In an email exchange with one of my former students, I summarized some of the advantages that Mortgage Brokers bring to this field:
1. They can source 12 or more mortgage lenders and get the most competitive rates and terms for you to choose from.
2. It saves you a lot of time– how long would it take you to get in front of and apply to, say, 12 lenders?
3. Banks sometime try to sell tied products– insurance, RRSPs, other banking services, credit cards and more, sometimes ‘forcing’ you to buy things: a) you don’t need and b) at higher prices than you can get elsewhere.
4. Mortgage Brokers can source multiple lenders with ONE credit report on you and your partner. If you apply to multiple lenders yourself, each one will ‘ping’ your credit rating and each ping on your credit rating lowers your Beacon Score (your credit rating) by 2.7 points. Therefore, 12 lenders would lower your credit score by 32.4 points. If your Beacon Score was just above 700 (a good score), it would now be below 700 and this could affect your loan rate (i.e., the interest rate goes up and it becomes more expensive)!
The theory is that your credit score goes down if you are applying all over town for more and more credit. This is, of course, unfair in this case because you are only applying for one mortgage of, say, $200,000 but it appears to be multiple applications for $2.4 million in financing and your Beacon Score therefore drops!
5. It doesn’t cost you a thing– the Mortgage Lenders pay the mortgage broker a fee for sourcing the loan (at least in the case of residential mortgages. In commercial mortgages, the Borrowers often pays these fees.)
More than 75% of all mortgage loans are now sourced in the US through mortgage brokers. The rate in Canada is about 30% but I expect it will increase a lot in the next decade.
Cheers, Bruce
ps. here is a spreadsheet I created in .xls format that tries to quantify the merits of using a residential mortgage broker: http://www.ottawarealestatenews.com/ValuePropositionOfAResidentialMortgageBroker.xls.
Comment from John Walsh, Mortgage Agent:
“I like what you say, however, using an actual numerical number for a credit hit can be misleading.
As an example, I had one client who tried to get a new car lease. He was consistent. He hit one car lease company every 3-4 weeks. His credit score after 18 months of trying was down to 500 from probably over 700!
He had clean credit otherwise. So he went down roughly 200 points from just 18 hits (approximately).
In this case, he was seen as ‘seeking credit’. Someone should have told him what was happening (I did and told him he wouldn’t be eligible for a home mortgage for 12 months). He, like so many, had no clue what was happening to his credit.
A credit score is more of a ‘ranking over time’.
JRW”