Here’s part 6 of my 10 step series on mortgages here at Financial Uproar every Wednesday. Every step of the process will be covered from the application to qualifying to tips and tricks to save money on your mortgage and everything in between. To read all of these just click on the category Mortgage Basics.
Traditionally, the process for getting a mortgage was the same for all borrowers. You went down to the bank, had a talk with your friendly neighborhood banker, and he either gave you the mortgage or told you to go pound dirt. As time went on and Canadians got more choice, mortgage brokers started gaining popularity. They’ve gained approximately a third of market share, putting a significant dent in the dominance of traditional banks.
Which should you use, a mortgage broker or banker? Each have their own advantages and disadvantages.
What’s a Mortgage Broker?
For those of you unaware, a mortgage broker is a middleman in between the borrower and the lender. The borrower approaches the mortgage broker, the broker takes all the borrower’s information and then shops that deal to a lender. The broker has access to lots of lenders, including some lenders that will fund deals a traditional bank won’t touch. Once the lender gets the deal, they either say yay or nay, usually accompanying an approval with a list of conditions. The broker collects all the paperwork needed to satisfy those conditions, and the deal gets done.
Advantages To Using A Banker
The first advantage to using a bank employee is the lack of paperwork required. Of course, this advantage only applies if you use your own banker, and not one from a competing brand.
When the borrower uses a mortgage broker, they have to prove everything they’ve stated in their application. The new lender asks for copies of bank statements, pay stubs, and the like, to prove the borrower has the required down payment, they make as much as they said, etc. As a former broker, I know that getting all this paperwork from a disorganized borrower can be a pain in the ass. I also know that lenders will often be very cautious with their paperwork, sometimes rejecting paperwork they don’t find satisfactory.
When the borrower applies at their local branch, a lot of this paperwork isn’t required because the bank already has it on hand. This can make the mortgage process much easier. Many borrowers will take the path of least resistance, especially during the stressful time of buying a house.
Other borrowers will value the relationship they have with their banker. They have fond feelings for their loans officer because they’ve borrowed from the bank before, or perhaps they just think she’s cute. For whatever reason, many borrowers feel a loyalty to their bank. Confidentiality plays an issue with this point as well. Most people don’t want all sorts of people knowing their financial information. They reason that their bank already knows all this stuff, so they aren’t giving that information to anyone else.
Many mortgage brokers will tout the large number of lenders they have access to as a reason for using a broker over a banker. The reality is if the borrower fits into the standard mold, most brokers have two or three lenders they split the majority of their business with. The broker will often have an assigned underwriter they work with, someone who they feel does a good job. Like a lot of borrowers, most brokers take the path of least resistance too, sometimes sacrificing the best deal for the customer in the interest of an easier deal.
Advantages To Using A Broker
While the banks have gotten better in their rate transparency, the borrower still often won’t know if the rate being offered by the bank is the bank’s best rate or not. Banks still enjoy playing the posted rate game, offering naive borrowers a crappier rate, in an effort to make the bank more money. A borrower who isn’t mortgage savvy really has no idea whether they’re getting the best deal or not. Mortgage brokers are much more transparent in their rates, each borrower sent to the same lender gets the same rate.
Mortgage brokers are generally more flexible than traditional bank employees. Brokers are usually willing to come over to a borrower’s house to do the application, pick up documents, etc. Brokers often meet clients after supper and on weekends, getting a head start on deals outside of traditional business hours. The banks are starting to combat this advantage by introducing mobile mortgage specialists, commission based salespeople who have the flexibility of mortgage brokers, only offering one bank’s products.
Brokers are paid on completed deals only. Therefore, a broker is likely to try harder to get a deal done than a bank employee who is paid salary. If a borrower has a tough deal to fund, the tenacity of a broker is definitely an advantage.
Which Should You Use?
Being that I’m not a broker anymore, use whichever you want. It’s not like I care anymore. 🙂
Each borrower has to figure out whether they value the relationship with their existing bank (at the cost of perhaps paying more) or the flexibility of a broker (at the cost of more paperwork). Each path has its own advantages and disadvantages, leaving the borrower to decide which is best for them. Brokers continue to gain market share, a growth that might decline as banks do a better job competing with the advantages a broker brings to the table.