Mortgage Brokers – Some Perspective

By James Day

There is no doubt that mortgage brokers have gained a significant foothold in the Canadian market. They have shed the “loan-shark” stigma. They along with pioneer discounters like ING Direct and PC Financial have forced a change in the way the big banks do business.

CIBC, Scotiabank, and TD (BMO no more) have embraced the broker channel as a way to increase their business. Thanks to mortgage brokers, alternative lenders like Home Trust, Equitable Trust and Xceed have found a growing market for their products without the huge expense of building retail branches.

Brokers, abundant mortgage information available on the Internet, and discounters have also brought price competition to the banks. So while the banks still choose to post fictional rates on their website and in press releases, today virtually no one pays those rates. So it is a little misleading every time the CEO of X brokerage gets quoted in the paper saying that a broker can save 130 to 150 “beeps” (basis points) on a 5-year mortgage.

Photo by Ryandt33There was a time not long ago (pre 2002) that if a customer did not press for a discount he ended up paying close to the posted rate.  Maybe the bank offered him/her a 25 to 50 bps “discount,” letting the customer think he got a great deal.  In reality, for a new customer, the bank would have done 100 to 125 bps on a 5-year.

Discounting only became widespread starting in the 1990s. TD bank tried to copy the “everyday low price” strategy of the discounters (on 5-year mortgages) for 18 months in 2002, but they actually lost market share and switched back to the “selective discounting” strategy, in line with the rest of the banks.

The latest CAAMP survey shows that the average discount on a 5-year mortgage is 135 bps. Other non-free data shows similar discounts are the norm.  No one pays posted anymore. In order to get new business the banks will often match the rates of discounters in hopes of getting all their business (mortgage, insurance, RRSP, line of credit).

In another vein, brokers often stress they have access to hundreds of lenders and are working for the borrower. On the surface this may be true, but there are other forces at work. The 2005 Taddingstone mortgage broker report (a survey of over 500 brokers) showed that the number of lenders that the average broker deals with is only 5.9.  Moreover, the annual deal volume brokers send to their “preferred lender” is 53%!

Surprising? Not really. Financially, it is in the brokers best interest to use few (or 1) lender(s). Lenders offer rewards and incentives based on the volume of business a broker sends to them. Now this may not necessarily be bad for the client, but it could be. This is where all those ethics courses CAAMP offers come into play.

We can also look to the U.S. experience. 70% of deals go through brokers there, and the recent subprime fall-out shows that many people were put into mortgages that clearly were not in their best interest.

A mortgage needs to be viewed as one component of an overall financial plan. If brokers can stress that to clients, and offer total solutions then they will do better than if they compete on rate, which is becoming more difficult everyday. These points are rarely brought out in the media.

  1. James,
    These insights offer a wonderfully balanced viewpoint to CMT readers. Thanks so much for the story.
    I would completely agree that paying posted rates is almost unheard of today. We, for one, benchmark against quoted bank rates simply to compare our offerings to a fixed yardstick.
    As you imply, banks do generally try to extract the biggest possible spread from borrowers. In this case, mortgage brokers add real value by presenting the client with alternatives.
    While it’s true that brokers can potentially make more by charging a rate premium or steering clients to lenders with the biggest finder’s fees (or biggest volume bonus), that isn’t how most credible brokers do business.
    We, for example, consider lender incentives irrelevant unless all other things are equal. If lenders A and B both offer the exact same rate, terms, and privileges–but B pays an extra 20 basis points—it makes sense to choose lender B.
    However, if lender A can save the client even 1 basis point more, we feel it’s our duty to recommend lender A, or offer the client a cash rebate to cover the difference. I realize not all brokers work that way, but the good ones do.
    In short, the best mortgage planners always have loyalty to the client first, lenders second, and their own wallet third.

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