Mortgage Coming Due? Why Mortgage Brokers Could be the Hidden Gems You’ve Been Ignoring!

The Ultimate Guide to Choosing Between a Mortgage Broker and a Bank

Acquiring a home stands as one of the most significant financial decisions you’ll encounter. Hence, it’s crucial to approach this decision with careful consideration. As with any substantial life decision, whether financial or otherwise, various options are available. Two noteworthy avenues include working directly with a bank or engaging the services of a mortgage broker. To assist you in determining the optimal choice for your individual financial circumstances, we will examine the advantages and disadvantages associated with each option.

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Mortgage Broker or Renew through my Bank? What’s Better?

Ever wondered about the perks of working with a mortgage broker rather than a bank? The answer is intricately tied to your financial situation, negotiation preferences, and comfort with paperwork. Discover the key factors that influence whether a mortgage broker or a bank is the right fit for you.

Inquiries — What you need to know

A soft inquiry, also known as a ‘soft hit,’ refers to a credit check that registers on your credit report exclusively for your viewing. It remains invisible to others, ensuring that it does not impact your credit score. Common instances of soft inquiries involve personal requests for a copy of your credit report or companies seeking to update their records regarding an account in your name.

Conversely, a hard inquiry, or ‘hard hit,’ is initiated by a lender and leaves a trace on your credit report visible to anyone requesting a copy. It is noteworthy that hard inquiries have the potential to slightly reduce your credit score. Examples of situations leading to hard inquiries include applying for a credit card, loan, job, or rental agreement.

Banks

When dealing with major banks like TD, BMO, RBC, or others, you’ll need to apply separately to each to determine your pre-approved amount. This could cause hard inquiries, and each time you apply, it may reduce your credit score. If you’re familiar with the mortgage application process, going directly to a bank has its perks — you can negotiate directly. Having an existing relationship with the bank can also be a leverage point for securing a better deal.

Mortgage Brokers — Who are they?

A mortgage broker is a licensed professional tasked with securing a mortgage for clients. Functioning as an intermediary between you and potential lenders, they offer guidance and ensure the accuracy of all paperwork. Their role is pivotal in preventing delays and ensuring that your lender possesses all the necessary information for a smooth mortgage approval process.

Additionally, when mortgage brokers engage A-lenders, their services come at no cost to you. This is because the lender compensates them upon the successful closure of the mortgage.

Choosing Between a Mortgage Broker and a Bank: Which is the Right Fit for Your Mortgage?

The decision between a bank and a mortgage broker is a personal one with no clear right or wrong choice. To make the best decision, compare the options, evaluate the pros and cons, and consider seeking advice from an investment advisor portfolio manager.

Pros for Renewing at Your Bank

When it comes to mortgage applications, many individuals instinctively turn to their primary bank, especially in Canada where the top 5 banks — RBC, TD Bank, Scotiabank, BMO, and CIBC — are well-established and trusted for various financial needs, including mortgages. Opting for a traditional bank offers several advantages:

1. Convenience: The comfort of having all financial resources in one place contributes to a sense of security.
2. Location: Having a physical branch in the neighborhood is valued by many.
3. Face-to-Face Communication: Direct interaction with a familiar professional who understands your family’s dynamics can be beneficial. If your day-to-day banking is already with them, the mortgage specialist gains access to a comprehensive view of your financial situation.
4. Perks for Combining Services: Some banks offer perks like waived account fees or a free safety deposit box when you combine services. You might even secure an additional home equity line of credit for post-move renovations.
5. A-lenders: Banks are considered A-lenders, typically seeking lower-risk borrowers with excellent credit scores. While A-lenders may offer favorable rates, their policies are stringent, and your bank might not always accommodate your specific needs.

Pros for Using a Mortgage Broker

If you find yourself self-employed, with a low income, a significant amount of debt, or a history that involves recent bankruptcy, a mortgage broker could be a more suitable option for your needs. Several reasons make a mortgage broker the right choice for individuals facing such circumstances, including:

Access to More Lenders

Mortgage brokers offer a convenient one-stop solution for clients by providing access to a diverse pool of potential lenders. With just one credit inquiry affecting your score, they can explore numerous options, often securing competitive rates and swift approvals.

In particular, mortgage brokers frequently have access to prominent A lenders like TD, Scotiabank, and BMO. Additionally, they tap into a network of other A lenders outside major banks, offering favorable rates and terms. Moreover, brokers have connections with B lenders and private lenders, addressing the needs of individuals with less-than-perfect credit or financial situations.

They Negotiate on Your Behalf

While banks generally expect clients to negotiate or accept the provided rate, mortgage brokers are often more proactive in negotiating on your behalf to secure a lower interest rate.

Versatility

Mortgage brokers frequently demonstrate flexibility in scheduling and communication. Many are available beyond regular business hours and are open to conducting meetings and handling essential paperwork through text, email, and platforms like Zoom or Teams. For those who prefer a more private approach, engaging with an online mortgage broker allows for transactions without the need for face-to-face meetings.

Higher Probability Of Getting A Mortgage

If you’re unable to get approved for a mortgage with a traditional bank, a mortgage broker can still help you qualify for one. Mortgage brokers are often able to get their clients approved, even when banks deny them because they work with many different lenders, including credit unions and private lenders.

Mortgage brokers play a crucial role in linking borrowers with less-than-perfect credit or unique financial situations to B-lenders and private lenders. These lenders take a more holistic approach, considering individual circumstances rather than relying solely on numerical metrics. However, it’s essential to exercise caution and thoroughly review the terms. While securing financing from a B-lender or private lender can fulfill your monetary needs, it may involve higher interest rates, unforeseen fees, and potentially unfavorable mortgage terms such as penalties for extra payments.

Mortgage Broker vs Bank — Key Differences

Qualifying

To qualify for a mortgage, you typically need to provide the following:

1. Stable Income: Lenders prefer a steady and reliable source of income. This could be from employment, self-employment, or other verifiable sources.
2. Employment Verification: Proof of employment is often required, such as recent pay stubs or income tax returns for self-employed individuals.
3. Good Credit Score: A higher credit score improves your chances of qualifying for a mortgage and may lead to better interest rates. Before applying, always be sure to check your credit score to see where you stand.
4. Down Payment: Most lenders require a down payment, typically a percentage of the home’s purchase price. The amount varies but is often around 20%.
5. Debt-to-Income Ratio: Both banks and brokers use your debt load to calculate Total Debt Service (TDS) and Gross Debt Service (GDS) ratios to determine how much mortgage you can afford.
6. Income Level and Stability: Your income level as well as your employment stability will be taken into consideration when determining your eligibility.
7. Property Appraisal: The property you’re purchasing may need to be appraised to determine its value and ensure it meets lending standards.
8. Legal Documentation: You’ll need legal documents, such as proof of identity, proof of residence, and other paperwork required by the lender.
9. Mortgage Application: Completing a mortgage application is a standard requirement. This includes providing details about your financial situation, employment, and the property you intend to purchase.
10. Mortgage Insurance: If your down payment is less than 20%, you may be required to obtain mortgage insurance to protect the lender in case of default.
11. Credit Score for Brokers: While banks put major emphasis on your credit scores, brokers may use your credit to better match you with their network of lenders.

Keep in mind that specific requirements can vary between lenders, and it’s advisable to consult with a mortgage professional to understand the criteria based on your unique situation and location. You can check your credit score for free using Equifax or a third-party provider like Loans Canada’s Compare Hub. Independent investment advisors, portfolio managers often have valuable contacts and can provide warm introductions to trusted mortgage brokers. Consider reaching out to your advisor to inquire about potential introductions to reputable mortgage professionals.

Stress Tests

The stress test is a requirement for federally regulated financial institutions, obligating banks to assess their clients. Private mortgage lenders, however, are not bound by this regulation. If you aim to bypass the stress test, working with a mortgage broker to connect with a reputable private lender is a viable option.

It’s important to acknowledge that private lenders typically impose higher interest rates compared to banks. Therefore, it’s advisable to consider a shorter term with a private lender until your credit score and financial standing are robust enough to successfully navigate the stress test.

Can a Mortgage Broker get you Pre-Approved?

Similar to most banks, mortgage brokers facilitate pre-approvals. They analyze multiple mortgage offers on your behalf, securing pre-approval with a lender that aligns with your specific needs.

In the event of a denial, a mortgage broker can assist in devising a plan to improve your situation before recommencing your property search. Their willingness to guide you through the process and help organize your affairs can enhance your chances of a successful application in the future.

Helpful Questions to Ask Your Lender:

Choosing your mortgage provider is a personal decision. Whichever option you choose, make sure you understand your mortgage terms before you sign the deal. To help you make sure you’re as prepared as possible, here are some questions to ask:

Interest Rate?

Consider whether you prefer a fixed or variable rate for your mortgage. With fixed rates, your monthly payment remains constant throughout the term. On the other hand, variable rates, while potentially lower, can fluctuate — either up or down — during the term of the mortgage.

Can I make Lump-Sum Payments?

If you come across some extra cash, you might consider accelerating your mortgage payments. However, it’s essential to check the terms of your agreement as prepayments may or may not be allowed.

When am I Paid Off?

The duration until you fully pay off your mortgage is determined by the amortization period, typically set at 25 or 30 years.

When is the renewal?

The opportunity to renew or renegotiate your mortgage can occur anywhere from 6 months to 10 years, with the most common term being 5 years.

Are there any Hidden Costs I need to know about?

Additional costs may arise before your mortgage is funded. Certain lenders may necessitate a home appraisal, and proof of insurance may involve expenses for fireplace/woodstove, plumbing, or electrical components.

Opting for a B lender or private mortgage might also incur additional fees, such as broker or lender fees.

Types of Mortgages Available:

The primary reason for negotiating a mortgage is typically to finance the purchase of a home. If this marks your first home purchase, congratulations! It’s advisable to explore incentives tailored for first-time buyers, such as the First-Time Home Buyers’ Tax Credit or the First Home Savings Account (FHSA).

Experienced Buyers

If you’ve sold a home and are gearing up to buy a new one, drawing from your previous experience can be beneficial. It’s crucial to be aware that ending your mortgage contract early may result in penalties. However, exceptions exist, such as when porting your mortgage.

Renewals

As your mortgage term concludes, the renewal stage arrives. At this point, you can choose to stay with the lender who approved your initial mortgage, or you might consider exploring other options. Waiting until your renewal date may present an opportunity to secure a better rate or alter the terms without incurring penalties.

Refinancing

Refinancing your mortgage can potentially provide additional funds, making it a favorable choice for consolidating debt or initiating a home renovation project. Should you seek to augment the existing mortgage amount, a home appraisal is typically required to assess the current value of your home.

Reverse Mortgages

This option, open to seniors, allows homeowners to pull a portion of equity, in cash, out of their home to use for living expenses, travel, home repairs, or other expenses. A reverse mortgage only needs to be repaid if the house is sold or the owner passes away.

And Finally……

Whether you opt for a bank or a mortgage broker, building a relationship with your chosen professional is crucial. Requesting references and seeking input from your investment advisor portfolio manager, family, friends, and your realtor can offer valuable insights before making a decision. Keep in mind that there’s no one-size-fits-all answer; the choice between a bank or a mortgage broker depends on your preferences and the approach that aligns best with finding the right mortgage for your needs.

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Joe A. Macek, FMA, CIM, DMS, FCSI

Investment Advisor, Portfolio Manager

iA Private Wealth | iA Private Wealth USA

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