Mortgage brokers are expected to be honest when it comes to providing their customers with financial advice. It’s their job, after all, to find you the best possible rate based on your unique financial situation. But, as with any other position of authority, there are always a few bad apples in the bunch. If you’re shopping for a mortgage rate, never assume that just because your broker has a friendly face, that he or she is looking out for your best interests.
Educate yourself in order to avoid less-than-ethical mortgage brokers. Remember, mortgage brokers are usually paid by the lender for referring customers and processing applications. This compensation varies based on the lender and the mortgage type. As such, it’s difficult for many brokers to resist the temptation of a higher commission for recommending a certain product. The following are five important conflicts to discuss with your broker the next time you’re shopping for a new rate.
#1 – Why are you recommending a certain mortgage term?
Many lenders will compensate brokers on a term-based scale. Generally, the longer the term of your mortgage, the more money the broker will get. This is why mortgage regulators in Ontario, Saskatchewan, and Nova Scotia require mortgage brokers to confirm suitability when recommending a mortgage product to a customer. This requirement, which doesn’t apply to mortgage sales representatives at major banks, protects consumers from unethical recommendations. If you live in a province that doesn’t have suitability legislation in place, be sure to ask your broker to provide you with a risk/reward analysis of different mortgage terms. This will help you to pick the product that’s right for you.
#2 – Is this really the lowest rate for that term and that lender?
This may seem like a redundant questions, however it’s anything but. This is because of something known as “scaled pricing” in the brokerage world. This is when a lender offers two rates for the same mortgage: one rate is competitive and offers the broker a fair compensation; the other is a higher, less-competitive rate which pays the broker extra. Unethical brokers will sell the above-market rate without batting an eye.
In order to protect yourself from this shady business, simply ask your mortgage broker whether or not the rate they’re quoting you is the lowest rate for that term on the lender’s broker rate sheet. If you have doubts, ask another broker for a second opinion.
#3 – What’s your mortgage volume?
Many mortgage brokers participate in status programs. These arrangements reward brokers who sell a high volume of mortgages for a specific lender. On one hand, this is good for customers; lenders often offer high volume brokers better rates. However, some mortgage brokers will recommend a particular lender solely to maintain perks with the lender, even when another outlet may be offering a better product.
There’s real power in volume, so don’t be afraid to ask your brokerage about their closing record. Brokerages that have a record of closing a high number of mortgages will likely have access to a larger book of lenders, providing you with more options.
#4 – Why are you pushing rates?
If rates are the first thing that your broker talks about when you walk in the door, it’s probably best that you turn around and walk out the door. Rates are just a part of the mortgage puzzle. Fees, penalties, prepayment restrictions, portability, and closed terms should also factor into your mortgage decision. The only way a broker will know what product is best for you is if he or she takes the time to understand your financial situation. In some cases, a higher rate with fewer restrictions might make sense in the long run.
#5 – What happens if I don’t understand your disclosures?
Mortgage brokers are required to disclose conflicts, like the ones above, in government mandated disclosure documents. Unfortunately, disclosure documents are often vague and confusing for customers who aren’t well-versed in mortgage intricacies. Before you work with a broker, ask to review these disclosures. If you don’t understand something, don’t be afraid to ask for further clarification. If the broker can’t provide you with a firm answer, find another representative.
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