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Should I Work With a Bank or a Broker For My Mortgage?
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Purchasing a home is likely the largest financial decision you will ever make so it’s important to consider your options carefully. And just like with any major decision in your life, financial or otherwise, there are many options to choose from. Working directly with a bank or going through a mortgage broker are both great options and to help you decide which is better for your unique financial situation, we’re breaking down the pros and the cons of each.
Interested in what the minimum credit score for a mortgage approval in Canada is? Click here.
The Most Common Types of Mortgages
The most obvious reason for needing to negotiate a mortgage is financing the purchase of a home. If this is your first home, congratulations! Sometimes, are incentives for first-time buyers just entering the market.
Perhaps you’ve sold a home and are ready to purchase a new one. You’ve been through the process before and gained a little knowledge along the way. Remember if you are ending your contract early though, you may incur penalties.
Maybe your mortgage term has come to an end. Now it’s time to renew. In this situation, you may stick with the lender who approved your first mortgage, or it may be time to do some shopping. If you’ve waited until your renewal date, you may be able to get a better rate or change the terms without penalty.
You may be looking to refinance your mortgage loan, increasing the funds available to you. This can be a great option if you are looking to consolidate debt or begin a renovation project in your home. If you want to increase the amount of your current mortgage, you will need a home appraisal to determine the value of your home.
This option, open to seniors, allows homeowners to pull a portion of equity, in cash, out of their home to use for living expenses, travel, home repairs, or other expenses.
For more information on reverse mortgages, click here.
What Can My Bank Do for Me?
At first mention of a mortgage application, most people think of their primary bank first. Canada’s top 5 banks (RBC, TD Bank, Scotiabank, BMO, and CIBC) are well-established and a trusted source for your family’s financial needs, including mortgages. There are many advantages to working with traditional banks:
- Convenience. People tend to feel safe with a bank and people like having all their financial resources in one place.
- Location. Many people appreciate a bricks-and-mortar branch located in their neighbourhood.
- Face-to-Face Communication. Being able to chat with a familiar person who knows you and your family, is often a benefit. If you already do your day-to-day banking there, your mortgage specialist will be able to access information that gives them an overview of your entire financial picture.
- Perks for Combining Services. Your mortgage might even come with perks like waived account fees or a free safety deposit box. It’s even possible that you could land an extra, home equity line of credit to help with renovations after you move in.
- A-lenders. Banks are A-lenders.They tend to look for lower risk borrower with the best credit scores. A-lenders may provide great rates but also have the strictest policies. For that reason, your bank may not always be able to give you what you are looking for.
At the bank, you may be offered higher-than-advertised rates, unless you are prepared to negotiate and we recommend that you do. If you plan to shop several banks in your area, it will mean multiple appointments and hits to your credit.
If you’re are self-employed, have a low-income, high amount of debt, or have a history that includes a recent bankruptcy, a mortgage broker might have a better chance of finding a lender for you.
What Can a Mortgage Broker Do for me?
A mortgage broker is a licensed professional who can secure a mortgage for their clients. They act as an intermediary between you and a potential lender. When they use A-lenders, their services do not cost you anything because they are paid by the lender, after the mortgage closes. They are required to update their qualifications regularly, though specifics vary by province.
Here are the most important questions to ask your mortgage broker.
According to The Canadian Mortgage and Housing Corporation’s 2017 Mortgage Consumer Survey, mortgage brokers are gaining an increasingly large share of the market:
- First-time buyers, 55%
- People renewing their mortgages, 35%
- Refinancers, 40%
- Repeat buyers, 40%
There are a lot of reasons why a mortgage broker may be right for you:
Access to More Lenders
Mortgage brokers provide a one-stop shop for their clients. They may have access to hundreds of potential lenders with only one credit inquiry impacting your score. They are often able to find great rates and get you approved quickly.
While banks expect the client will negotiate with them, or accept the given rate, mortgage brokers are more likely to go to bat for you, to get a lower interest rate.
Mortgage brokers are often very flexible with meetings and communication. Many are available after business hours and are willing to deal with meetings and much of the necessary paperwork through text, email, and Skype. If you’re a bit of an introvert, you can even deal with an online mortgage broker, avoiding face-to-face meetings altogether.
Higher Chance of Getting a Mortgage
They are often able to get their clients approved when banks can’t since they are able to work with more lenders and with those who are willing to take a little more risk. Under trickier financial circumstances, a mortgage broker can work with less traditional, B-lenders and private lenders, allowing them to take the details of each unique case into consideration, rather than considering numbers alone. Be careful to read the fine print though. While a deal with a B-lender or a private lender can get you the money you need, it might come with higher interest rates, unexpected brokers fees, lender’s fees and/or unfavourable mortgage terms such as penalties for extra payments.
Interested in seeing how much it costs to purchase a house in each major Canadian city? Click here.
Qualifying for a Mortgage
Whether you choose to use a bank or a mortgage broker, your lender will look at your income and your debt load when calculating your mortgage amount.
When you are deciding where to pursue your mortgage, it is important to educate yourself. Interest rates are increasing and rules are tightening up because lenders want to know that you will be able to carry the costs.
A better interest rate can mean a savings of hundreds of dollars every year. Learn as much as you can about the terminology and your potential options before consulting a mortgage professional. This will give you a better idea of what questions you should ask.
Determine the amount you will be able to use for your down payment and the monthly payment you can afford ahead of time. You can even check your own credit score so there won’t be any surprises when you meet with your lender. You can do this easily through companies like Equifax and Transunion, for a minimal fee. If you do it yourself, it doesn’t count as an inquiry on your credit report. Be careful when shopping around for mortgages because each time a lender pulls your report, it can affect your score.
Start with a pre-approval. If you are denied, you can work on improving your situation before searching for a property. A mortgage broker is often willing to help you make a plan to put things in order before applying again.
Questions to Ask
Choosing your mortgage provider is a very personal decision. Whichever option you choose, make sure you understand your mortgage terms before you sign the deal. To help you make sure you’re as prepared as possible, here are some questions to ask:
What about the interest rate?
Is it fixed or variable? Fixed rates mean your monthly payment will always be the same for the period of your term. Variable rates may be lower, but it may fluctuate, up or down, throughout the term.
Can I make a lump-sum payment?
If you find some extra cash “under your mattress”, you might like to pay down your mortgage a little faster. Prepayments may or may not be allowed, depending on the terms of your agreement.
How long until I’m done paying my mortgage?
Typical amortization periods are 25 or 30 years.
When can I renew or renegotiate?
This can range from 6 months to 10 years but 5 years is the most common term.
Are there any other costs involved?
You may incur further expenses before your mortgage can be funded. Some lenders require a home appraisal. Also, lenders typically want to see proof of insurance which may require fireplace/woodstove, plumbing, or electrical expenses.
Don’t worry. You are never stuck with a particular lender or a specific rate, forever. In your mortgage contract, you will negotiate a deal that lasts for a specific period called a term. At the end of that time, you can re-negotiate for a better rate with the same lender or even choose to go somewhere else for your financing.
If you break the term agreement before the end of your term, there will be penalties and fees for you to pay. But, if you’re able to get a very good deal on a lower interest rate before the end of your term, it might be worth it for you to pay the fees. Keep in mind that this is rarely the case so always seek the help of a professional before deciding to break your mortgage contract.
No matter whether you work with a bank or a mortgage broker, you will be working closely with them and forming a relationship. Ask for references and consider word of mouth from your family, friends, and even your realtor before settling on a specific bank or mortgage broker.
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Margaret Johnson is in the business of helping Canadians tackle their debt, deal with credit issues, and regain control of their finances.