement when applying] was never going to be a customer anyway," Mr. Eisner says. He admits that it's occasionally a hard sell, since most banks don't charge cancellation fees (yet). But brokers who do must provide better rates, better advice and a better customer experience.

"The biggest competitors for brokers are the banks, and brokers have long been impacted by banks matching rates," says Jim Murphy, President and CEO of the Canadian Association of Accredited Mortgage Professionals. One of the major benefits of using a broker is that you do not pay, he added, especially on a well-qualified deal.

Opinions in the mortgage industry are mixed. Realtors have had exclusivity agreements for years. And in the U.S., fees are commonplace, with a median mortgage application fee of $365 (U.S.), according to the Federal Reserve. But $365 is a lot more tolerable than 1 per cent standard cancellation fee, which amounts to about $1,750 on the average Canadian mortgage.

Another challenge with cancellation charges is that enforcing them can get messy. And there are also disclosure risks if clients are not explicitly made aware of such fees (e.g., if they're buried deep in the paperwork). As a result, some brokers believe they could reflect poorly on the industry.

Will they stick?
In an ideal world, the lender or broker with the best overall deal should win the client's business. That seems logical. But cancellation fee advocates say that doesn't mitigate customers who ask for a complete approval with little intention of closing with that lender. That increases costs in a market with razor thin margins, costs that are eventually transferred back to consumers.

Going forward, there will unquestionably be more lenders and brokers that tie better rates to such fees. Whether it's a trend with legs will depend on how superior the value is, and if no-fee lenders or brokers are willing to match that value. In the end, mortgage consumers will vote with their signatures.

Robert McLister is the editor of and a mortgage planner at VERICO intelliMortgage, a mortgage brokerage. You can also follow him on twitter at @CdnMortgageNews.