Shop around and do your own research – no one lender has the best rates and terms all the time!
Has your real estate agent or financial adviser suggested that you go to a specific bank or broker for your mortgage? If they did, and they got paid to do so, there’s a potential conflict of interest.
Most referrals are made in good faith. Your adviser recommends a banker or broker because they believe you’ll get a good deal, a fast approval and competent service.
The issue is that some advisers pocket incentives when you close a mortgage with the person you recommend. That renumeration can take the form of cash referral fees or referral program “points”. For example, RBC has just started one such program.
The compensation in the RBC example above is $1,000 for every five first-time homebuyers but some real estate brokerages get paid up to 50 basis points ($2,000 on a $400,000 mortgage) for referring clients to that bank.
Who can blame banks for wanting to pay realtors? Not only can it be less expensive and more lucrative than advertising, it can also be cheaper than paying an internal sales rep or broker.
Is this an issue? As a consumer, you have to be sure that the person you’re being referred to is really working in your best interests. Direct or indirect compensation can alter the motives behind a referral.
The truth is, no single lender has the best rates, terms and policies all of the time. A referrer can’t recommend one institution all the time, and expect you to get the right mortgage. If their recommendation is made in exchange for compensation, customers can potentially hold that realtor responsible if things go wrong.
Now of course you say, “well what could go wrong?”
For one thing, the institution you’re referred to may not have the optimal lending guidelines or flexibility for your circumstances. Moreover, if your application requires lender exceptions (i.e. due to credit issues, debt service ratios or income/employment type), the mortgage specialist at the lender you’re referred to may not have the experience to properly build your case to the underwriter.
Both of these scenarios can potentially get your application declined, costing you time, frustration and even missed deadlines for removal of financing conditions – in a hopping real estate market like we have today, this might coast you your dream home!
Furthermore, if a botched application is turned down by the mortgage default insurer (i.e. CMHC), it hurts your chances of approval with all mainstream lenders.
If your realtor is getting paid to route you to a lender, you’re probably better off doing independent research. Take the time to explore rates online and contact different lenders and brokers to compare the fine print. Call only experienced mortgage professionals and ask questions such as:
- What are the penalties for breaking my mortgage early?
- Are these based on discounted rates or more expensive posted rates?
- How much and how often can I make extra payments without penalty?
- Can I extend my mortgage term before maturity at best rates with no penalty?
- Will I get the best rate you offer if I convert my variable rate mortgage to a fixed during the term?
- Finally, if you want to know whether a trusted adviser is getting paid for sending you someplace, don’t be shy, just ask! Realtors must generally disclose when they’re getting paid for recommending a lender to a client so if you’re shy, you can always look at your agreement.
Potential conflicts aren’t limited to real estate agents and financial advisors. Mortgage Brokers and lender reps also get paid for referring financial services, especially creditor life insurance.
If those in a position of trust are going to be paid for directing consumers to a single provider, it better be the right provider!
Consumers do rely on recommendations from trusted advisers, friends and family, so this shouldn’t stop you from taking the advise of trusted people in your life.
When it comes to Realtors, Mortgage Brokers, Financial Advisers and Insurance Professionals, we work with each other a lot and obviously have some ideas of who the good ones are – as a consumer you should leverage our exposure to the various players in the market. After all is said and done, it is much better to go with a recommendation than to source someone out yourself but make sure you ask the right questions.
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