Mortgage brokers act as negotiators between the borrower and lender, helping borrowers find the best deal for their mortgage. Mortgage brokers facilitate the origination of mortgages and cultivate relationships with borrowers, offering a wide range of knowledge and support throughout the mortgage process. 

Brokers typically receive their earnings through commissions from lenders, which vary based on the type of mortgage and the specific lender. This could influence the broker’s mortgage solutions as they may be motivated to sell borrowers on specific products or lenders with higher commissions.

Key Takeaways

• Brokers earn commissions typically from lenders. 
• Commissions could influence the products and lenders a broker recommends.
• Borrowers should understand compensation structures and the potential for conflicts of interest.

Difference Between a Mortgage Broker, Specialist and Advisor

A mortgage broker serves as the negotiator between borrowers and lenders and is not tied to a specific lender. They use their extensive connections and network of lenders to help find the most suitable mortgage option for a borrower’s financial needs. They possess strong bargaining skills and have access to a range of loan products from many lenders, which helps borrowers obtain competitive rates and terms. 

A mortgage specialist is typically employed by a lending institution that concentrates on marketing its specific mortgage products. They are well-versed in the intricacies of their employer’s offerings, enabling them to assist borrowers in completing the application process while adhering to the lender’s guidelines. Since they have access to the lender’s pool of clients, mortgage specialists typically receive modest commissions compared to brokers, usually half or a third of what brokers earn. 

A mortgage advisor is a professional who works with an institution that offers a wide range of financial guidance. They will typically evaluate a borrower’s financial status and objectives before suggesting appropriate mortgage solutions. To help borrowers make mortgage decisions, mortgage advisors consider various aspects of their financial picture, including credit scores, income stability, and long-term financial strategy. An advisor can guide you through the financial aspects of purchasing property, such as how much you can afford. Advisors receive payment through a salary from their employer and bonuses based on quarterly or annual sales targets. 

Commission and Compensation

Mortgage brokers can be compensated through different methods, including commissions, fees, and funding bonuses. Commissions are typically paid as a percentage of the loan amount. Additional fees may be charged for providing their services during the mortgage process. 

Bonuses are often rewards for meeting targets or closing a specific number of mortgages within a certain timeframe. Compensation structures may depend on the agreement between the broker and their lenders, with some brokers receiving higher commissions while charging lower fees. 

Trailer fees are commission fees lenders make to brokers when the broker advises the borrower to renew with the same lender at the end of the mortgage term. These fees are typically in exchange for smaller upfront commissions spread out over the mortgage term. This fee could discourage brokers from having borrowers switch lenders even if it may be in their best interest.  

The original broker receives a renewal fee when a borrower renews their mortgage with the same lender. This fee could encourage brokers to recommend borrowers stay with the current lender at renewal. However, brokers typically earn higher fees if borrowers switch lenders at renewal. If renewing with a subprime lender, using a trusted broker can help borrowers negotiate better rates. 

Comparison Between Commissions Paid by Lenders and Borrowers

Commission rates can vary significantly depending on the lender, with some offering higher commissions or volume bonuses to motivate brokers to bring in more business. These variations across lenders can be due to the lender’s business model, the type of mortgage offered, and the broker’s negotiating skills. 

Brokers are paid based on:

• Commissions: Typically, prime lenders pay commissions of 0.5% to 1.2%, 1% to 3% is split 50/50 between B lenders and borrowers, and the borrower pays the entire 1% to 5% for private lenders. 
• Trailer Fees: Typically, up to 0.4% in commissions are paid annually as long as the mortgage remains with the same lender. This is usually paired with lower upfront commissions. 
• Volume Bonuses: Typically up to 0.3% as a top-up commission paid to reach a specific volume of business each quarter or annually. 
• Renewal Fees: Typically up to 0.6% as commission paid at renewal for the broker’s original referral to the lender or for renegotiating the rate with a subprime lender.

When working with prime lending, brokers earn commissions solely from the lender. In non-prime lending, brokers may earn commissions from borrowers, or there may be a commission split where half comes from the lender and half comes from the borrower. 

Commissions are typically calculated based on a percentage of the total loan amount, ranging between 0.5% and 1.2%. Commissions can vary based on the lender and specific mortgage product or solution. For example, if you have a $500,000 mortgage, a broker may earn between $2,500 and $6,000. However, the broker may receive much less after fees are deducted by their brokerage network. 

Subprime lending typically has a fee-sharing model. A portion of the fee is added to the interest rate set by B lenders, and the borrower pays the remaining portion directly. This typically results in a total fee of 2% to 3% of the loan amount to compensate for the higher risks involved with subprime lending.

Private mortgage lenders may require borrowers to pay the full fee owed to the broker if they don’t offer commissions for securing business. Brokers determine the fee, typically between 3% and 5% of the total loan amount. 

Operating Costs of Mortgage Brokers

Mortgage brokers’ fees can vary significantly depending on the broker’s experience and success. For example, a well-established broker with a client base who can quickly generate a large volume of funded mortgages may only pay around 20% of their commissions to their brokerage. New brokers who need training and support may pay up to 50% of their commissions to their brokerage. 

In addition to the commission fees paid to the brokerage, additional costs may include charges for each client file, monthly Equifax registration fees, annual errors and omissions insurance expenses, and provincial registration fees to be licensed and operate as a mortgage broker in compliance with regulations.  

When adding these costs together, a mortgage broker just starting could take home $400 for every $1,000 earned in commissions once they’ve deducted brokerage fees and operating expenses. Meanwhile, an established broker may take home $700 for every $1,000 earned in commissions. 

Broker Buydowns

Buydowns are commonly used in the mortgage industry as a financial strategy to decrease the interest rate on a loan for a specified period or the entire duration. This allows mortgage brokers to offset the lower rate by using the commissions they expect to receive from the transaction. 

However, buydowns do not follow a 1:1 ratio, with the most generous being 1:5. This means that for every 1 basis point decrease in rate, there is a 5 basis point decrease in the buydown. Typically, buydowns are priced at 1:10 and 1:20 ratios, making it expensive for brokers to earn their full commission when negotiating lower rates with lenders.

A different type of buydown associated with preconstruction properties involves the borrower or a third party, like a seller or builder, paying a fee in advance to lower the interest rate. This setup can benefit borrowers by making their monthly payments more affordable and allowing brokers to increase their earnings.

Disclosure Regulations 

Regulations are essential for protecting borrowers and ensuring ethical standards in the mortgage industry. Since brokers’ compensation can influence their decisions and advice, provincial regulators have established strict guidelines to protect borrowers. These rules emphasize the importance of being open about how brokers are paid to borrowers, building trust and accountability in the mortgage process.

In some provinces, like Ontario and Quebec, mortgage brokers must reveal all fees before finalizing agreements. In Ontario, specific regulations exist for fees on loans above a certain amount, such as an initial fee or retainer for loans exceeding $400,000. This fee system guarantees that clients know the expenses and that payments are made to the brokerage rather than individual brokers. By following these guidelines, brokers can establish trust and credibility with their clients while maintaining fair practices in the mortgage industry.

Frequently Asked Questions

Final Thoughts 

Mortgage brokers receive commissions mainly from lenders, which may affect their decision-making when offering recommendations. Knowing what impacts the mortgage process and the differences between brokers, specialists, and advisors can help you better understand their compensation structure. This can help you make comparisons and choose the best broker for your mortgage needs.  

Contact our team of mortgage professionals today for personalized mortgage advice.