BEWARE – When Choosing a Mortgage Broker

Salesman CurtWe all know that reputation is everything.  Unfortunately, due to several unscrupulous mortgage brokers that have taken advantage of clients over the years, it has tarnished the image of our profession.

My vision and hope is that this will change in the future.  There are many in the industry such as myself whom have been actively helping other brokers to elevate themselves to be better and do only good.  We are investing time to educate the consumer better and mentoring new brokers that enter our industry.

I foresee that mortgage brokers will be the primary source of financing in the future.  We have a lot of work ahead for us.  Moving forward, we are the best choice and we will work diligently to earn that privilege.

The title is a touchy issue.  I know many in the industry won’t appreciate the tone but read on and you will agree.  Let’s start by looking at the options available to the consumer when financing their property.

Majority of people tend to choose the path of least resistance and walk into their local bank to get it done.  Let’s look at what a bank branch mortgage manager or mobile mortgage advisor could offer:

  • leverage multiple products in-house

  • reduce legal fees with in-house legal

  • discounts on daily banking products with their mortgage

What can an independent mortgage broker offer?

  • help you with all aspects of a mortgage, from budgeting to advising how much you can truly afford rather than just what you want to borrow

  • determining the best mortgage product for you.  Are the terms and conditions of the mortgage suit your specific circumstance?

  • finding ways to save you money and pay off your mortgage faster (total debt management)

  • invest sufficient time to truly understand your needs that are transparent and hidden needs (you weren’t aware of)

Myth of going straight to the bank:  on the basis of competitive nature of mortgages (residential or commercial), you would think that the existing lender would want your loyalty and continued business but in reality, it is far from the truth.  (You can find out why in this article I wrote here: why brokers will become the ultimate advocate for consumers)

Caveat Emptor (Latin)- let the buyer’s beware.  Don’t judge a book by it’s title. Same can be said about a mortgage broker. There’s a wide range of professionals with varying degrees of experience, qualifications and quality in this particular industry.  Not every mortgage broker is reputable nor would they place the clients best interest first.  Ask for several reference that you can contact.  Don’t let a fancy designation such as AMP fool you either.  I’ve known some highly ethical and unbelievably amazing mortgage brokers that do not have that designation.  I’ve also known some that got the designation purely so that they can buy the trust using that fancy designation (some I would not care to invite into my home).  Beware.  Trust your gut feelings when interviewing your mortgage broker.  Don’t settle for the first or the last one.

“A fool and his money are soon parted.” This is an old English idiom that I like to refer to when people are fascinated with only “the lowest rate”.  I, myself have been at the receiving end of a mortgage penalty on my own mortgage with one of the big 5 bank lenders.  Yes, I swore I would never put myself into a position where I had to cancel my mortgage early.  Since I was an employee with the bank,  I got the lowest rate mortgage which later turned out to be an expensive lesson.  My own penalty on a $200,000 mortgage that had less than 2 years remaining was nearly $10,000.  The interest that the my bank would have lost out on my mortgage if they had used that money to lend it back out was less than $4,000.  Why the difference of $6000?  I won’t go into this in detail but if you use Google to search for Interest Rate Differential or mortgage penalty IRD, you will find your answer.  Even better, search for “mortgage penalty lawsuit” and you will be shocked.

All retail bank lenders use an unfair method to calculate mortgage penalties since they have 2 sets of rates (posted and discount rates).  If I had worked with a mortgage broker and had a mortgage from a wholesale lender, my penalty would have been less than $4000 (since most wholesale lenders use only 1 set of rates).

The lowest rate on a mortgage is not always the lowest cost mortgage. Matter of fact, there is one wholesale lender in the broker channel that has the lowest rate in the entire industry but they also have the highest penalty. When a life event happens and you are forced to sell that property or break that mortgage before the end of the term, you will be hit with a hefty penalty. They have the lowest fixed rate term and variable rate that none of the retail banks could match. The downside is that both their variable rate and fixed rate mortgage have a much higher penalty (even compared to the retail banks).

Summary:  Let’s be honest here, sometimes one is not better than the other. It all depends on your future goals and immediate plans. What is your strategy and how knowledgeable are you about financial services? Are you fixated by the lowest rate or would you want options that would be more beneficial to you in the near future? Chasing the lowest rate mortgage is like buying a car and opting out of the optional passenger air-bag. That is until you get into an accident with a car full of passengers, you don’t think much about having that “option” then.

Lesson to be learned here is to have all the options presented to you (the good, the bad and the ugly).  That way you can make an informed decision.  If you ask a broker if they can get you the lowest rate mortgage and the answer that you get is: “Yes, when would you like to get started?”  Go find another broker.  The answer that you should have received is somewhere in the lines of: “Any broker can get you the lowest rate; please tell me about your situation so that I can help you better.”

Beware when choosing your mortgage broker.  Ask for references and go with your gut feelings.

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