How Do Mortgage Brokers Make Money?
(Five minute read time)
Are you thinking of buying a home and wondering if a mortgage broker is right for you?
Maybe you have used a mortgage broker before and are just curious how the mortgage broker got paid since you didn't get an invoice from them.
Maybe you want to know if a mortgage broker is biased or not towards one bank or another.
Keep reading, and you can learn the facts about how mortgage brokers get paid in Ontario. The process is similar across Canada and other parts of the world. Still, this article was initially written for Ontario readers.
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How Much Do Mortgage Brokers Charge?
For most homebuyers, the cost to you is zero. Mortgage brokers don't charge you directly because the lender pays them. In some cases, usually with alternative lending or some unique circumstances, there is an upfront fee. This fee is sometimes called a lender fee or an application fee. Sometimes, part of this fee represents the mortgage broker's commission, and sometimes this fee goes directly to the lender.
You might also see a lender fee in cases where the mortgage rate is discounted. If you are asked to pay a fee, never agree to pay it in cash to the broker. All fees must be documented and disclosed to the homebuyer.
How Do Mortgage Brokers Get Paid?
A mortgage broker is not an employee of any bank or other lender, so they do not receive a regular salary. Instead, they collect a commission (also called finder's fee) from the lender when your mortgage closes. This means once your lender provides the funds for your mortgage, they also pay a small commission to the mortgage broker that arranged the deal.
Usually, the commission is a one-time payment to the broker once your mortgage has been funded. In some cases, the mortgage broker may also get a commission when you renew your mortgage after the end of your term (usually five years).
When the lender pays a commission to the broker at renewal, it can reduce your mortgage broker's chances of trying to "churn" the mortgage. Churning means switching you to another lender when it provides no benefit to the homeowner, only to capture another commission. Often, it is a good idea to consider switching lenders at renewal. Still, you should always consider how the switch affects you. Avoid incurring switching costs if there is no good reason to do so.
In some cases, the mortgage broker gets an ongoing payment from the lender after your mortgage has been funded. This is called a trailer. Usually, the upfront commission is reduced, but the mortgage broker receives a more steady stream of income instead.
Your mortgage broker is required to disclose how they get paid, and you should ask for clarity if you don't understand.
When Does A Mortgage Broker Get Paid?
Usually, the commission payment comes through within a few weeks of your mortgage closing, depending on the lender and how fast the brokerage can process payment.
Remember, a mortgage broker only gets paid after your closing day. There is no salary or hourly pay for the time spent on mortgage applications that don't get approved and funded.
How Much Money Do Mortgage Brokers Make?
The commission amounts vary widely. Lenders usually pay a higher commission for a longer mortgage term, so a 5-year mortgage pays more than a 2-year mortgage. As a rule of thumb, when the lender earns more interest, they can afford to pay a higher commission.
Like most industries, sometimes a lender will offer promotions with temporary increases in commission for mortgages funded at a particular time. These promotions are not unlike interest rate promotions provided by lenders when looking to pick up additional business.
Lenders may also offer loyalty bonuses to mortgage brokers who do a lot of business with only one lender. If a mortgage broker has a high volume and primarily deals with only one lender, there might be a bonus structure in place. Lenders may also offer rate discounts for high-volume brokers, which benefit the homeowner who pays less interest.
Typical compensation ranges from about 50 basis points (bps) equal to one-half of a percent up to about 120 bps (1.2%) of the mortgage amount. The price of the house is not part of the compensation, only the mortgage amount.
For example, if you buy a house for $700,000 and get a 5-year mortgage for $550,000, the lender might pay the mortgage broker 100bps or $5,500. This commission is the gross amount and is probably not what the mortgage broker will take home.
Most brokers have a commission split with their brokerage. This means a portion of their commission is shared with their brokerage. The split is intended to pay for overheads, marketing, administration, and other services the broker might receive to help them do business.
Can a Mortgage Broker Get You A Better Deal?
Mortgage brokers work with dozens of lenders to find the best offers available. The best brokers also have great relationships with some of Canada’s biggest mortgage lenders and big banks. These relationships mean that you might even get a better offer from your bank through a broker than by going direct.
Also, there is often some flexibility in the commission fee that the mortgage broker earns. Some lenders allow mortgage brokers to discount the mortgage rate by sacrificing some of their commission. This is called a buydown.
Most lenders limit the amount of buydown to 10-20bps. The cost to the broker could eliminate most of their commission depending on the situation.
How Does A Mortgage Broker Compare to A Bank?
As far as pay is concerned, the bank's mortgage specialist might receive a salary, plus commission and/or bonuses for the mortgages they fund. A mortgage broker is only paid when your mortgage is funded, so they are invested in your approval.
Some mortgage brokers could be incentivized to work with lenders who pay the highest amounts. If they do this, you might not be getting the best mortgage for you. You need to understand how a mortgage broker is paid so that you can ask the right questions.
Before your mortgage is final, the mortgage broker is required to present a borrower disclosure form that explains the following:
How the broker is paid (commission, bonuses, etc.)
How many lenders they have worked with in the last year
If any lender was responsible for more than 50% of their business
If the mortgage broker also acted as a lender
If there are any potential conflicts
Final Words On Mortgage Broker Compensation
Remember, most mortgage brokers will act in your best interests. Not only are they highly regulated in Ontario, but they are referral-driven. A mortgage broker's best source of new business is happy customers. Besides, the easy access to information online makes it simpler for people to read reviews, do mortgage research, and see what rates are out there.
In the end, you should work with a mortgage broker that you can trust. Find someone who takes the time to explain how you can save money and get the best mortgage for you in the long term. Don't be romanticized by advertisements of ultra-low rates until you read the fine print. Ask questions until you feel comfortable, and don't be afraid to walk away if you aren't satisfied with the answers.
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