I think we can all agree that competition is a good thing.
If it wasn’t for competition, we’d all be drinking $5 bottles of Coke, driving $50,000 Fort Pintos, and our economy would probably look kinda like the old Soviet Union. Competition is what motivates companies to produce their best product at the best possible price.
There are some downfalls to competition, but they’re somewhat minimal. Volkswagen is a great example of a company finding ways around a problem, rather than dealing with it head-on. If there wasn’t so much competition in the auto industry, Volkswagen might have been more motivated to come up with a real solution to its emissions problem, since it would have just been able to raise the price of its cars in response.
Businesses competing for your dollars is a major part of the mortgage broker business. Look at the website of any mortgage broker in Canada, and you’ll see a gigantic list of lenders they deal with, along with proclamations of “shopping hard to get you the best deal.”
On the surface, this makes all sorts of sense. When the mortgage broker gets your application, they can use their expertise to find the best mortgage for you. Some lenders prefer traditionally-employed applicants, while others don’t have much of a problem with folks who are self-employed. Some have great short-term rates, while others excel at five-year fixed mortgages. Others might charge a big penalty if you break the mortgage in a year or two, while don’t. There are a many variables to consider.
This is why mortgage brokers will always get the subprime business. Subprime doesn’t just mean riskier borrowers, at least from my perspective. Think of subprime as less risky, and more odd. If there’s someone with a unique situation, chances are they’re going to a broker.
Most mortgages, however, are pretty straightforward. They involve one or two borrowers with regular job, good credit and a down payment from the usual sources, buying a very average house or condo.
The average borrower goes to a mortgage broker because they want a low rate, at least most of the time. One of the biggest selling points by brokers is they can get you lower rates.
In reality, many brokers don’t really care about finding borrowers the lowest rate. Why? Two words: volume bonuses.
Why volume bonuses are so important to brokers
Essentially, it works like this.
Most brokers work as part of a team. Together, these teams can qualify for volume bonuses if they send enough business a certain lender’s way, and assuming they don’t have many deals that end up getting cancelled, for whatever reason.
The pay on a normal five-year fixed mortgage is about 0.80%, depending on the lender. If a group of brokers channel enough volume through that lender, they can get bonuses that will up the payment to closer to 1%.
On a $300,000 mortgage, a normal commission would be about $2,400. Including a volume bonus, that can be as high as $3,000.
You can see how those volume bonuses make a big difference for somebody that does 30-40 deals per year. They’re a big incentive for a broker to send every possible deal through one or two lenders. We’d all do the same thing in their shoes.
It doesn’t take a genius to see the big issue with this. Is a borrower really getting the best deal if a broker is channelling all their business through a handful of lenders? And can lenders even afford to give borrowers competitive rates if they’re paying volume bonuses?
Fortunately, for consumers, a new batch of mortgage brokers are coming onto the scene. These brokers are willing to forego big commissions by doing things like channelling much of their business to the lowest rate lenders, and telling lenders they’ll accept less in exchange for lower rates. Think of these guys as the Wal-Mart of the mortgage business.
It’s going to be hard for the traditional brokers to compete with these rate discounters. Old-school brokers argue they make sure the borrower has the proper mortgage for their needs, and that discounters care only about the rate. For many borrowers, the mortgage decision should only start at rate.
But if these brokers insist on funneling most of their business to certain preferred lenders even if they have a higher rate, I struggle to see the real value proposition they add.
At a minimum, ask your broker about this, and ask to see the rates available from every lender. There are plenty of websites that have that info easily available. Remember, as much as financial professionals say they’re out to help you, they’re far more interested in helping themselves.