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Canadian Business Magazine
If you're looking for a cut-rate mortgage, don't go to the bank -- call a broker

by Paul Kaihla Feb 12, 1999

John and Carla Davidson are the kind of customers banks drool over. They both have long-standing, full-time jobs, and they're in the habit of borrowing money to buy income properties. But when the Timmins, Ont., couple went to their local bank branch a year and a half ago to seek financing for a triplex, they got a royal run-around. That's when they decided to try out a mortgage broker. "Everything went so smoothly with our mortgage broker, we started wondering why we were putting up with all this baloney from our personal banking whatever-they-call-them at CIBC," says John Davidson. "It was mind-boggling. We wanted to borrow another $100,000 from the bank, and they wouldn't even return our phone calls for two or three days."

The Davidsons did end up borrowing money from a bank -- $95,000 from the National Bank--but it was arranged at arm's length by their mortgage broker. And while it's a truism in business that eliminating the middleman brings the best bargain, that was not at all the case for the Davidson's. Their broker beat the preferred rate offered by their CIBC branch by almost 1 per cent, which will save them a couple thousands of dollars over the five-year term of the loan. How much did they pay for that service? Nothing.

Consumers like the Davidsons, who swear they will never go directly to a bank for a mortgage loan again, have quickly turned Canada's mortgage brokerage industry into one of the fastest-growing segments of the financial services sector. In 1997 alone, mortgage brokers processed more than $15 billion in residential mortgages. But there is still plenty of room for expansion. In the US, mortgage brokers originate more than two-thirds of all residential mortgages. In Canada, that number stands at only 20 per cent, but it could double in the next two or three years.

Converts like the Davidsons say that a big attraction is that a mortgage broker acts as an advocate -- holding a borrower's hand through the application and approval process, advising on how to raise a downpayment, and pitting several banks, trust companies and other lenders against each other to get the best deal. While mortgage brokers are entitled to charge a fee, most do not. They generate revenue through finder's fees paid by the lender, which average 65 basis points. Even better, they can discount the posted rates at chartered banks across Canada by one-half to a full percentage point on any given day.

 The reason mortgage brokers can undercut the banks' rates has a lot to do with the volume of deals they negotiate. "If I give a single lender more than $100 million worth of business a year, which I do, I have more leverage than the average consumer to negotiate a lower rate," says Pierre Fournier, CEO of Quebec's largest mortgage broker, Multi Prêts hypotheques.

In the mortgage brokerage industry, there's a definite advantage to being big. In the past few years, many of the smaller players have been devoured by half a dozen so-called "Super Brokers." These firms have scores of agents working under the licence of a master broker, and they account for close to half of Canada's mortgage-brokered deals.

Super brokers have brought consolidation and modernization to a business plagued by image problems in the past. Says Norlite Financial Services' Art Trojan, head of Canada's largest super brokerage: "The stereotypical image of the mortgage broker was that of a guy who's sitting in a back room, saying, 'Hey buddy, do you need some money? We're going to charge half a point extra and, if you miss a payment, we're going to break your legs.'"
A sign of the changing times is that many of Canada's leading banks and trust companies now look to super brokers to bolster their mortgage portfolios. Their agents work on straight commission, specialize in selling nothing but mortgages day after day, and can bring in business at a far lower cost than a bank's coast-to-coast staff of sales reps. Trojan predicts that those members of the financial services sector will become an endangered species. "The banks are going to look at the cost of generating mortgage business through their branch network, and they're going to be outsourcing on a major scale," he declares.

Trojan's firm, which has its headquarters in Mississauga, Ont., emphasizes speed and service. Armed with state-of-the-art software and computer networks, Norlite has collapsed the traditional application and approval process -- a days-long affair with lots of faxes and 30-page credit histories -- into an electronic transaction which can be concluded online in hours. "With the way banks are treating people, I think mortgage brokers are really going to catch on," says John Davidson, who dealt with a Norlite agent. Many Canadians, it seems, feel the same way.