August 26th 2021
Mortgage Broker vs Bank: What's the Difference?
By Corey Sherwood
Real estate is a very personal investment. Choosing a mortgage lender from the hundreds available can be a frustrating task. You want someone who is knowledgeable about the market. You also want someone who will actually get you the best possible rate, not just the lowest rate. As you get ready to start looking for a home, you may be confused about what it means to work with a mortgage broker or a bank.
In this article, we’ll describe the differences between the two.
Mortgage Broker vs Bank
The main difference between a bank and a mortgage broker is that a bank can only offer its own products, while a mortgage broker can offer multiple options for mortgages. Independent mortgage brokers are licensed to have access to numerous lenders and rates. The idea is for them to negotiate the best rate for you. Since brokers acquire many mortgage products, they can offer volume discounts. Banks are limited to offering only their own mortgage products.
Mortgage Broker Advantages
Mortgage brokers act as intermediaries between you and the potential lender. In CMHC’s 2021 Mortgage Consumer Survey, 85% of people felt that a mortgage broker would get them the best deal. Here are some advantages of working with a mortgage broker:
- Less research: Brokers have regular contact with multiple lenders, some of whom you may not even know exist. A broker can also make recommendations on which lenders to avoid who have complicated payment terms to their contracts. Still, it’s important to do some preliminary research before working with a broker. A simple way is to search for current interest rates and to use a mortgage calculator online. This will help you get an idea of what to expect from the brokers.
- More connected: Some lenders only work with brokers and target a specific clientele. Brokers might also be able to get special rates due to the higher volume of business generated that might not be possible to get on your own with a bank.
- Waive fees: With a bank, there might be several fees involved, including origination fees, appraisal fees, and application fees. It’s possible that a broker might be able to waive all or a portion of those fees, saving you money.
Mortgage Broker Disadvantages
With so many brokers out there, it can be very hard to know which one is best. The thing is, each broker has their own strengths and weaknesses, and no one broker is perfect for everyone. This is because each broker has their own set of products, qualifications, and services that they specialize in. The following might be some disadvantages of working with a broker:
- Misaligned interests: A borrower wants to find the best rates and lower fees. The broker is receiving a fee from the lender, which makes their goal to maximize their compensation.
- Risk of not getting a better deal: It’s not guaranteed that a broker will find you the best rate. While some people believe that a broker will find the best deal, it’s not always the case. It’s advised to shop around to see and get a picture of the current mortgage market.
- Broker fees: Mortgage brokers can receive their fees either from you or the lender. If the lender is covering the fee, then they might be pushing a heftier loan for a better commission. If you’re paying the fee, do the calculations to see how good of a deal you are getting.
- No estimate guarantee: Brokers might offer you an estimate that they label a “good faith estimate”. They cannot promise to honor this estimate. In some cases, the lender might modify the terms of the loan after assessing your actual application, leading to higher fees.
- Miss out on certain lenders: Not all lenders work with brokers. Fewer lenders are going with brokers as they found that broker-originated mortgages are more likely to go into default instead of direct lenders. Working with a broker means you might be limited in terms of which lenders you can work with through them.
There are many advantages of working with a bank, including the following:
- Familiarity: If a client already has a good existing relationship with the bank and uses their services, it can be more convenient to go with your home bank.
- Perks: Getting your mortgage from a bank might have certain perks rather than negotiating with a mortgage broker. This might include access to a home equity line of credit or the bank paying for an appraisal.
- Trustworthy: Some borrowers feel more comfortable going with a bank as they perceive it to be a more stable, secure institution.
Some of the disadvantages of working with a bank include:
- Higher rates: Major banks typically have higher rates than the lowest rates available. If a borrower is unable to negotiate a discount, they might be stuck with higher rates over the life of their mortgage.
- Fewer options: A bank only carries their own products, which means they are limited in terms of what they can offer.
- Negotiation: A bank loan office does not have to offer you the best rate. They get paid a commission on their sales, so it’s up to the borrower to negotiate for the best rate.
- Stricter conditions for approval: Major banks typically have stricter rules in place to approve mortgages. They do not hesitate to turn a borrower away with low income or a bad credit mortgage rating. In such cases, they would have better luck working with a broker.
If you are looking to buy a home soon, you've probably done a lot of research into all the options available to you. For the average home buyer, the next big decision you'll make after your mortgage is whether you want to buy a single-family home, condominium, or townhouse. This choice will have far-reaching effects, and there's a lot of information out there to help you make it.