By Calum Ross
In all the mortgages that I arrange I find it very surprising how few people actually ask me how I get paid. A recent study in the US indicated that less than 10% of people could properly identify how different types of mortgage providers get paid during the transaction. One of the most important lessons I learned during my MBA was the importance of aligning supplier interests with your own, or at the very least knowing when there is a conflict of interest.
Sadly, in the Canadian financial services landscape we have some of the worst consumer disclosure laws that exist in modern western civilization. While they have made some progress during my now over ten years in the mortgage business the disclosure and what it mean to you has a long way to go.
Now, I ask you this dont you want to know whether that person who is so eager to sign you up has a financial advantage to selling a particular product? You definitely should care – and here is why. Almost every single provider in the mortgage marketplace (including myself) has a potential or absolute direct financial gain by selling particular mortgage products and/or rates. To make matters worse, that financial gain or pat on the back from their companys management is often gained at the expense of the borrowing consumer.
Have you noticed that you have never seen a bank or broker mortgage marketing campaign pushing shorter term mortgage products? I have also yet to see a lender comparing their mortgage products to another lender who has better features but that definitely happens almost as often. The fact is consumer marketing is often designed to distort consumers instead of educate them.
In the interest of keeping me unpopular with all the groups equally – lets take a look at your main mortgage providers to see what you as a mortgage consumer should watch:
Bank Branch Manager/Bank Account Manager: This friendly and trusted advisor has a sales quota to hit just like every one else (you did notice that Canadian banks do fairly well financially, right? like roughly one billion dollars a quarter). Their salary increase, bonus, and often even their promotion depend on the volume and the profitability of their sales results. Typically, bank managers have sales quotas for particular products as well as growth targets on the loan/investment portfolios.
I have never seen a bank bonus system ever incentivize managers or sales staff to show clients how to decrease debt. Given this fact, is it any wonder Canadian national debts are at their highest levels in history considering banks are the biggest supplier by a long shot? Their targets are often based on the size of their mortgage portfolio as well as the average term of the portfolio and the spread over cost of funds. Thats right, they get extra points in annual reviews and/or extra bonuses when you pay higher loan and mortgage rates. The longer the term, and larger the size of the mortgage, equals a better Christmas bonus in many cases.
Furthermore, these managers are increasingly being graded on the profitability of these portfolios. When you go to your old bank branch and it has moved to a new location (aka merged with another location) – where do you think one of the bank managers went? Which one do you think they kept with the bank – the one with the great discounted loans and mortgage rates, or the one that is making the bank the most money? Not only does their performance depend on it, but often their ability to stay employed does.
Bank Mortgage Representatives: These are typically contract or full time employees of the bank paid usually on a straight commission basis. Most only sell one banks mortgages and if they are allowed to refer, it is only done once they establish beyond a doubt it cant be funded internally.
These individuals are usually paid based on three criteria: the size of the mortgage, the term of the mortgage, and the discount given. That means that these representatives can make more money by putting you in a longer term at a higher rate. Their livelihood depends on you not getting the most discounted rate and their income increases based on the length of your mortgage term.
Mortgage Consultants/ Mortgage Brokers: These are supposed to be independent mortgage providers that theoretically work for you and not one particular bank.
These individuals are paid a finders fee from the institution with whom the mortgage is funded. The problem is that not all banks are paying the same amount for each of the mortgage products and some offer non-cash incentives and volume bonuses. These lenders also pay brokers based on the size of the loan and the term selected. The longer the term that is selected, the bigger the commission to the broker.
On top of the different pay-offs for the terms, some lenders also pay more for the same product. A broker could make more money funding a five-year term through one lender over another. Typically, there is no advantage to the broker if the consumer gets a higher rate, but there are now even growing exceptions to that rule.
So now that you know how it works – who do you trust? When you go mortgage shopping – dont believe that everyone is out to get you. While the incentive systems are there, many mortgage providers will look out for your best interest. A satisfied past client that refers family, friends and colleagues is worth a lot more than one big commission payout.
Generally speaking, the top people get to the top by doing the right thing, and doing some background checks and customer references should give you some comfort. Do your research; ask for testimonials, or ask your friends. A mortgage is a huge financial decision. Make sure it is a decision based on your financial situation, and not on your providers bank account, or for your banks shareholders.
While I realize there are conflicts of interests in all of the above situations until the day that I walk into a bank and they recommend a mortgage product from another lender, I will always favour the broker channel (but then again my opinion is clearly biased).
Calum Ross is biased. As one of Canadas top mortgage brokers, he cant help it. Calum Ross was ranked as the top producing mortgage broker in the country by Canadian Mortgage Professional Magazine. He holds both a B.Comm and MBA in Finance and recently completed a comprehensive Leadership Program at Harvard Business School. Reach him at: www.calumross.com.
Who do you prefer to work with when it comes to your portfolio? Leave a comment below!