Mortgage Fees
Don’t Get Caught by Surprise
One of the frustrations of mortgage borrowers is finding out, often late in the process of getting a mortgage, that you will be charged fees that had not yet been disclosed to you. The lack of transparency is frustrating. The financial outcome from your mortgage financing now looks a bit different than you had counted on.
If you are using a mortgage broker, you need to ask them upfront what fees and costs will apply to your mortgage deal. These are categorized into three groups:
Mortgage broker fees;
Lender fees; and
Closing costs.
Mortgage Broker Fees
Mortgage brokers are paid finder’s fees by mortgage lenders. These fees are their main source of revenue. Lenders pay this fee to the mortgage broker when a mortgage they arranged with the lender closes. If you are a prime mortgage borrower, this is the only compensation a mortgage broker receives for arranging your mortgage. If you are a prime customer and a mortgage broker wants to charge you a fee, you need to find another mortgage broker.
If you are not a prime mortgage borrower, then you may be asked to pay a fee to your mortgage broker. You may not be considered a prime customer for a variety of reasons including, low credit score, inadequate job tenure, self-employment, non-traditional income, lack of credit history, property type or high debt service ratios. Missing the current standard for prime status for any one of these measures can mean you are not a prime borrower, but it does not mean you are not a good borrower or a good customer. Most lenders will still give you a mortgage.
A non-prime mortgage may be referred to as a B mortgage or an Alt mortgage. If you are offered one of these, you need to know that there are additional costs for these mortgages. The mortgage rates are higher than for prime mortgages. The lenders will charge a fee (see below). Your mortgage broker may also charge a fee, typically in the range of 0.50% to 2.0%. This can be a material sum. Considering an average Canadian mortgage of about $580,000, this fee could amount to $2,900 to $11,600. This fee is paid out of the proceeds when the mortgage closes. Make sure you understand the fees a mortgage broker may charge before you agree to work with them.
Also note that if your mortgage broker wants to charge you an upfront fee, you should end the conversation right there. In most jurisdictions, regulations prohibit mortgage brokers from charging upfront fees. Not only is it against regulations but it is a bad faith business practice.
Our advice to mortgage borrowers regarding mortgage broker fees is to find a broker that does not charge fees. Almost all will charge a fee for a non-prime mortgage, so this may not be easy. However, many borrowers that would have previously been considered prime are no longer prime due to measures put in by the government, such as the stress test, and changes in the market. Others that are not prime are the least likely to be able to afford a large fee. We do not think these fees are fair. At Frank Mortgage we have created an online mortgage broker platform that is free to all users. We do not charge our customers mortgage broker fees.
Lender Fees
For prime mortgage lending in Canada, mortgage lenders do not charge fees. For non-prime, or Alt lending, they will charge a fee. The lender fee is most commonly 1% of the mortgage principal balance, paid only when the mortgage closes. Be sure to ask your mortgage broker or your lender upfront exactly what lender fees may be charged so you are not surprised by the fees once you are already deep into the mortgage process.
Closing Costs
There are several costs required to close your mortgage. We wrote a blog on this that you can access here - A Guide to Mortgage Closing Costs (frankmortgage.com)
In summary you will need to pay for:
Legal fees;
Appraisal;
Insurance;
Building inspection;
Land survey;
Taxes – land transfer tax, GST on new build homes and PST in some Provinces on mortgage default insurance.
Not all costs apply to every situation. In some instances, you can be rebated part of the land transfer tax. In others, you may find the lender offering a special promotion where they cover certain costs. In general, you need to budget for closing costs to range from between 1.5% and 4% of your mortgage balance. Please refer to our blog, noted above, for more detail.
Find a Good Mortgage Broker
New mortgage borrowers often don’t understand the costs involved in getting a mortgage. That is understandable. What you do need to understand is that you need to ask questions from your mortgage broker or lender upfront. Make sure you find out exactly what fees and closing costs apply to your situation. Not only will this help you plan your finances, but it may also be a key determinant whether you decide to do business with the mortgage broker or lender. Finding out late in the process often leaves you no choice and tarnishes the experience.
The best mortgage brokers will disclose all of this to you upfront. In fact, regulations require that a mortgage broker disclose all fees before entering an agreement with you. If a mortgage broker you are talking to is not letting you know the costs of using them then you need to look elsewhere.
The market is changing, and it is changing in favour of mortgage borrowers. One of the great innovations is that you can now get a mortgage online with a mortgage broker that provides an easy-to-use solution while also supporting you with free and fair advice.
A consumer-oriented mortgage market should not charge fees for good customers. This is one of the key ingredients in the transformation that we at Frank Mortgage hope to bring to the market. We are all about you.
Contact us to get the free and fair advice that you deserve at www.frankmortgage.com or call us at 1-888-850-1337.
Don Scott
Don Scott is the founder of a challenger mortgage brokerage that is focused on improving access to mortgages. We can eliminate traditional biases and market restrictions through the use of technology to deliver a mortgage experience focused on the customer. Frankly, getting a mortgage doesn't have to be stressful.
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