One of the most asked questions people have when they work with a mortgage broker is, without a doubt, “how do mortgage broker fees work?” and “who pays for mortgage broker fees?”
Now, obviously, mortgage brokers don’t work for free, but the confusion surrounding how the fees work is understandable. Just like with real estate agent’s fees as a buyer, you’re not technically paying for their services and the same can somewhat be said about a mortgage broker. Ultimately, they won’t get paid until a deal closes.
Mortgage brokers vs. real estate agents: what’s the difference?
Many people confuse the difference between mortgage brokers and real estate agents and that’s okay. They are similar in ways, after all, they both work hard to help their clients get the home of their dreams, but the main differences are; a mortgage broker deals with connecting buyers with lenders, and a real estate agent helps connect buyers and sellers.
A day in the life of a real estate agent can typically involve:
- Keeping up with the market/trends in their area
- Completing and filing paperwork
- Plan open houses, showings, meetings with their clients or other agents, etc.
- Create a marketing plan for their clients
- Running their social media accounts and marketing themselves
- Responding to various emails, phone calls and other messages
- Getting interviewed by buyers, sellers or investors or doing the interviewing and getting to know their clients and the type of home/property they’re looking for
A day in the life of a mortgage broker can typically involve:
- Answering various emails and phone calls
- Get to know their client and what type of home/property they’re looking for
- Setting up meetings with clients
- Help clients gather and fill out the documents required to send in a mortgage application loan
- Submit applications to lenders and let clients know about the conditions that need to be met with the lender that approved them
- Shops for and negotiates mortgage rates and terms with the lender on the client’s behalf
- Collaborate with the client’s real estate agent to ensure everything is running smoothly to close the deal
Then what does a mortgage specialist do?
A mortgage specialist is the same as a broker, only a broker isn’t tied down to just one lending company. A mortgage specialist will actually work for a specific lending company and can only offer you deals available through that lender. Brokers, however, are not just tied down with one lending company. They can help home buyers shop around for the best mortgage deals that suit their particular wants and needs from a handful of lenders.
How mortgage brokers get paid
Like an agent and other financial advisors, mortgage brokers get paid by commission. The lender who your broker ends up connecting you with will pay that commission for referring and managing the application and closing. However, unlike how an agent’s commission is laid out in Ontario (5 per cent commission which is typically evenly split between the buyer’s agent and seller’s agent), a mortgage broker’s commission will vary depending on the lender, the type of mortgage loan, and how long the mortgage term is. This is broken up by “basis points”. A basis point (bps) represents one-hundredth of a percent, for example, on average, commission rates may be anywhere from 50 bps (.50 percent of the mortgage amount) to 110 bps (1.1 per cent of the mortgage amount). So if a lender gives you $650,000 to borrow and the mortgage broker’s commission rate is .50 per cent of that, they’ll make $3,250. If a lender gives you $800,000 to borrow and the mortgage broker’s commission rate is 1.1 per cent, they’ll make $8,800.
How a trailer fee works
While understanding the basics is simple, there is a more complicated side when it comes to what a mortgage broker is paid. A term you might hear get thrown around is “trailer fee”. This is when a broker may agree to collect a lower commission when the mortgage is first signed, and then they’ll receive payment of a “trailer fee” from the lender every year the mortgage remains (which the fee they’ll earn will vary). A broker may decide to do this with mortgages because it will provide them with a steady, ongoing income.
Questions to ask a mortgage broker before doing business with them
Just as you would gather as much information on your REALTORⓇ as possible, you’ll want to do the same for a mortgage broker. Here are some questions you can ask the mortgage broker you’re interested in working with:
1. How is your commission compensated?
You may feel uncomfortable asking a money question, but don’t worry, they’re likely used to it. A client will (usually) always want to know what commission amount the broker will be taking away once they close the deal, or if they charge less to collect trailer fees. A reliable and professional broker should always disclose all fees and how they’re broken down. If they don’t, you should move onto the next broker. Plus, on top of commissions, ask if there are any cancellation fees in case you decide that you do not want to close on the home after all. Some brokers will charge a cancellation fee because their pay is strictly relying on the fact that a client must close on a deal.
2. How does the mortgage approval process work?
Your broker should know if you’re a first-time buyer or not and if so, they should take the time to explain how the process will work, what to expect, and what paperwork/documents are required by you so they can shop around for mortgages from different lenders for you. Like a REALTORⓇ, a broker should be patient with you and have your best interests at heart.
3. Which type of mortgage loan is best for me?
This might seem like an obvious question, but remember that you’re going to be interviewing a few mortgage brokers and comparing their answers, so you want to be able to compare as much information as possible to make the right decision. They’re also the expert when it comes to mortgages and lenders, therefore, they should be upfront and honest with you. When they do suggest which specific mortgage term may be best for you, ask about how the contract works, what the specific terms are, and what extra fees may be included should you exit or refinance early.
4. What lenders do you work with?
Mortgage brokers have a large network of their favourite lenders and they know who offers the best mortgage rates around depending on clients’ needs. Even if they’re not familiar with a certain lender but they know you, as their client, would benefit from those rates better (even if they don’t get paid more), brokers should be willing to help connect you with them.
5. How long have you been a full-time broker?
Even though brokers who have worked part-time for a shorter period of time are just as hardworking and reliable as a full-time broker who has been in business for years on end, it’s understandable if you’re curious about their track record, what reputation they’ve built, and, in turn, what their list of networks looks like.
Tip: everyone has a social media and online presence nowadays, including brokers. Browse through their testimonials to see what people are saying about their business, costs/what they charged, and if they recommend them.
Are brokers’ fees negotiable?
Another commonly asked question those getting into the real estate market will ask is, “are brokers’ fees negotiable?” and the answer is: yes. All fees in real estate are always negotiable and your broker won’t be offended that you asked. In fact, they’re probably used to it and should be more than happy to negotiate with you to ensure you’re a happy customer, especially if you’re a first-time buyer who has a tighter budget.
Are full-service brokers worth it?
Ultimately, when it comes down to it, the choice is all yours, but you might definitely find that paying for broker services is the right thing for you for a number of reasons, particularly because they shop around for the best mortgage offers for you from various lending companies. Their fees may seem confusing at first, but they will not get paid until your transaction closes on the home you’ve been longing for. When it comes to choosing a broker to do business with, interview them as you would a real estate agent. Ask them what they charge, if their fee is negotiable, if there are any other costs you should know about, what lending networks they usually use, and how experienced they are. Work with a broker who is upfront and honest with you and who actually takes the time to walk you through the mortgage approval process, especially if you’re a first-time buyer.