One of the most important early decisions you’ll make in the home buying process is how and where to secure a mortgage. Banks and brokers alike can help you find a mortgage, but they function differently. Each comes with their own strengths and limitations.

Let’s go through the differences between working with a mortgage broker and a bank, the pros and cons of each and how to pick the right approach for your home buying needs.

What Does A Mortgage Broker Do?

Mortgage brokers aren’t lenders themselves. Instead, a mortgage broker is a licensed professional who acts as an intermediary between borrowers and prospective lenders. Brokers work with banks, credit unions, online lenders and more to compare rates and find the best mortgage for a borrower’s situation. 

In addition to sorting through various mortgage options from multiple lenders, a broker can also negotiate on their client’s behalf. A broker may leverage their established relationship with a lender to help you get an even better deal.

What Does A Bank Do?

A traditional bank is a financial institution that may offer mortgages and other lending options in addition to services like chequing and savings. The so-called “Big Five” banks in Canada are Toronto-Dominion Bank (TD), Bank of Montreal (BMO), Canadian Imperial Bank of Commerce (CBIC), Royal Bank of Canada (RBC) and Scotiabank.

Individual banks may differ in the types of mortgages they offer, and the same is true of their interest rates, terms and loan conditions. When considering any mortgage provider, remember that you may uncover additional options elsewhere. It’s wise to consider multiple lenders and their offerings before making your selection.

Pros Of Working With A Mortgage Broker

Now that we’ve discussed how mortgage brokers operate, let’s have a closer look at some of the advantages of working with a broker:

Access To Multiple Lenders

As we’ve mentioned, mortgage brokers work with a wide network of lenders. This can expedite any comparison shopping you might have done on your own. Increased access to lenders also translates to more mortgage options to choose from. A mortgage broker can be beneficial for prospective home buyers who are self-employed, have a limited income, low credit, significant debts or a spotty credit history. They might be able to find a lender that specializes in working with your unique financial needs.

Education About Mortgages

Since mortgage brokers don’t strictly deal with their own products, they have a vast amount of knowledge when it comes to the market as a whole. If you’re a first-time home buyer, you may benefit from a broker explaining your mortgage options and other home buying topics.

Negotiation On Your Behalf 

A mortgage broker will actively negotiate for the best interest rates, terms and conditions that they can get from lenders. This type of advocacy may be especially valuable to people who are uncomfortable negotiating themselves. Also, because brokers often do such a high volume of business with particular lenders, they may have more negotiation power than you might have if you approached one such lender on your own.

Help With The Application Process

In addition to connecting you with a suitable lender and mortgage product, a mortgage broker can walk you through the process of getting preapproved and answer questions you might have along the way.

Potentially Free Services

Broker fees are typically paid by the lender when you take out a prime mortgage. However, in some situations, the borrower may pay broker fees. To avoid any surprise expenses, ensure you understand all of the terms of your agreement with the broker.

Cons Of Working With A Mortgage Broker

Mortgage brokers offer a lot of advantages, but there are some drawbacks to consider as well:

Network Limitations

While mortgage brokers can connect you with a wide variety of lenders, it’s important to note that a given broker’s network won’t include every lender out there. This isn’t a reason to avoid brokers, but It’s something to keep in mind when comparing brokers or other lender options.

No Guarantee Of Getting The Best Deal

A mortgage broker will negotiate on your behalf for competitive rates, terms and conditions. However, this doesn’t mean there isn’t a better deal out there. For example, there may be competitive deals available from providers your broker isn’t connected to.

Need To Build A New Relationship

Unless you have a pre-existing relationship with a broker, you’ll likely have to fill out some extra paperwork for their services, as well as set up multiple meetings with them. This may slow down the application process.

Potential For Broker Fees

Certain types of “non-prime” mortgage options may shift the burden of paying broker fees from the lender to the borrower. Broker fees are typically assessed as a percentage of your total mortgage amount and can appreciably increase the cost of financing your home. 

Pros Of Working Directly With A Bank

There are some upsides to working directly with a traditional bank. Here are a few:

Streamlined Finances

Taking out a mortgage through the same bank where you have one or more existing accounts will allow you to manage your finances in one place. Some people value this type of convenience, especially if they plan to take advantage of other services offered by the bank in the future.

Potential Deals For Existing Clients

Banks may reward the loyalty of their current clients by offering them promotional deals. You may be able to leverage your existing relationship with a bank to negotiate better mortgage rates, terms and conditions, especially if you’re well-qualified and have been with the bank for a considerable period of time.

Face-To-Face Relationships

If you’re the sort of person who wants to walk into a brick-and-mortar building and build longstanding, in-person relationships, you may consider working directly with a bank in your area.

Cons Of Working Directly With A Bank

Let’s have a look at the potential drawbacks to working directly with a bank:

Limited Mortgage Options

When you work directly with a bank, you’re limited to choosing among their mortgage product offerings and term lengths. Banks are more likely to promote products they offer, meaning you may not be made aware of some good alternatives offered elsewhere.

The Burden Of Negotiation

If you approach a bank without the representation of a mortgage broker, you’re on your own when it comes to negotiating interest rates, terms and other conditions. This creates additional work – and, potentially, stress – for you as the borrower. Also, if you lack experience negotiating in this way, you may not get the best possible rates, terms or conditions on your new mortgage.

Stricter Financial Requirements

Generally speaking, federally regulated banks have stricter financial requirements than some other providers, including alternative lenders. For example, banks will require applicants to take the mortgage stress test, which determines if your finances could still cover your mortgage payments if rates go up.

If your mortgage application is denied by a particular bank, you’ll then have to reapply with another lender. This could make a successful mortgage application a longer, more complex process.

Should You Work With A Mortgage Broker Or Bank?

Choosing between a mortgage broker and a bank comes down to weighing the pros and cons of each, as well as your financial situation and personal preferences. Here are some questions to keep in mind as you weigh your options:

  • Do you want more mortgage options? A bank will only offer you its own products and rates. By contrast, a broker can connect you with a broad variety of lenders and their offers. Because a broker does the “shopping” for you, they can save a lot of the legwork it would take you to compare individual lenders on your own. 
  • How strong is your financial situation? Federally regulated banks offering prime mortgages will have more stringent mortgage application requirements (including mortgage stress tests). If you qualify for a prime mortgage directly through a preferred bank, that could be a good option for you. If you want to explore a broader range of options – including bank and alternative mortgage products – you may decide to work with a broker.
  • Where can you get the best rate? As we mentioned, brokers have the ability to compare options from multiple lenders in order to find the best interest rates. Brokers can also work to negotiate lower rates on your behalf. However, if you have an established relationship with a bank, you may be able to get a special rate for being a loyal client.
  • How do you prefer to manage your finances? If you prefer to have all of your finances in one place, you may want to take out a mortgage through a bank where you already have accounts. On the other hand, if you value maximum savings and can secure a better interest rate through a broker, it may be worth having separate providers for your mortgage and personal banking needs, respectively.

Bear in mind that there is no right or wrong answer when choosing between a broker and a bank. The important thing is to find the right fit for you.

Alternatives To A Mortgage Broker Or Bank

In addition to brokers and banks, there are other means to finding the right mortgage for you. These can include:

  • Credit unions: Credit unions are member-owned and not-for-profit financial institutions that offer similar services as a traditional bank. Credit unions can offer lower rates, but they require membership for you to access their products. 
  • Trust companies: Some trust companies can act as direct lenders for mortgage borrowers with some more flexibility than a bank. Trust companies will often work with borrowers who are unable to obtain a mortgage through a bank, so they may charge higher fees for a higher investment risk. 
  • Private lenders: Unlike banks, private lenders aren’t federally regulated and therefore may have less strict credit score requirements for mortgage approval. Make sure to read all of the fine print when working with a private lender so as not to be surprised by hidden fees or penalties.

A mortgage broker usually has connections with some or all of the above in their network, so working through a broker could save you time and effort on your journey to homeownership.

The Bottom Line

When deciding between a mortgage broker and a bank, be sure to consider their pros and cons, as well as your personal finances and preferences. The right choice is the one that best suits your specific goals and mortgage needs. 

Ready to explore your mortgage options? Get started today with Rocket Mortgage Canada, UL (Rocket Mortgage™)!