Is a Mortgage Broker a Middleman?
Getting the best possible deal on your mortgage involves working with a low cost, efficient organization that does not have to allocate money to unnecessary costs. By keeping costs low, the lender can offer lower rates. So many have asked the question, ‘If I can just go straight to my bank or mortgage lender, and deal direct, why would I want to get a mortgage broker involved? Isn’t this just adding an unnecessary middleman and an unnecessary cost to the transaction?’ This is a completely reasonable question that the rest of this article will explore.
Most people reading this article are advanced mortgage shoppers or industry professionals who love to ask questions. So we’ll forget the article bloat here and get straight to the main point of whether mortgage brokers are middlemen or not. The conclusion is that mortgage brokers are not middlemen, but are catalysts that drive down mortgage costs by providing greater transparency and lender competition, drive down marketing costs for lenders, and drive down administrative costs for lenders.
Mortgage Transparency and Lender Competition
Imagine if there was a monopoly over the mortgage market, or any market for that matter. That firm would have a great opportunity to increase costs to maximize its profit by charging the most possible, to the most amount of people. In terms of the mortgage market, even though there is technically no monopoly in the Ontario mortgage market, the way Big Banks work with each other forms an entity that is closely related to what is known as an Oligopoly. This is a few firms in a market, that work closely together in order to dictate price.
In its most basic form, a Mortgage Broker unravels this price setting by providing a platform for the Banks to compete against each other. For example, if one bank ofers a special on its 5 year fixed mortgage rate, then this special becomes instantly available to the customer, through the broker. Now other banks have to step up their game if they want to compete. Of course, customers can shop from bank to bank in order to discover this kind of promotion for themselves as well, what kind of time and aggravation are they experiencing in order to shop around like this? Its the time and aggravation that most people dislike, and its a primary point of where a mortgage brokers value lies: Saving you time and delivering information.
No picture not only 5 banks, but over 20 mortgage lending institutions in Ontario competing for your business. The stakes change even further here, as the breadth of information that brokers instantly can provide to the consumer is widened. So causing Bank competition and providing transparency, it is argued has a value and this is core to the job of the mortgage broker.
Driving Down Marketing Costs for Banks and Mortgage Lenders
Sometimes it seems like every other commercial on TV is for a Bank or some other type of financial institution. Indeed, finance is the largest industry in Canada and the stakes are high. Without hundreds of millions thrown into marketing on TV, Radio, Internat and print, mortgage lenders are likely to lose business to those who are engaging in these marketing activities.
Mortgage brokers lower banks marketing costs by bringing them business on a silver platter. They will also often reward mortgage brokers with their best mortgage rates, in order for doing this. There is a number – a cost per new customer acquisition that banks keep very secret. However, logically speaking, because banks want to work with mortgage brokers, the cost of customer acquisition through a mortgage broker must be comparable – if not lower. In fact, there are some lenders that Brokers have access to, that have no advertising and marketing costs, and no branches. They rely completely on the mortgage broker channel to distribute their product, and this allows them to become very aggressive on rate. Therefore in order for banks to compete, they must lower rates in some cases as well, and this is great for the customer.
So by forming relationships with real estate agents, family and friends in their community, and by creating innovative lower cost market campaigning, it is more than likely that mortgage brokers are able to do the advertising and market for lenders, at lower costs.
Driving Down Administrative Costs for Lenders
At the end of the day, there is a lot of work involved with processing each mortgage. Good mortgage brokers will attempt to simplify this process for their clients by using plain language and organizing the process very well to provide a much better customer experience. However, there is no hiding the fact that even for the most straightforward of applications, there is a lot of paperwork and correspondence involved.
Mortgage brokers handle much of this ‘legwork’ on behalf of the client AND the lender. Its what make a broker, a broker to bridge the two interests and streamline the process. In fact, most mortgage brokers would agree that there is about 5 – 10 hours of work involved on each mortgage. Weather this work is put on the customer’s shoulders, or that of the lender – its is necessary work that has to be completed by someone. Dealing direct with a lender, either the customer spends more time and frustration, or the lender charges more, through a higher rate, to do this work themselves, with their own in-house people. Much of this work involves pre-approving the application, gathering documentation and analyzing it, dealing with any issues that arise in effective ways, and answering customer questions as they arise throughout the process.
So there is a definite value involved with this, and it is real physical value that the broker is providing. The broker pays for the lease, the systems, the heating and staff to do these things, so the lender doesnt have to.
In reality, these areas of competition, marketing and administrative costs work closely together and form a value proposition that the broker is surely deserving of. Most lenders are not forthcoming in offering the best interest rates available. Many shoppers will visit a broker and return to their bank, with their findings. the bank, if they want the business, is then forced to compete. This saves the customer thousands of dollars, and it is argued that the efficiency of mortgage brokers is seen here, even when the customer is dealing directly with the lender.
If a good mortgage broker is found though, the relationship between the customer and the broker can endure for years, and when changes, moves or renewals come up for the customer, they have someone that they can count on to give them their best, every time. This shouldn’t discount shopping for the best mortgage broker available – as there are more differences between brokers today than ever. However the general message, it is argued, is the same – and that is mortgage brokers are not simply a middleman and are great for the customer in several complementary ways.