Photos: James Bombales
For many years, the traditional route towards obtaining a residential mortgage was through a loan from one of the big six Canadian banks (TD, CIBC, BMO, National Bank of Canada, Scotiabank and RBC). These are referred to as “A lenders” or traditional lenders that usually cater to clients with good credit scores and steady income. However, with the introduction of new mortgage rules and stress tests introduced in January 2018, combined with rising home prices, it’s becoming more difficult for homebuyers to be approved for a traditional loan.
Samantha Brookes, CEO and founder of Mortgages of Canada, has seen a rise in Canadians who don’t qualify for a bank mortgage and instead are turning to “B lenders” and private lenders to achieve the dream of homeownership. As a mortgage broker, Brookes plays the important role of connecting homebuyers with a variety of lenders including banks, alternative lenders and private lenders.
Photo: Mortgages of Canada
While alternative and private lenders provide another option for homebuyers to enter the housing market with fewer restrictions, they do come with risks. Unlike banks and monoline lenders, alternative and private lenders are not federally regulated and don’t have to follow the rules set out by the Office of the Superintendent of Financial Institutions (OSFI). And while they do offer lower barriers to entry for those not eligible for a bank loan, they also come with higher interest rates and fees. Many who choose to go with an alternative or private lender often have lower credit scores or are already in precarious financial situations so it’s vital that they choose the right mortgage broker with their best interests in mind.
“A mortgage broker acts as a liaison between the homebuyer and the lender and negotiates on behalf of both parties to ensure that the conditions in order for the transaction to be completed are fulfilled,” says Brookes. “A home is likely the largest purchase you’re going to make in your life so it’s important to ask questions in order to find a reputable mortgage broker.”
Here she shares five questions every homebuyer should ask a potential mortgage broker before hiring them.
1. How many transactions have you closed in the last two years?
“This is really important because even in one year you can’t truly know the business,” says Brookes. “If somebody has two years experience doing mortgages and they’ve closed at least five to -ten transactions each year I would say that that person has enough experience and knowledge to get the deal done.”
A lower number of transactions could also mean the broker isn’t dealing with mortgages on a full-time basis. “If your mortgage broker is only working part time, it could be difficult to get timely responses.”
2. Are you licensed to trade and deliver mortgages in the province?
Mortgage brokers must be licensed with their respective provincial governing body to ensure that they meet the specific education and experience requirements to arrange the mortgage for your purchase. “In Ontario, the Financial Services Commission of Ontario (FSCO) is the government agency responsible for overseeing the mortgage brokering industry,” says Brookes. “To check if a mortgage broker is licensed, you can go to the FSCO website and type in their name and the city that they’re in.”
3. What types of transactions do you accommodate?
Prospective homebuyers should know if their mortgage broker can accommodate multiple levels of lending. This ensures that they will have a good understanding of your situation and provide the right solution for your needs without having to perform multiple checks on your credit report.
“If you deal with a broker who accommodates people with good and bad credit and who deals with banks, monolines, alternative lenders, private lenders — the whole spectrum of lending — then you know you have a good broker,” says Brookes. “There are a lot of brokers that only work with private lenders because it’s a much faster process to close transactions, even when a private lender may not be the best option for the client.”
4. How much do you charge for your fee?
Most mortgage brokers charge a fee of 1 to 5 per cent paid by the borrower or the lender depending on the whether the loan is through an alternative lender or a private lender. Others may charge more or even charge a flat rate so make sure that your mortgage broker discloses all the fees up front before an agreement is signed.
“When it comes to alternative lenders or private mortgages — we don’t get paid at all with private mortgages — its the mortgage broker’s responsibility to charge a fee,” says Brookes. “The way that we get paid is through the actual transaction so if, for instance, your house is worth $100k and you only need a $50k loan, we may bump up the amount of the mortgage to $55k to accomodate for the broker and legal fees. But this will be added to your mortgage amount so it doesn’t actually come out of your pocket.”
5. What is your down payment requirement based on my financial situation?
Some first-time buyers may not realize that there are various down payment options that allow homebuyers to put down less than the typical 20 per cent. After an initial consultation, a qualified mortgage broker should be able to paint an accurate picture of your down payment requirements based on your credit score, income and employment history. “If you fall on the A side, your minimum downpayment is 5 per cent, but if you’re on the alternative side, it’s 20 per cent,” says Brookes. “With that said, the less you put down, the more interest and fees you pay for your loan. That’s why it’s best to look at what down payment options work best for you and your financial situation.”