Advantages and disadvantages of using a mortgage broker

From my CBC radio national column, September 3, 2009:

To use a mortgage broker or not to use a mortgage broker? Once you've got that dream house picked out, here's some advice on how to pay for it .

There was news last week that the federal privacy commissioner is investigating a number of mortgage brokers because of the way they may be treating client information. So today we're looking at the advantages and disadvantages of using a mortgage broker. Here's everything you need to know before you sign on the dotted line.

The mortgage broker sector has grown in recent years

Once fairly rare, the use of brokers has become a lot more common, especially among younger, first-time buyers.

While mortgage brokers are responsible for about 30 per cent of the mortgage business in Canada, a CMHC survey from earlier this year showed that 44 per cent of first-time
buyers used mortgage brokers in 2009. Compare that to 35 per cent in 2007.

So the share of the $235 billion mortgage market handled by brokers is clearly growing.

Advantages of using a mortgage broker

There are many reasons for using a mortgage broker.

First, they can shop your mortgage to all of the big banks, non-traditional and event private lenders, so that raises the competition for your business.

Second, by pulling your credit report only once, they can shop your deal to numerous institutions without hurting your credit score.

Lastly, their marketed advantage is that they'll do the rate negotiation for you. If you have good credit, a stable job with good income numbers - basically, all the criteria the big banks are looking for and don't have the time or inclination to haggle with the banks over your interest
rate, then they can be a great idea. You know you're getting the best rate they can find.

That makes mortgage brokers sound like they could be a good option for many people. So why has the privacy commissioner decided to take a closer look at the business?

According to a Globe and Mail report out early this week, the privacy commissioner is auditing a number of mortgage brokerages because of concerns about the security of borrowers' personal financial information. The audit, which began this month, is looking into possible misuse of consumers' information. The commissioner is concerned about the potential for identity theft and fraud if this information ends up in the wrong hands, which is a serious issue. Here's a link to the Globe article - http://www.theglobeandmail.com/report-on-business/ottawa-probes-mortgage-brokerages/article1270036/

We've all heard about the sub-prime mortgage crisis in the US, with some of the blame being placed on overzealous brokers. So what should you look for if your considering using a mortgage broker for the first time?

Most mortgage brokers are above board. And many are in favour of tough privacy rules in order to protect the integrity of their industry.

Still you have to protect yourself. And if the main reason you're considering using a mortgage broker is that you're not an ideal candidate for a conventional mortgage at a Schedule one bank - that's the big guys that have to follow the rules of the bank charter--you should know that the broker may end up presenting ideas for private mortgage options, some that could be defined as sub prime.

This might seem like a good thing, because at least you're getting access to credit. But even though as a eager home owner you just want to get your hands on that house now, you need to step back and ask, at what cost?

Getting into a mortgage like this can be extremely expensive with high fees and interest rates.
So although home ownership is a worthy goal, not at any prince. And remember, the job of these individuals is to get you into a mortgage, period.

Anything else to keep in mind?

Yes, it's important to remember that you may not be getting a full selection of quotes. For example, the Bank of Montreal recently decided to stop offering its mortgages through mortgage brokers. This wasn't due to a specific problem with specific mortgage brokers; it was more of a
strategic decision about how they would sell their products. So you should know you're not going a full sense of what's available if you limit your mortgage shopping to one broker.

How should someone proceed if they want to do their own mortgage shopping?

First, get a copy of your credit report and score. You can do that for around $24 bucks at http://www.equifax.ca/ or http://www.transunion.ca/. With your score in hand, when you shop around at the different banks, you can tell them that you're not wanting to go through the approval process just yet. If your banker has your score and basic details such as income, net worth, etc. they can give you an idea of what rate they'll give you and if you'd be approved. Once you decide on a bank to deal with, they will have to pull your credit report, but by bringing it in yourself and asking doing a "pre approval" interview, you won't have a bunch of banks pulling your report and pulling down your score.

Some final tips for mortgage shoppers

Get on the internet before you call your banker and be armed with the best rates on the market. Remember, like everything else in your financial life, your mortgage is negotiable. Just asking for a simply rate reduction from your bank can save you thousands And don't feel you have to use the mortgage broker recommended by your real estate agent.

If you do choose to opt for a mortgage broker, I'd suggest calling up a Certified Financial Planner for some referrals. Unusually these pros have vetted a few and always shop around. A CFP isn't generally allowed to be paid a referral fee, so, they're likely to give a more honest referral. Plus, they have no vested interest in getting the deal approved, while the real estate agent does.

Before you even apply for a mortgage with these folks, get the bottom line costs to you, their fee, hidden fees, the interest rate and details if the deal will be with a sub-prime lender.