By Don Procter
While banks and mortgage lenders reluctantly cut lending rates after the Bank of Canada dropped its interest rate, buyers of real estate have much more to consider than the lending rates when they choose a mortgage.
Lenders that allow frequent lump sum payments, flexible portability and “blend and extend” options, in which terms are extended by blending old interest rates with new rates, are cases in point. Those lenders are not always the banks. It’s often mortgage brokers who find the best options, largely because they can choose from a host of different lenders to tailor mortgages to specific clients, says Rob McLister.
McLister is editor of CanadianMortgageTrends.com and founder of RateSpy.com, the latter of which provides rates and options from more than 350 lenders, including all the major banks, credit unions, trust companies and most top brokers.
“Having more than one lender choice benefits the borrower,” he says, noting that major banks don’t necessarily have the most flexible mortgage features. “No one lender has the best product for every client.”
Penalty clauses for breaking the mortgage contract early are a prime example. They should be reviewed with clients before signing on the dotted line because some lending institutions – particularly the Big Six banks – have more onerous clauses than others.
Still, says McLister, many experienced real estate agents have established relationships with banks that have provided reasonable rates and service.
Since the Bank of Canada dropped lending rates in January, mortgage brokers were quick to make the deepest rate cuts.
McLister calls it the widest rate differential between the two groups in years. “With the lowest broker rates, you’re sometimes talking about different products – a low-frills mortgage versus a bank mortgage – but nevertheless the interest cost gap is extremely wide.”
That might change in the spring when property sales traditionally pick up and banks lower rates to stay competitive, he says.
Why the hesitation to drop rates now? Banks are likely trying to maintain profit margins for as long as they can. Unlike the banking world, however, the broker world has access to varied funding sources. “There are always a few lenders at any given time with exceptional pricing, and the (business) volume tends to shift to them, which benefits broker customers.”
One credit union, for example, DUCA Financial, has a pricing program for a select number of high-producing brokers that is “significantly below the market.”
McLister cautions that due diligence is required before selecting a broker. “You want to make sure that they are established and that they have access to the best lenders and lender status programs”, which ensures that they will get the best rates and options.
Experienced mortgage brokers best foresee potential problems. That helps the client avoid unpleasant surprises on closing day “because things can and do go wrong during the mortgage process.”
Jim Murphy, CEO of the Canadian Association of Accredited Mortgage Professionals (CAAMP), says many real estate salespeople have developed relationships with specific mortgage brokers, which can assist consumers “perhaps better than banks.”
Tougher lending rules and underwriting guidelines have sent more people through broker channels, he says. Typically, mortgage brokers appeal to three groups: self-employed, many of whom have solid credit ratings but less stellar incomes; new Canadians who may have solid income but no credit history; and first-time buyers, says Murphy, adding brokers can “shop the market” to find lenders for clients who are rejected by the banks.
Founded in 1994, CAAMP has about 11,500 members across Canada – 80 per cent of which are mortgage brokers and 20 per cent are lenders, insurers and other service providers. There are a lot of mortgage brokers who were real estate agents and some who are jointly licensed.
The CEO says first-time buyers have a history of turning to mortgage brokers in part because they do online research and are savvy shoppers. “Mortgage brokers have done very well at reaching out on social media.”
There are banks that go through the mortgage broker channel to find the best product for their customers.
The market is much more competitive than it was a decade ago – and not just for lower prices, McLister says. While mortgage companies can offer more competitive lending packages than banks today, there was a time when the reverse was true, he adds.
McLister anticipates a better spring market than original forecasts but how active the market is may depend on how far rates fall. He notes that a quarter-point rate cut on an average mortgage rate means someone making $50,000 a year with no debt and five per cent down can only qualify for a 2.3 per cent more expensive home.
Mortgage brokers have about 30 per cent market share in mortgages – much of that share coming in the last decade, says Murphy. According to research, says Murphy, mortgage brokers are also gaining market share on renewals, a traditionally weak area for them.
Growth in mortgage credit has dropped to four to five per cent from about eight to 10 per cent growth in 2006-2009, says Murphy. He believes mortgage brokers can continue to grow, although not likely as prominently as brokers did in the U.S. prior to the mortgage meltdown, when broker share was well over 60 per cent. To continue to hike their market share in Canada, mortgage brokers have to continue to broaden awareness among the general public.