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Should you use a mortgage broker?

A mortgage is likely the most onerous burden you'll ever carry. It's a loan of monstrous proportions, but for anyone who isn't a rock star or Bill Gates, it's the only way you'll own a house.

Clearly, the goal is to find the most competitive interest rate on that whopping sum, but not everyone knows how to go about it. According to stats culled by the Canada Mortgage and Housing Corporation, more than 50 percent of Canadian homebuyers accept the first rate their bank offers.

Not only does that mean most of them are settling for the first quote, but that the majority aren't using a mortgage broker.

A mortgage broker is a certified professional who seeks the best mortgage terms for you by accessing a network of lenders that includes major banks, trust companies, credit unions and finance companies. (Brokers may also draw on local lenders that aren't part of a network.) This stable of lenders provides brokers with interest rates on a near-daily basis.

While she has relationships with the country's biggest lenders, a mortgage broker is not beholden to any of them. A broker is beholden only to you, the client. She will sift through her posted rates to find you the best one.

Mortgage expertise can save you money
The most basic advantage of a mortgage broker is that she saves you from approaching the various lending institutions yourself, a laborious and sometimes undignified task. You fill out an application stating your assets and earnings, and based on your financial details, she will scout the market for the best mortgage.

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What makes a certain mortgage company attractive isn't necessarily the lowest rate. Say you want a mortgage of $250,000. One lender might get you a competitive rate of 4.5 percent on a five-year term, but may only be willing to give you $225,000. Many first-time homebuyers will sacrifice the best rate for a company that will lend them more money.

"You're trying to get a client the best rate and you're trying to get them the best service, so whichever institution fits those bills, that's what gets the deal," says Wayne McConnell, president and owner of A+ Financial Services in Winnipeg.

Brokers are paid by lenders, not by you
Colin Dreyer, president of the Canadian Institute of Mortgage Brokers and Lenders, says that years ago there was a stigma attached to mortgage brokers. They dealt primarily with the downtrodden and people whom the major banks deemed high credit risks, or so the logic went.

The other misconception -- which still exists today -- is that brokers exact an up-front fee from clients. Brokers do not charge clients a fee, either before or after they've secured them a mortgage. So how do brokers get paid?

They earn a commission from the lender. Commissions are fairly standard, ranging from 0.5 percent to 1.25 percent of the mortgage amount, depending on the length of the term. (A client that locks in for five years will bring a higher commission than one that opts for a variable rate.)

In the last decade, mortgage brokers have enjoyed a tremendous surge in business. Ten years ago, Dreyer says brokers comprised less than 10 percent of the mortgage market; today, they occupy between 25 and 30 percent.

"There has been a real shift in how the consumer looks at doing business," says Dreyer. "They're realizing that [mortgage brokers] research the market for you, and they're only going to get paid when they're successful in providing the service."

Brokers can be more flexible than banks
Two years ago, Jeff Piotrowski and his partner, Rebecca, decided they'd had it with renting and wanted to graduate to ownership. Figuring they could only manage the minimum down payment on a home -- five percent for first-time buyers -- their first instinct was to approach their own financial institution.

Unfortunately, their 20-year loyalty to the bank counted for zilch -- their mortgage application was rejected. So they visited a mortgage broker, who found another lender willing to provide the sum they needed to purchase the home they coveted in Tottenham, 100 kilometres north of Toronto.

"The whole point of it was we just wanted to put five percent down," says Piotrowski. "We just wanted to get into a house, but the bank was saying, 'Look, you put more down or we're not approving you,' and this other [lender] said, 'We'll approve you, sure, no problem.'"

It never hurts to shop around
While mortgage brokers have much to recommend them, it's not given that they can arrange the best mortgage terms. A broker can comb his lending network and extract what seems like the best available rate, but as a client, you are not obligated to accept it.

Many homebuyers take a broker's quote and submit it to their own bank in the hopes they might beat it. They often do, as was the case with Ottawa resident Julie McCann.

In the market for their first home, McCann and her partner, David, met with a mortgage broker, who pre-approved them for a significant sum and a competitive interest rate. When they found their idyll in Ottawa's east end, the home's sale price was significantly less than the amount they'd been approved for.

The house did, however, require some immediate upgrades, which got them thinking that it would be advantageous to have a line of credit in addition to the mortgage.

With the broker's pre-approved quote in hand, McCann went back to her own financial institution to see if they could outdo it. Not only did the bank trump the broker's best rate by four basis points, but they were able to offer the young couple competitive terms on a line of credit for their intended renovations.

"Our account manager kept pitching to us all the weeks that we were looking for a house," says McCann. "She beat [the mortgage broker's rate], and she got us a line of credit at a great rate. So there was no competition -- we had to switch."

Even so, McCann doesn't question the usefulness of engaging a mortgage broker. "For other people it may work out," she says. "For us, it didn't."

The biggest advantage to having a mortgage broker, says Piotrowski, is the personalized service. With the bank, he and Rebecca had to endure long, stressful and ultimately fruitless meetings in a daunting institutional environment. The mortgage broker put them more at ease.

"He came right to our house and he sat down with us, told us our options and all that kind of stuff, and the next day he called and said, 'Yeah, you're pre-approved for this amount of money.'"

Andre Mayer is a freelance writer in Toronto.

-- Posted: Sept. 20, 2004
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