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Mortgage Broker Access to Lenders

February 2, 2019 | Posted by: Kelleway Mortgage Architects

 

The Canadian Big 5 Banks are listed here in order from largest to smallest:

RBC – Royal Bank of Canada
TD Bank – Toronto Dominion
Scotiabank – Bank of Nova Scotia
BMO – Bank of Montreal
CIBC – Canadian Imperial Bank of Commerce

All the above five banks listed are headquartered in Toronto, Ontario. All own shares in each other’s bank through their mutual fund portfolios, and that amounts to big business through all the equities they own. For example, as of August 2016, the Toronto Star reported that “Canada’s Big 5 banks made $9.89 billion in combined third-quarter profits.” The collective impact on the Canadian economy is that the Big 5 account for more than 85% of the banking industry in Canada.

NBC, the National Bank of Canada, was once considered the 6th big bank but it has slipped in its standing with the closing of 200 branches in recent years.)

On the positive side, concentration of the Canadian banking system can mean more efficient economies of scale and financial stability amongst all the banks. With good management savvy, those factors helped the Canadian banking system survive through the Great Depression in the 1930’s and the more recent financial crisis in 2008 when the more diverse US banking system did not fare as well.

On the less positive side, banking customers may not receive the most competitive service and may pay more via increased fees for the service they do receive. As a loose group, the Big 5 tend to trend together to protect their shareholders’ interests in response to national and international economic factors and in response to government regulations. If the wrong management decisions are made, that “group-mindset” could lead to significant systemic risk. That systemic risk to the financial wellbeing of Canadian households and the national economy is what concerns the federal government. At times when the government perceives a potential threat to the national economy, the regulator tends to step in to monitor bank policies and enact regulations. The “good government” hope is to prevent Canadian borrowers from experiencing excessive financial risk that may prove, in turn, detrimental to the national economy.

As a result of this context, the Big 5 may not respond as well to the individual needs of customers when advising them about a variety of service options and lending products (e.g, mortgages). The individuals are left to make their own decisions without the help of more in-depth or comparative advice. The outcome may be that while customers are made aware of their bank’s offerings, customers remain ill-informed of alternative choices that could perhaps better their own financial situation.

Dropping Mortgage Broker Channels

Of the Big 5 Banks, which ones encourage the sale of their mortgage products through mortgage brokers?

Scotiabank – Bank of Nova Scotia (ranked #1 re share of business obtained through mortgage brokers)

TD Bank – Toronto Dominion (ranked #7 re share of business obtained through mortgage brokers)

Which banks do not have a mortgage broker channel?

RBC – Royal Bank of Canada (exited mortgage broker channel prior to 2002)
BMO – Bank of Montreal (exited mortgage broker channel in March 2007)
CIBC – Canadian Imperial Bank of Commerce (it’s FirstLine mortgage broker channel exited in July 2012 after 25 years in operation)

(NBC-National Bank of Canada too, on December 1, 2016, announced that it will no longer sell its mortgage products through mortgage brokers.)

However, these banks continue to be indirectly involved with the broker channel. Through their investment portfolio subsidiaries, the Big 5 continue to fund smaller banks that do approve mortgage applications originated and submitted by mortgage brokers. Many times, it’s virtually the same money, just re-packaged and re-branded differently.

What’s Left?

Take note, although the Big 5 (or 6) federally regulated banks receive most of the press, there is a total of 30 domestic banks as of September 2016 that are registered under the Canada Bank Act (first enacted in 1871). The domestic banks are allowed to take small and large deposits. Two recent additions to this list include the Home Trust Company and Street Capital Bank - with the majority of their mortgage business being generated by mortgage brokers. 

Provincially regulated financial institutions such as Canadian credit unions (and caisses populaires) take deposits too. However, unlike banks, they are member-owned and governed by co-operative principles. In 2012, there were 394 credit unions and caisses populaires operating outside of Quebec. Desjardins is the largest network of caisses populaires operating within Quebec. Many of these financial institutions also act as suppliers of funds available through the mortgage broker channel.

In addition to domestic banks, there are over 50 subsidiaries of foreign banks operating in Canada of which some are allowed to accept deposits and some are not. Some are not authorized to take deposits under $150,000. Those that are restricted in their authority to accept smaller deposits operate within a more narrowly defined channel of banking business.  

Added to this overall lending arena of banks and credit unions are various trusts, financial services companies, mortgage investment corporations (MICs) and private lenders who also fund mortgages.

Mortgage Brokering Value and Growth

Mortgage brokering in Canada is a relatively young industry that has been gaining in significance over the past 50 years. The purpose of mortgage brokers is to represent the borrowers’ interest and negotiate the best deal possible for their clients. Comparative competition in the lending industry is actually increasing through the brokers’ actions of originating mortgages through a variety of lenders. That shopping and matching activity is recognized by clients as shown by the broker share of the mortgage market rising from 25% of funded mortgages currently held by Canadians in 2012 to 33% by December 2016 (according to Canadian Mortgage Trends and Mortgage Broker News).

Mortgage brokers review in detail the clients’ needs for mortgage financing (including debt management) and match that to the policies and product offerings from lenders who supply the funds. The mortgage broker is seeking a best fit for the client regarding product, rate and terms. In effect the mortgage broker is a Match Maker. The mortgage broker handles the paperwork (usually in digital form) and guides the borrower through the process. Many times throughout this process mortgage brokers are providing clients with sage money-saving advice.  

In the 1990s, mortgage brokers pushed major banks to discount their posted rates in order to offer more competitively priced mortgage products to their customers. With lower interest rates, more purchasers entered the housing market. Those mortgages were often government default insured to compensate for the lender’s increased risk of accepting less than 20% of the purchase price for down payments.
According to the 2016 Consumer Survey by Mortgage Professionals Canada (MPC), mortgage brokers have substantially increased their positive market presence. From that survey, more than half of first-time buyers embraced the services offered by mortgage brokers. The numbers of Canadians renewing or refinancing mortgages have also trended upwards in using the services of an independent and licensed mortgage broker rather than going to their bank branch or to their financial institution’s mortgage representative.

More Important than Ever to Have a Mortgage Broker Working For You

If you value lender choice and comparative financial advice, use the services of a licensed and experienced mortgage broker. Choose someone knowledgeable who individually and proactively closes at least 30 funded mortgages year after year. Personal financial management is a lifelong activity and it pays to have someone on your side who is attentive in getting you the best deal possible on your mortgage financing. Therefore, it makes sense to work with someone who knows your financial history, your life demands and who you can trust to serve your interests well over the long term.

In comparison, bank branch and mortgage specialists are bank employees, not licensed mortgage brokers. Many bank employees are dedicated to providing good service for their customers. However, the fact remains that they are hired by their employers to sell the products and services available through their own bank or financial institution. Bank employees have no fiduciary duty to mention their competitor’s comparative financial options and products to their bank customers. The focus of the bank is to create profitability for its shareholders. One way of doing so is by selling as many financial products (mortgages, chequing accounts, credit cards, insurance policies, etc), as possible to their customers in order to encourage brand loyalty to their employer’s bank or financial institution.

Over the past decade, the mortgage lending industry has become more complex with many new imposed rules and regulations. Sorting through options for clients offered by various lenders requires considerable knowledge from an experienced mortgage broker. Those mortgage options also need to fit with the mortgage borrower’s personal circumstances of work, family and life events – both expected and unexpected. Now, more than ever, your interests are best served by having a skilled and knowledgeable guide on your side when seeking mortgage financing.

 

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Glen Kelleway, BSc, AMP, Senior Mortgage Planner & Owner
 

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