To Mortgage Broker or NOT to Mortgage Broker: Which is Riskier?

“I’ve never heard of that Broker before – is it riskier than using my Bank Branch? Can I lose my money by using a Mortgage Broker?” These are a couple common questions asked by mortgage shoppers, and the short answer to them – is No.

In fact one of the most common mortgage sales strategies that a Bank Branch will use is the ‘Stick with us, because you know us, we’re stable, and we’ll be here in 20 years’. The Bank may also go a step further and tell you that the Broker uses unstable lenders and that you don’t know what you’re getting into. With these Bank sales strategies, it’s about invoking fear and worry in the customer, who is faced with such a big decision.

But, really, how much truth is behind these kinds of statements? What are the real Mortgage Broker risks if any?

Fundamentally, a Mortgage Broker is not a lender, but helps you shop for and select the best lender, while providing mortgage education, strategy and guidance. More specifically – good, reputable Brokers usually won’t look so much at the name of the company, but at the quality of the mortgage contracts that top Canadian lenders are offering. And of course they work at lowering your interest rate to levels below those offered directly through Bank Branches. So for a Broker it’s about reviewing quality of the mortgage product and your ultimate savings, and in fact the Broker may even be able to help you get a better deal through your own Bank Branch. This is the business of Mortgage Brokers, and is why over 35% of the Canadian Mortgage Market continues to use one.

Now given the value that a Broker can provide, in most cases at no cost to you, the important thing to understand is that ALL Canadian mortgage lenders are governed by the same strict lending rules, and are legally required to be in very stable positions. There has NEVER been an instance in known Canadian history where a mortgage lender has shut down, leaving their customers stranded and hanging for a bill. Even if this did happen – wouldn’t it be great to be off the hook for a couple hundred thousand? An interesting thought but not likely to happen.

So the question is – Is it riskier to shop using a Broker and potentially pay less money, OR not to use a Broker and be limited to your choices among lenders? Maybe a bit of a loaded question – but I think the point is made clear by it. Check out the additional information below regarding customer safety with Brokers. You can be the judge.

What Rules Specifically Govern Canadian Mortgage Lenders and Banks?

Canadian mortgage lenders are stable because of strong lending or ‘underwriting’ guidelines that the Federal Government of has put in place known as the ‘B-20 Lending Guidelines’. The B-20 Guidelines are summarised just below:

  1. Lenders must define the nature of their business, and the focus of their mortgage portfolio. There must be oversight mechanisms to ensure the consistency of their focus and their portfolio.
  2. Borrower identity and information must be known by the lender as well as their clear willingness to repay their mortgage.
  3. Lenders must review the ability for a borrower to manage their mortgage in a timely manner.
  4. The property value must be assessed and confirmed by an independent third party.
  5. There must be stress tests put in place that use potential, but unlikely scenarios to assess the resiliency of the overall debt portfolio and how it would stand up in a more extreme type of economic environment.

Lenders must continuously report on how their business is performing to the government, and lenders know that they can be audited any time. Given these very tight rules, there is little risk variation among ‘A type’ low rate mortgage lenders across Canada.

For more specific information on B-20 Guidelines, check out the Government below:

http://www.osfi-bsif.gc.ca/eng/fi-if/rg-ro/gdn-ort/gl-ld/pages/b20.aspx

Also, consider that for less than 20% down payment high ratio mortgages, where the Canadian Mortgage and Housing Corporation (CMHC) is required, the Government owned CMHC assumes the majority of the risk for the mortgage through the insurance – not the lender. This also protects and stabilizes lenders to a big extent.

Mortgage Broker Licensing – What is needed to become a Mortgage Broker? How does this compare to how Bankers provide mortgages?

Mortgage Brokers are held to increasingly higher standards in their licensing process and must follow formal legal codes of conduct, such as the Mortgage Broker Lenders Administration Act (MBLAA) in Ontario, at all times. Having completed the Canadian Mortgage Professionals, Mortgage Brokers of Ontario course with a final mark of A+, I can personally attest to the great emphasis surrounding consumer protection and fairness, in the materials taught. There are major fines that apply to poor Broker practices, including the removal of one’s license for more serious matters such as fraud.

Ultimately, all reputable brokers will use creativity and good lender relationships to get more difficult deals approved – but will not risk their license and entire livelihood by using deceptive or fraudulent tactics to help approve mortgages that should not be approved. Broker adherence to strict code is a measure that continues to provide consumer trust, and security in the Canadian market.

In contrast there is no licence or course that a Banker needs to pass to provide mortgages across Canada. Simply getting hired is all that it takes to start providing mortgage advice to hundreds or even thousands of people. Perhaps the sheer size of the Banks as well as their own internal policies can compensate for this lack of licensing. However it’s interesting that any working financial professional needs a licence to sell Investment products and services ANYWHERE in Canada, but that this does not apply to mortgages too.

Check out the Canadian Mortgage Professionals for more information on Broker professionalism