In a nutshell, a mortgage broker acts as the ‘go-between’ a mortgage borrower (you) and the lender (typically the big Canadian banks).  Mortgage brokers act on your behalf offering their expertise and contacts for free, and receive their commission from the lenders only once a mortgage is arranged.  There may be charges for their services if you have an exceptional situation, such as very poor credit, as they may need to spend more time on your application.

Mortgage broker’s are able to get the best rates for homebuyers and their rates are typically discounted when compared to the big bank’s posted rates because they arrange so much volume for the lenders (almost $50B last year).  As a result, many times the banks and other lenders compete amongst themselves to offer the broker the best rate in order to secure their business.  Many deal with over 65 lenders, and this is the reason why they can get the best rate for almost any person’s situation.

The residential mortgage market is extremely lucrative and competitive, as there were $191B worth of mortgages approved last year by 80+ lenders.  As a result, mortgage brokers are becoming more popular as more people are turning to them to find the lowest mortgages, representing an estimated 25-30% of mortgages being arranged according to Jim Murphy, president of the Canadian Association of Accredited Mortgage Professionals (CAAMP).

Many people aren’t sure where brokers actually source the mortgages from.  A recent report by Canada’s leading mortgage systems supplier, showed that mortgage brokers secured home loans through the following channels through their network in April 2008:

·         Banks:                    50.68%

·         Mortgage Banks:      41.92%

·         Sub Prime:                4.25%

·         Credit Unions:   3.14%

The actual mortgage rate arranged by the broker, could be influenced by many factors, some of which are:

·         What type of mortgage (open or closed) are you looking for?

·          Is it a fixed rate mortgage or variable rate mortgage (adjustable rate mortgage ARM)

·         Is this a single home mortgage loan?

·         Or do second or third loans exist?

·         How long do you want the mortgage amortized over?

·         Is this is a refinanced mortgage?

As is the case with brokers in other industries such as insurance, mortgage brokers are generally former employees of the lenders such as banks. As a result, they know the ins and outs of the industry, who to contact and where to find the rates across Canada.  If you’re looking for help arranging your next mortgage, a mortgage broker, may just be a sound option.

Real estate has been an outstanding investment in most parts of Canada in the past few years. Home valuations are continuing to rise and have broken through the peak of their 1989 “bubble” in many areas of the country. That’s good news for Canada’s 7.5 million home owners, who are enjoying an average increase of $43,000 in real estate wealth since the upward trend took hold in 1998.

The hot housing market is being fuelled by mortgage rates which are the lowest they’ve been in almost 50 years. First-time home buyers are finding the rates attractive, and home buyers are lining up to purchase their first home or to upgrade to their dream homes. Housing statistics have been capturing headlines for months and the boom is noticeable on key economic indicators.

But the news isn’t just about rising valuations or Canadians moving into their new homes. Quietly in the background, there is a significant trend to refinancing. Canadians who have built up the equity in their home over the last few years are borrowing against that equity in record numbers. According to a report from a major bank, since 2001, Canadian households have taken out approximately $20 billion in cash out of their homes through mortgage refinancing and home equity loans.

We might thank the Ontario mortgage industry for the surprising resilience of the North American economy. In the past two years, the North American economy has endured numerous economic fallouts but consumer confidence remains reasonably strong – at least partly because homeowners have seen some of their losses offset by an increase in their real estate wealth. We find that we are sitting on (and sleeping in) the best-performing investment we own. And even if they have no plans to sell, homeowners have found that the return on their investment is still as good as cash in the bank.

That cash has been a key economic stimulus both here and in the U.S., where the trend is even more pronounced. As Canadians look beyond the view of a home as primarily shelter, mortgages become a valuable resource – and homeowners aren’t necessarily waiting for renewal time to cash out some of their gains.

So where is the money going? The equity being pulled out is often being used to pay down other more expensive debt. Credit card interest rates are shockingly high and – as a nation – our credit card and other consumer debt is continuing to grow. And much of the money is being used for increased spending. There has never been a better time to borrow against home equity to build the kitchen of your dreams, add a new wing, embark on the landscaping project you’ve wanted for years, enjoy the vacation you’ve always dreamed of, or help with the high cost of post secondary education. However, as always, never let your enthusiasm for the opportunity to spend get in the way of good common sense about debt management.

 

Ask any Canadian who has gone through the home buying process what score is more important – last night’s NHL results or their Beacon Score – and they’ll most likely respond, “the Beacon Score of course!”. The reason being that a Beacon Score is one of the credit scores that lender’s use to measure a borrowers’ risk based on a valuation of their financial history including details on credit cards, charge cards, loans, mortgages and overall payment history.

 

 

 

In Canada, 3 private company’s generate almost all the credit scores – Equifax, Trans Union and Experian. Though all 3 bureaus offer FICO (Fair Isaac Credit Organization) scores using the formula developed by Fair and Isaac, each has its own brand name – Equifax calls it the Beacon Credit Score, Trans Union has the FICO score and Experian uses the Fair, Isaac Risk Model.

 

 

 

A high credit score is an important factor in applying and securing the mortgage and mortgage rate of your choice. It also makes it easier for an individual to get credit cards and loans on favorable terms, sometimes even with instant approvals. The higher your score, the lower the interest rate! The difference between a good and bad score can increase the cost of a loan by 3% or more.

 

 

 

Equifax is the most popular credit score used by lenders and results range from 300 to 900. The break-up is as follows:

 

 

 

35% of the total score is based on payment history

 

 

30% is the amount owed and the available credit

 

 

15% is for length of credit history

 

 

10% is for types of credit used

 

 

10% is for search and acquisition of new credit and inquiries

 

 

 

A common misperception is that all inquiries will negatively impact your score instantly. The reality is that this may happen but its not a given and depends on your overall credit profile. The first inquiry can result in a drop of 5 to 20 points on the first mortgage inquiry, and will usually have a larger impact on the score for consumers with limited credit history and on consumers with previous late payments, but it’s different in every case.

 

 

 

Factors that affect your credit score

 

1. You have a short credit history

 

 

Age of your credit on revolving or non-revolving accounts also affects your credit score. Revolving accounts are credit cards such as Visa, MasterCard, or retail store card that allow you to make a minimum monthly payment and “revolve” the remainder of their balance over to the next month.

Non-revolving accounts include cards such as American Express and Diners Club and must be paid off in full each month.

 

 

 

Research shows that consumers with longer credit histories have better repayment risk than those with shorter credit histories. Also, consumers who frequently open new accounts have greater repayment risk than those who do not.

 

 

 

If you can maintain low balances and make sure your payments are on time, your score should improve as your revolving credit history ages.

 

 

2. You’ve been looking for credit in the past year

 

 

If you’ve been recently been seeking credit, this is evident on your credit file based on the number of inquiries in the past 12 months. Research shows that consumers who are seeking new credit accounts are riskier than consumers who are not seeking credit.

 

 

 

There are both credit and non-credit inquiries on the report and the score only considers those related to credit applications. Inquiries such as your bank reviewing your account or you requesting a copy of your own report are not considered.

 

 

 

The scores can identify “rate shopping” so that one credit search leading to multiple inquiries being reported is usually only counted as a single inquiry. For most consumers, a few inquiries on your credit file has a limited impact on FICO scores and the best advice is to only apply for credit when you need it.

 

 

3. Not paying off your loans

 

If you have installment loans and owe money on them, this does not mean you are a high-risk borrower. Paying down these installment loans is very positive as it shows that you are willing and able to manage and repay debt, and a successful repayment history is good for your credit rating.

 

 

 

One measurement is to compare outstanding loan balances against the original loan amounts. If you took out a $1,000 line of credit 1 year ago and still owe $925, this shows that you may be having trouble paying off the debt. Generally, the closer the loans are to being fully paid off, the better the score. This metric has limited influence on the FICO score.

 

 

 

Paying off loans on a timely basis reflects well on your credit score, but if you really want to improve it, try to pay the loans, (especially non-mortgage debt) as quickly possible.

 

 

4. Non-mortgage debt is too high

 

Consumers with larger credit amounts have a greater future repayment risk than those who owe less, resulting in the score measuring how much non-mortgage related debt you have.

 

 

 

The total outstanding balance on your last credit card statement is generally the amount that will show in your credit bureau report. Even if you pay these off in full each month, your credit bureau report may show the last billing statement balance.

 

 

 

Paying off your debts and maintaining low balances will help to improve your credit score. Consolidating or moving your debt into one account will usually not, however, raise your score, since the same amount is still owed.

 

 

 

Bankruptcy on the credit report is a borrower’s worst nightmare, as it stays on record for almost 10 years and reduces your score by 200 points or more.

 

 

Top tips to improve your credit score

 

1. Review your credit report at least once a year

2. Contact your creditors or the credit reporting agency to have errors on your credit profile corrected

3. Apply for credit only when you need it

4. Keep balances below 50% on your credit cards

5. Pay off non-mortgage debt on time as quickly as possible