Welcome to Mortgage Rundown, a quick take on Canada’s home financing landscape from mortgage strategist Robert McLister.
Mortgage shoppers seldom get truly unbiased advice in this country. It’s something Canada’s mortgage industry doesn’t like to talk about.
Sure, you can go to a mortgage broker and get personalized advice and multiple options. And yes, unlike bank representatives, brokers won’t sell you on just one product. That’s key, because no lender has the best financing for everyone.
But for well-qualified borrowers – those who can get approved by virtually any lender – the best possible mortgage advice won’t come from a traditional mortgage broker.
The reasons are simple. For one thing, there are quality lenders that don’t deal with mortgage brokers. Moreover, brokers get paid a commission from the lender they recommend to you. That can be a conflict of interest, as a 2016 letter from B.C.’s mortgage broker regulator explained.
That letter stated in no uncertain terms: “…Lender compensation can influence a mortgage broker’s advice to a consumer. That can result in advice that does not align with the consumer’s best interests.”
This type of conflict is exactly why fee-only financial planners exist. Certified financial planners who are fiduciaries and charge an hourly fee for advice don’t suffer from commission-related bias.
Sadly, there’s nothing equivalent in Canada’s mortgage business. But there should be.
Mortgages 101: What’s a mortgage and how to choose between fixed and variable rates in Canada?
The case for fee-only mortgage advice
You can get free advice from thousands of mortgage brokers. But don’t expect those brokers to objectively compare all major lenders and rates for you. Virtually no mortgage broker does that.
Brokers typically recommend mortgages only from lenders they know and deal with. They have little incentive to comprehensively compare mortgages from all key lenders because that takes a lot of effort, and not all lenders pay them.
But, if a broker could charge you a reasonable fee up front, you’d potentially get more forthright counsel, a broader array of mortgage choices and a mortgage with the lowest projected borrowing cost.
And remember, borrowing cost isn’t just about the rate. It’s about flexible features that help you port, refinance, break, convert or prepay your mortgage early, at the lowest possible cost. Those things usually save you more than a small difference in interest rates, sometimes dramatically more.
The cost savings of fee-only advice could be significant. A fee-based broker might only charge $150 an hour for advice, for example. Mortgage flexibility and the lowest rates can save you 20 times that, or more. Alternatively, a broker might charge a flat $795 on a $400,000 mortgage, and kick back all of the commission they earn if you get a mortgage through them.
Contrast that to today where brokers often get paid one percentage point on a typical five-year mortgage. On that $400,000 loan, that’s upwards of $4,000, less the broker’s expenses.
The key is this. If your most suitable mortgage was from a lender that doesn’t sell through mortgage brokers (Tangerine or CIBC, for example), a fee-based broker would still be incentivized to recommend them.
Regulatory roadblocks
In some provinces, red tape prevents mortgage brokers from offering this value-added model. Take B.C., for example. Even though its broker regulator pointed the finger at mortgage brokers for being biased by compensation and lender rewards, the B.C. Financial Services Authority says it prohibits brokers from charging a fair fee in advance for unbiased mortgage advice, citing its interpretation of legislation as the reason.
Other provinces, like Ontario, are more open to innovative broker models. Unlike in B.C., an Ontario borrower can hire a mortgage broker to provide only advice, and not a mortgage, and that broker can charge a fee immediately after providing the advice. And, “There is no requirement that a broker can only be paid when a mortgage is closed,” says Huston Loke, Executive VP of Market Conduct at the Financial Services Regulatory Authority of Ontario.
That makes professional, honest, fee-based mortgage advice possible.
The future of pay-for-advice mortgage models
Thus far, I’m not aware of any brokers that offer this model. For now, the truth is that most folks are programmed to avoid fees, even if they can save more money over all.
Then again, if a “free” mortgage adviser recommends a mortgage with a 10-basis-points higher rate, a worse prepayment penalty or other costly restrictions, you have to question how free they really are.
Don’t expect an industry shift to fee-based mortgage advice any time soon. As with financial planners, only a minority of mortgage brokers would entertain hourly or flat-fee consulting arrangements, and fewer yet would be willing to kick back all of their commission (less costs) to the borrower.
But give it time. A decade ago, people never thought we’d see commission-free stock trading either.
Mortgage rates inch higher again
Another week, another round of fixed mortgage rate increases. The average uninsured five-year fixed at national lenders rose six bps this week and is now above three per cent for the first time since April 2019.
There’s just one Big Six bank left advertising uninsured five-year fixed rates in the two’s, Scotiabank eHOME at 2.98 per cent. If bond yields continue their upward crawl as expected, that rate may not last long.
For default-insured borrowers, the lowest nationally available 10-year fixed rate is now just 35 basis points more than a five-year fixed. Since the beginning of inflation targeting in 1991, 10-year fixed rates have never outperformed five-year fixed rates over five years, but inflation hasn’t been this high since 1991 either.
Default-insured five-year fixed rates are now 165 bps more than variable rates, the most since 2010. The wider that spread gets, the less likely you’ll save more in a five-year fixed.
Rates are as of Wednesday from providers that advertise rates online and lend in at least nine provinces. Insured rates apply to those buying with less than a 20 per cent down payment, or those switching a pre-existing insured mortgage to a new lender. Uninsured rates apply to refinances and purchases over $1-million and may include applicable lender rate premiums. For providers whose rates vary by province, their highest rate is shown.
Robert McLister is an interest rate analyst, mortgage strategist and columnist. You can follow him on Twitter at @RobMcLister.
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