December 1, 2011 – In all the mortgages that I arrange, I find it surprising how few people actually ask me how I get paid. A recent study in the U.S. indicates that less than 10 per cent of people could properly identify how different types of mortgage providers get paid during the transaction. Don’t you want to know whether that person who is so eager to sign you up has a financial advantage to selling a particular product?
You definitely should care – and here is why. Almost every single provider in the mortgage marketplace has a potential financial gain by selling a particular mortgage product and rate. To make matters worse, that financial gain or pat-on-the-back is often gained
at the expense of the consumer.
Let’s take a look at your main mortgage providers to see what to watch for:
Bank branch manager
This friendly and trusted advisor has a sales quota to hit just like everyone else (you did notice that Canadian banks do fairly well financially, right?). Their salary increase, bonus and promotion depends on results. Typically, bank managers have sales quotas for particular products as well as growth targets on the loan/investment portfolios. Their targets are often based on the size of their mortgage portfolio as well as the average term of the portfolio. The longer the term, and larger the size of the mortgage, the better the Christmas bonus.
Furthermore, these managers are increasingly being graded on the profitability of these portfolios. When you go to your old bank branch and it has moved to a new location, where do you think one of the bank managers went? Which one do you think they kept with the bank? The one with the great discounted loans and mortgage rates, or the one that is making the bank the most money?
Bank mortgage representatives
These are typically contract employees of the bank who are usually paid on a straight commission basis. Most only sell one bank’s mortgages, while some sell several. The ones that sell other bank’s products are often only permitted to do so once they have met a quota of their own bank’s products. These individuals are usually paid based on three criteria: the size of the mortgage, the term of the mortgage and the discount given. That means that these representatives can make more money by putting you in a longer
term at a higher rate.
Mortgage consultants/mortgage brokers
These people are independent mortgage providers that theoretically work for you and not for one particular bank.
They are paid a finder’s fee (or commission) from the institution that the mortgage is funded with. The problem is that not all banks are paying the same amount for each of the mortgage products. The lenders pay brokers based on the size of the loan and the term selected. The longer the term selected, the bigger the commission to the broker. On top of the different payoffs for the terms, some lenders also pay more for the same product. A broker could make more money funding a five-year term through one lender over another. Typically, there is no advantage to the broker
if the consumer gets a higher rate, but there are exceptions to that rule.
So now that you know how it works, who do you trust? When you go mortgage shopping, don’t believe that everyone is out to get you. While the incentive systems are there, many mortgage providers will look out for your best interest. A satisfied past client that refers family, friends and colleagues is worth a lot more than one big commission payout. Do your research, ask for testimonials, or ask your friends. A mortgage is a huge financial decision. Make sure it is a decision being based on your financial situation, and not your mortgage provider’s bank account.
Calum Ross is senior vice-president and practicing mortgage agent with The Mortgage Centre. He has appeared on Canada AM, Investment Television, BNN and Citytv. He holds an MBA in finance and is an accredited mortgage professional. He can be reached at 416.410.9905.