How mortgage brokers get paid

People are often reluctant to ask this, which is exactly why it is worth setting out plainly. How a broker is paid shapes the advice you get, and you are entitled to understand it before you rely on any of it.

On a normal residential mortgage, the lender pays

For the great majority of residential mortgages — a purchase, a refinance, a renewal or a switch placed with a mainstream lender — the lender pays the broker a finder’s fee when the mortgage funds, and the borrower pays nothing.

Not a discounted fee. Nothing. No charge for the application, no charge for a pre-approval, no charge if the deal does not complete.

The fee comes out of the lender’s own cost of acquiring the business. Lenders use brokers because it is cheaper than staffing branches to find the same borrower, and the rate you are offered through a broker is not marked up to cover it. That is the part people find hardest to believe, and it is the part that is most consistently true.

What the lender’s payment depends on

The finder’s fee is a percentage of the mortgage amount, and it varies:

• By lender. Different lenders pay different amounts.
• By term. Longer terms generally pay more than shorter ones.
• By volume. Many lenders run status or tier programs where a brokerage sending more business earns a higher rate of compensation.

Those three facts are where the conflicts live, and they are worth naming.

The conflicts, stated plainly

Longer terms pay more. A five-year term typically pays a broker more than a two-year one. There are good reasons to choose a five-year term and good reasons not to, and the compensation difference is not one of them. If you are being steered toward a longer term, the reasoning should be about your plans — how long you will keep the home, how likely you are to move or refinance, what breaking it would cost — and not left vague. Fixed or variable and term versus amortization cover the actual trade-offs.

Some lenders pay more than others. The right lender is the one whose guidelines fit your file and whose terms suit what you are trying to do. If a particular lender is being recommended, you should be able to hear why in terms of your circumstances.

Volume programs reward concentration. A brokerage that sends most of its business to one lender may be earning a better rate for doing so. That is legal and disclosed, and it is a fair thing to ask about.

None of this makes broker-placed mortgages a bad deal — a broker comparing the whole market still beats a single bank offering only its own shelf. But you should be able to ask “why this lender and why this term” and get an answer about your file rather than a shrug.

When the borrower does pay a fee

There is a part of the market where the borrower pays, and it is not hidden:

Private mortgages. Private lenders do not pay finder’s fees the way institutional lenders do, so the broker’s compensation comes from a fee paid by the borrower, usually expressed as a percentage of the loan. There is normally a lender fee as well, plus legal costs. See private mortgages.

Some alternative and B-lender deals. Depending on the lender and the complexity, a fee may apply, sometimes alongside a smaller lender-paid component.

Unusually complex files. A file requiring substantial work with an uncertain outcome may carry a fee, agreed in advance.

In every one of these cases the fee is disclosed in writing, with the amount, before you commit to anything. In Ontario, mortgage brokerages are regulated by FSRA, and written disclosure of compensation and of any conflict of interest is a requirement, not a courtesy.

If you are ever asked to pay a fee on a straightforward residential mortgage with a mainstream lender, ask why. The normal answer is that there should not be one.

What you are actually buying

Since the lender usually pays, the fair question is what the service is worth. Concretely: one application instead of several, access to lenders who deal only through brokers, knowing which lender treats your particular income or property favourably, structuring the file so it is approved first time rather than after two rounds of conditions, and pointing out the clause that will cost you at renewal.

On a straightforward file with strong income and good credit, a bank may well match anything a broker arranges. On a file with anything unusual in it — self-employment, rental income, a recent job change, a property outside the ordinary — the gap between lenders is where the money is.

The short version

On almost every residential mortgage the lender pays the broker and you pay nothing. Fees exist in private and some alternative lending, and they are disclosed in writing before you commit. Longer terms and certain lenders pay brokers more, which is a real conflict and worth asking about directly. Anyone unwilling to answer that question has told you something useful.