The role of a mortgage broker is to provide their client with the best possible mortgage for which they qualify. That doesn’t always translate into the lowest rate.
But GDS, TDS, LTV and all of the other industry acronyms aside, what is the best mortgage for your client? And what do you need to do to arrange it for them?
The first question a client (or real estate agent) will ask is, “What is your rate?” Anyone who provides a number without asking some questions first is doing a disservice to their potential clients. But the rate is the rate is the rate. Or is it?
Financial institutions advertise a posted rate. Who pays the posted rate? Anyone who doesn’t ask if the institution can do better (more on this later). There are a number of websites that advertise mortgage rates well below “posted rates”. Many of these discounted rates are available to most mortgage brokers (and the public). Some rates are even lower. How do you get those rates? In many instances, the broker is buying down the rate with his commission. A good deal for the client? Maybe.
If you are shopping on rate alone, you may discover surprises later on. It’s like buying a car. The car is advertised at $10,000. Are you planning to drive it? You will need an engine and some wheels. Suddenly, that car costs $20,000.
Let’s say mortgages are advertised at 1.9 per cent. Do you plan on moving in the next five years? If so, this may not be the right product for you. The penalties to break a contract mid-term could be excessive.
In Ontario, the Financial Services Commission requires that mortgage brokers take steps to ensure the mortgage arranged is “suitable” for their client. (Similar legislation is in place across Canada.) What is the difference between “qualified” and “suitable”? The lender says, “You can have it.” The borrower says, “I’ll take it.” So who are we to tell them it is not suitable?
Knowing the differences between lender products, as well as having a sound understanding of the clients’ circumstances, could prevent a lot a grief and expense in the future. It’s not just the penalties for breaking a contract that we need to be concerned with.
There are certain qualifying ratios that the industry uses when approving mortgages. Just because someone qualifies for a mortgage, doesn’t mean they are comfortable carrying that much of a debt load. What if their circumstances were to change? (Loss of job, loss of income due to maternity leave, higher interest rates.) A prudent mortgage broker will initiate these discussions before asking their clients to commit to taking on additional debt.
Posted rates play a huge part in calculating pre-payment penalties. Most people are under the impression a mortgage is open on a three-month interest penalty. A mortgage is a contract. You agree to pay interest at a set rate, for a set term. If the mortgage does not specifically address early payout, you could be required to pay interest until maturity. Most mortgages require a payment of the GREATER of three month’s interest or the interest rate differential (IRD) for the remainder of the term. How does one calculate the IRD? There are no rules. The lender can use any calculation they choose. This is where posted rate MAY affect your client. If they have a discounted mortgage, the lender may look to re-coup the discount as part of their calculation. It is not as simple as difference in rates over the remaining term. A prudent mortgage broker will explain these nuances as part of the interview process.
The mortgage industry is changing. Technology is changing the way business is done. Lenders are tripping over themselves to give discounts in the hopes of attracting new clients (only to reward loyalty by offering the posted rate on renewal to those same clients who religiously made payments for the past 60 months). Brokers are discounting the rates even more, using rate-comparison websites. Information for consumers is everywhere (and it must be true, because it is on the Internet). Lenders are promising commitments within four hours of applying (though not necessarily consecutive hours). And in all this rush to save money quickly, the world around us is becoming more complex.
Your client is about to make one of the biggest financial decisions of their life. What’s the rush? Slow down. Get all the information you need from a trained professional. They have a fiduciary responsibility to help your client make the right decision. Don’t be blinded by the rate. A mortgage is more than a number.
Lorne Collis is a retired consultant to the mortgage broker industry. Over his 45-year career, Lorne worked as a mortgage broker, mortgage lender, association executive, event manager, author and educator. Contact him by email.
