Mortgage brokers can be very helpful during your home buying process, as they help you to get the financing that you need to purchase. Similar to real estate agents, as a buyer you will not directly pay a mortgage broker for their service. This is because their fee is incurred by the lender who is loaning you the money to purchase the home, as a finders fee.
As a mortgage broker, they are able to work in your best interest, considering that whichever option you choose, they will receive their fee. As well, mortgage brokers work in an industry reliant on referrals and good customer service, meaning it is crucial to work in their clients best interest. However, it's also important to know that a mortgage broker doesn't actually work for you, with the mortgage lender paying their commission.
Since a mortgage broker will make a commission for every mortgage they arrange, they are incentivized to make getting you a mortgage work, no matter your situation. This is partially why working with a broker as someone with bad credit or that needs a self-employed mortgage is so common, with the ability of your broker to do what it takes to get it done.
A mortgage buy down is when a borrower and a lender agree to pay more upfront in exchange for a lower mortgage interest rate. Each buy down impacts your mortgage rate by 1 basis point or 1/100th of 1%. This means if you buy down an additional five points, your mortgage rate will decrease by 0.05%.
Since the job is solely dependent on earning commissions through working with clients, a mortgage broker’s pay can be very volatile. For example, if a broker has many clients, they can earn large amounts of money through commissions. However, without a good reputation or if they are new to the industry, they may earn very little in commissions. With the average mortgage broker commission being between 0.5% and 1.2% of the mortgage amount, the average mortgage broker would bring in between $2500 and $6000 in revenue for brokering a $500,000 mortgage. If a mortgage broker is doing 25 mortgages a year with this average mortgage size, they will be earning between $62,500 and $150,000, before expenses. After expenses, which generally are ~20% of their commissions, a mortgage broker would likely earn between $50,000 and $120,000 per year.
Besides just earning up-front commissions from a client signing a mortgage, mortgage brokers may have other commission structures:
The first is through trailer fees, which is when the mortgage broker is paid for every year the mortgage holder has the mortgage, rather than with upfront commissions. This may cause a broker to recommend against switching mortgage lenders or not renewing your mortgage, as trailer fees are paid yearly.
Another way of payment is through renewals, where the original mortgage broker is paid when a mortgage holder renews their mortgage. Although your mortgage broker will be compensated if you renew your mortgage, this may not affect them considering that they will be compensated as well if they connect you to another lender instead.
For some private mortgage lenders who do not provide a commission to a mortgage broker for bringing in business, you may be required to pay your mortgage broker's fee. If this is the case, you and your mortgage broker will decide the fee before the transaction is finished, and could be around 1% of the mortgage amount.
As well, if you are to cancel your mortgage before you close the deal, you may be required to pay a cancellation fee of up to 1% of your mortgage amount, or it may be a flat fee. You may have this fee if you cancel the mortgage after receiving mortgage approval, as it would hurt the mortgage broker's efficiency rate.
Overall, with mortgage sizes becoming larger and larger as home prices in Canada rise, along with record sales numbers over the last year, the mortgage broker industry as a whole has done very well.
|How A Mortgage Broker Gets Paid|
|Commissions||Generally between 0.5% and 1.2% of the mortgage amount, paid by the mortgage lender.|
|Trailer Fees||Brokers may have a commission paid yearly for the mortgage business they brought in, instead of an up-front commission.|
|Renewal Fees||Commissions paid to a mortgage broker when a mortgage that they brought in is renewed.|
|Mortgage Cancellation Fees||Will vary based on the mortgage broker, but may be a few hundred dollars or up to 1% of the mortgage amount.|
Mortgage brokers can expect to pay around 20% of their commissions towards operating costs, which can especially be high when attracting and finding new clients. A major cost of being a broker is the franchise cost they may face, if they are working under a large mortgage broker franchise such as Dominion Lending Centres or Mortgage Alliance. As well, advertising costs, technology costs, and the cost to rent the office are also major expenses they will face.
No, mortgage brokers work off of commissions, meaning they will only get paid if they bring business in. This makes the job riskier for new entrants to the industry, without the stability of having a stable paycheck. On the contrary, if a mortgage broker is able to bring in a large number of clients and help them successfully find a mortgage, they do have the potential to earn large commissions.
As a home buyer it may be worthwhile to work with a mortgage broker if you are having trouble finding a lender, or if you do not want to or have the time to shop around for the best mortgage rate. Since a mortgage broker will be able to compare different mortgage rates and mortgage offerings for you, you will save yourself the time it would take to do this online and to meet with lenders. As well, many lenders work exclusively with mortgage brokers, which means even if you wanted to, you may not be able to compare all the options to find the best one. If you are having trouble finding a lender because you have a bad credit score, insufficient income, or are self-employed, a mortgage broker can help connect you with lenders who can help.
Besides helping you find the best mortgage rate, mortgage brokers may also be able to help you get a better mortgage rate by buying down your rate. This process is when a mortgage broker will give part of their commission so that you will get a better mortgage rate. There are limits related to buying down a rate, considering the mortgage broker will still want to get paid and may only offer a small portion of their commission. Even just a 5 basis points reduction on your mortgage rate through a buy down however can save you hundreds of dollars over your term. Usually buying down 1 basis point on your mortgage rate will cost 4 basis points from your broker’s commission, but will vary depending on the mortgage lender and term. This makes it important to negotiate with your mortgage broker, especially if you have a large mortgage amount you are getting, as it will save you money over your term.
Mortgage representatives working at a bank will likely be getting paid a salary, in addition to potential commissions they receive or bonuses. This may make a mortgage broker more invested in helping you get a mortgage, as they will not receive pay if they do not get you a mortgage. As well, mortgage brokers will be less tied to one lender than bank representatives. This is because brokers are independent contractors rather than bank employees, while mortgage representatives at banks are only able to offer mortgages from that bank.
In Ontario, a mortgage broker will be required to inform you up front of any and all fees, before an agreement can be signed. As well, for mortgages of less than $300,000, you will need to get approved by the lender before a mortgage broker can collect their fees.
Besides working with a mortgage broker to find a lower rate by shopping around, mortgage brokers offer other benefits. They can help you to get a mortgage under many situations, which can be very helpful for buyers who are facing a roadblock to getting a mortgage. As well, a mortgage broker can explain the process to you and help you through the financing part of it, making it less stressful.