A borrower can access different financing channels to complete the mortgage process. They can apply with a major bank, mortgage broker, credit union or even directly with a private lender (without a mortgage broker’s involvement).
Having options maintains a healthy level of competitiveness in the industry, however, borrowers should also ensure they learn how industry professional get paid to avoid financing pitfalls.
You may wonder how someone’s pay method can undermine the basic mortgage process and the universal business model of putting a customer’s needs first.
Well, in the banking world, mortgage advisors that work directly at branch level are on a basic salary, which in theory, should keep them honest. However, they also get heavily incentivized with bonuses and pay raises if they meet or exceed a pre-determined sales target, and most of them can lose their jobs if they consistently underperform. When needing to earn big bank shareholders a certain profit margin, pressure to perform becomes intense and employees can end up pushing products and services that don’t necessarily service their customer’s needs which can undermine the process.
For example, banks sell many products including mortgages, home lines of credit, personal loans, bank accounts, life insurance, investments and so forth. When many products are available to the public and are also part of the basic salary + bonus or commission model, it’s the perfect breeding ground for consumers to get sold multiple products whether or not those products help them financially.
Consumers are sometimes concerned about “tied selling.” Tied Selling is the practice of providing a product or service on the condition that a customer purchases some other product or service. In Canada, tied selling is illegal, and consumers should know their rights to avoid becoming a victim.
Although I am definitely not accusing big banks of doing this, there seems to be a fine line between incentivizing certain consumer actions in order to sell more products. Examples include big banks that offer more incentives for, let’s say, banking with them or offering a credit card, for example, that encourages the consumer to incur debt for travel points. Clearly, there will always be a greater push at the banking level for customers to sign on to different products, investments, etc. because of the basic pay models and the motivation to sell. Customers should make themselves privy to this information and perform a certain level of due diligence looking past possible sales tactics.
I once worked with a mortgage borrower who had become distraught after learning that the life insurance premium he paid for 10 years was not a mandatory part of qualifying for his mortgage. He had dished out over $72,000 in premiums and only learned in the last year of paying that he didn’t qualify for the policy’s coverage to begin with. Big mistake, of course, but he was obviously pressured into thinking this was something he needed to take on to get a mortgage. In the real world, a case like this, could possibly be looked at as tied selling and again, is not legal.
Therefore, as a mortgage borrower, it becomes even more essential to LOOK and READ what you are signing to ensure you understand all the terms.
You’re probably thinking I will promote the broker channel, instead. Wrong. Our compensation model can present flaws, too.
Unlike the banks that can only offer the bank’s products, mortgage brokers have access to both big banks and alternative lenders that include other mortgage finance companies and private lenders. And, although having a variety of lenders at our fingertips is a major competitive advantage, payment models from lenders can present challenges that can undermine the client's best interests.
Mortgage brokers work on a 100% commission model and get paid an “origination fee” by the lenders they work with. Some lenders pay more and some pay less. With alternative and private loans, there may be a broker fee involved which can vary amongst mortgage brokerages because these lenders either don’t pay brokers nearly as much as prime lenders or even at all.
A borrower who applies through a mortgage broker may get stuck with an inferior mortgage product because their broker may opt to apply with a lender paying the most commission instead of one with the best mortgage product paying less. (Many brokers will argue against this but as a mortgage agent, I can say this happens all the time. Some brokers will try to maximize their income potential which also can undermine the mortgage process.)
Realistically, there is likely to be fewer instances of tied selling or incentivizing customers to use or sign on to more products through the broker channel because brokers don’t have access to banking products and they don’t have to reach quotas to keep their jobs, which means there is no pressure on the customer to choose other services or use more products. In reality, if a mortgage broker wants repeat business and to earn a commission, he or she will try to earn the trust of their clients. This practice can work in a borrower’s favour.
Again, it is still very important that a borrower READ the fine print of their mortgage contract to ensure they understand everything from prepayment penalty calculations to transferability but knowing how each get paid can open ones eyes to what is presented in front of them.
Sarah A. Colucci
Mortgage Agent, Lic. M14000929
Mortgage Edge, Broker 10680
Direct: (647) 773-4849
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By: Sarah Colucci
411 Queen St.
15 Wertheim Court, Suite 210
Richmond Hill, Ontario
Sarah A. Colucci, Mortgage Agent Lic. M14000929
Mortgage Edge, FSCO Lic. 10680