Among the many tough decisions first-time home buyers face is whether to use a mortgage broker or rely on a bank to secure a mortgage.
As the housing markets in some of Canada's biggest cities continue to heat up, buyers are looking at skyrocketing prices at the same time that the federal government's concern about the situation resulted in several rule changes over the past few years, making it harder for some to get mortgages.
The latest, passed last fall, requires those who are applying for an insured mortgage to show they can afford to pay it back even if interest rates rise. This stress test uses the Bank of Canada's posted rate and means that some applicants are being approved for lower mortgages than they would have been before the rule change.
Previous rule changes included tightening lending rules for homes worth more than $500,000, lowering the amortization period down to 25 years for high-ratio insured mortgages in 2012 and tightening processes for mortgage approvals based on income, which can affect the self-employed.
This has left some borrowers with less negotiating power with the banks. But even those who would easily be approved by a bank may wonder whether to turn to a bank or a broker for a mortgage.
Jessi Johnson, a mortgage broker in Vancouver and the head of Jessi Johnson Mortgage Team, says using a broker allows for clients to have a one-stop shop when it comes to playing the field with lenders.
"If you go to the bank, and if they provide their approval, they may not have the most favourable options. Or, if they simply decline the file, you have to start from scratch with another lender," he explains. "Whereas with a broker, we can take you to 40 lenders and it's only one credit check. Mortgage brokers have access to lenders that a bank doesn't, because a bank has access to just that bank."
A bank, however, can help clients paint a wider financial picture. And while purchasing a home is a large financial decision and will affect home buyers for many years, it is just a part of a larger personal banking conversation, says Nicole Wells, vice-president of home equity finance at Royal Bank of Canada.
"People are often thinking of the now, and they're not necessarily thinking of the future. They often seek the lowest rate, understandably, as this is a big expenditure. They want to make sure they're getting the best rate and the best product features and they think by going to a broker that might be possible," she explains. "But what a bank like RBC offers is an army of expertise that helps not only in the present, but in the future as well."
She adds that while some smaller financial institutions and lenders may provide slightly better rates than a big bank, borrowers should think about the potential effects of future market volatility.
"A bank like RBC offers stability through the cycles, and I don't think first-time home buyers really think about that. What if there was vulnerability within the bank that a broker put them up with? With RBC, we've been here for 150 years, so we're here for them through the cycles of every part of their life," she says. "What a broker doesn't offer is things like advice on retirement, and what other goals you may have."
But while a bank creates a steady pillar for first-time home buyers to lean on, the laser-like focus on mortgages – and mortgages only – by brokers can be a key asset as well.
"In this environment over the last four or five years, and with all the government regulations and the tightening of the regulatory bodies, you really need a specialist. I do real-estate secured lending. I do mortgages. I don't do anything else," says Darren Keck, a mortgage agent with Mortgage Brokers Ottawa.
"Sometimes when people walk into a bank and see their financial advisor, sometimes that person knows mutual funds compliance, they know business banking, they know about car loans, and the ins and outs of their job. But they may do 15 mortgages a year and not 200."
There are, however, many questions that mortgage brokers would not have the capacity to answer.
Barry Gollom, vice-president of mortgages and lending for Canadian Imperial Bank of Commerce, says having someone who can provide advice on a first-time home buyer's broader financial needs, and not just on the borrowing solution for a home, is key.
"You want to ensure you're working with someone who can have that fulsome conversation, or at least bring that expertise to the table, because the discussion really needs to start long before the house hunting begins. What are your personal and financial goals? Do you have a family? Are you planning to start a family? Will you take time off work? What about retirement? What about an RESP to fund your child's education?" he says. "You have to connect with somebody who looks at it beyond just the mortgage transaction."
As with any major financial decision, buyers need to educate themselves to a certain extent.
"The whole process is very stressful without proper education," says Mr. Johnson, the mortgage broker. "There are a lot of issues that can arise, and you need to do your due diligence."