How Canadian mortgage brokers work and ways they can save you money

This article has been updated from a previous version.

Getting a mortgage can feel complicated, especially if it’s your first time navigating the homebuying process.

Once you start looking at all the options available to you – fixed rates, variable rates, cashback mortgages, no frills mortgages, full-featured mortgages, quick close specials – deciding on the right mortgage can seem overwhelming.

That’s where a good mortgage broker can help. If you’re a first-time homebuyer, going to your bank for mortgage financing may seem like the obvious choice. But working with a mortgage broker has its own advantages.

What is a mortgage broker?

A mortgage broker’s job is to look at your finances to determine the mortgage product that gets you the lowest overall borrowing cost.

They do that by comparing mortgages on your behalf, negotiating rates and terms when necessary. Once a suitable product is selected, they then help gather all the paperwork and submit it to the lender for approval.

Throughout the process, the broker liaises with the mortgage lender regarding any administrative steps. Finally, they guide you along the process, helping explain the application requirements and answering questions you may have regarding your mortgage contract.

Mortgage brokerages and their brokers are subject to a series of regulatory requirements. The Financial Services Regulatory Authority of Ontario (FSRA) is a regulatory body that licenses mortgage brokers and agents. It defines a mortgage broker as “an individual licensed by FSRA to carry out mortgage activities for a licensed mortgage brokerage,” who can only be licensed to work under one firm.

Related: Find the best Ontario mortgage brokers

Depending on the province, brokers are allowed to represent the borrower, the lender or both.

In Alberta, for example, mortgage brokers can’t represent both the borrower and the lender in the same transaction. They must choose to represent one party (either the borrower or the lender) to avoid conflicts of interest.

What does a mortgage broker actually do?

Here’s a quick rundown of what the process of working with a mortgage broker entails.  First, your mortgage broker needs access to your financial information to better understand your financial situation and match you with appropriate lenders.

Qualifying for a mortgage

When qualifying for a mortgage, your broker may request:

• A letter of employment and/or tax returns (confirmation of income)
• Bank statements
• Credit reports
• Proof of assets, investments and liabilities
• Details of your other debts and monthly obligations
• The amount of down payment you have
• Information about the property you wish to purchase (usually an MLS listing)
• Contract and building plans (if applicable)

This list is far from comprehensive, but it gives you an idea. For a full list of requirements, check with your broker.

Related: Looking for a new home? Why you need to pre-qualify first

Mortgage options to choose from

When selecting a mortgage, your broker should provide you with options that fit your individual circumstances.

According to FSRA, a mortgage broker will be able to explain all the options available to you, as well as their unique benefits, costs, and requirements.

Once you receive the options that fit your needs, you may also be asked to sign a document that says you understand the risks related to the mortgage you have chosen. Be sure to read this document and seek outside legal counsel, if necessary

Understanding the risk associated with getting a mortgage is key when considering how much debt you can comfortably take on.

Related: How to select the right mortgage term in today’s changing market

Submitting the mortgage application for approval

It is your mortgage broker’s responsibility to provide the lender with information that accurately reflects your circumstances. They must submit it in a timely manner so that the lender can make an appropriate decision regarding your approval and meet any financing deadlines.

Once the lender has agreed to advance the loan, your broker will fulfil the lender’s documentation conditions, arrange the appraisal (if applicable) and coordinate the closing with your lawyer or closing agent.

Before signing on the dotted line, make sure you fully understand all the terms and conditions of your mortgage contract. Answering such questions is a broker’s most important function given that restrictive terms can cost you after closing.

Benefits of using a mortgage broker

Mortgage brokers are experienced professionals who can guide you through the complicated process of buying a home. But beyond that, there are other advantages of using a broker to close your next home.

Cost savings: You pay nothing out of pocket for their services, assuming you’re an average qualified borrower (brokers are paid by the lender unless you have a “non-prime” mortgage —i.e., you have bad credit, unprovable income, etc.)

Access to multiple lenders: Unlike your local bank which offers mortgages from their own suite of products, brokers have access to rates from dozens of mortgage finance companies and banks, which increases your chances of finding the best product tailored to your needs and financial situation.

Financial planning assistance: Brokers can help you with strategic financial planning if, for example, you need additional cash for home renovations. If you have other debts, they can help you consolidate them into your mortgage – potentially reducing overall interest costs.

Expert negotiation: Mortgage brokers are skilled negotiators. They can advocate on your behalf to secure the most favorable terms and interest rates. Even if you prefer a mortgage from a big bank, brokers can often negotiate volume discounts with major lenders, resulting in a lower rate than what you could negotiate directly.

No obligation until you secure a rate: You’re not committed to anything until you know your mortgage rate. Brokers will find the best rate for you, and only then do you proceed with the application.

Read more: Mortgage amortization: Should you go long or short?

Are mortgage brokers actually free?

For typical, qualified borrowers, mortgage brokers offer their services for “free.” That’s because they solely work on commission (finders’ fees), which is paid by the lender once the mortgage closes.

Compensation from the lender is generally a percentage of the mortgage amount (roughly 1 per cent). It varies based on the mortgage rate and term length.

Beyond the basic commission, brokers may receive other incentives:

Volume bonuses: Lenders reward brokers based on the volume of business they bring.

Efficiency bonuses: Brokers who efficiently process mortgages may receive additional compensation.

Trailer fees: Some lenders pay brokers a small fee over the term of the mortgage.

These extra earnings are still covered by the lender and don’t directly impact borrowers. This commission structure allows brokers to assist borrowers without charging directly.

For special or more difficult financing (like higher-risk private lending), brokers may charge a percentage or flat fee for their services. In such cases, the amount of fees they receive can impact the total cost of your mortgage.

Related: How much are real estate commissions in Canada?

Understanding how much commission mortgage brokers make

There is no flat-rate commission across the board for mortgage brokers. There are multiple variables that affect how much they are paid out, including:

• The longer the fixed term, the more commission the mortgage broker may make
• Fixed terms sometimes pay a bit more commission then variable terms
• Larger brokerages may receive additional bonuses (and lower rates) because they produce a higher volume of deals

A broker’s compensation and lender perks can sometimes sway their advice. That’s why brokering isn’t always “free.” Despite regulators’ efforts to curb this behaviour, it’s almost impossible for a layperson to know when it is happening.

The main thing you can do is ask your broker candidly: “Are there any products in the broker market that offer you less compensation or perks that would save me more money in the long run?”

And keep in mind, the mortgage with the true lowest cost of borrowing may be available only to borrowers who deal directly with the lender (i.e., non-broker rates).

How do mortgage brokers get better rates?

Mortgage brokers don’t all operate on the same playing field – this means they don’t all offer the same financing.

Brokers that handle substantial business – such as those sourcing over $150 million in mortgages annually – tend to get better deals from lenders due to the volume of clients they bring in. These brokerages also receive exclusive promotions which is why some brokers offer lower rates than others.

It’s always a good idea to personally compare comprehensive mortgage rates across Canada to make sure that you’re juxtaposing offers from various brokers, banks, credit unions and other lenders—without bias.

Read next: The hidden costs of buying a home