Choosing Between a Mortgage Broker or Bank

We outline the pros and cons of each option to help you make an informed decision.

By Emily Southey | 16 minute read

If you’re buying a home in Canada, then chances are you’ve decided to take out a mortgage. But deciding to get a mortgage isn’t the only decision you have to make. Where are you going to get that mortgage from? Are you going to work directly with a mortgage lender, like a bank, or go through a mortgage broker?

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What Is a Mortgage Loan?

First thing’s first. Before we dive into the differences between mortgage brokers and direct lenders, we must first define a mortgage loan. A mortgage or mortgage loan is an agreement between the borrower (otherwise known as you, the homebuyer) and a mortgage lender, in which the lender agrees to loan money to the borrower so they have the funds necessary to purchase a home. Mortgage loan agreements give the lender the legal right to repossess the property if the borrower fails to meet the terms of the agreement (for example, if the borrower defaults on a mortgage payment). Generally speaking, mortgages are considered “secured” loans, which means the borrower promises collateral to the mortgage lender if they are unable to continue making payments. In the case of a mortgage, the collateral is usually the home. Therefore, if a borrower stops making their mortgage payments, the lender can take possession of their home through a process referred to as foreclosure.

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Mortgage loans are available to a wide range of homebuyers. However, mortgage terms vary depending on the personal finances of the buyer and the price of the home they wish to purchase. The better your credit score and financial standing, the more advantageous the terms of your mortgage loan will be. In contrast, if you have a low income and are trying to buy a home or have bad credit and are trying to get a mortgage, your loan may be subject to high interest rates or a traditional lender may reject your application altogether, forcing you to consider a mortgage from a subprime or private lender.

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Qualifying for a Mortgage

Whether you choose to apply for a mortgage through a broker or directly with a lender, the first step is to get pre-approved. Mortgage pre-approval is essentially an estimation of how much mortgage you will be approved for when you officially apply, based on a number of indicators, such as your income and debt levels. 

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In order to get pre-approved for a mortgage, you will need to provide a series of documents and information proving your financial status. Documents may vary by the financial institution but typically include:

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• Personal identification: Mortgage lenders require proof of your identity to confirm that you are who you claim to be. A valid, government-issued ID, such as a driver’s licence or Canadian passport, can be presented as proof.
• Proof of income/employment: First and foremost, you will need to provide documents that show proof of income or employment. Documents may include a pay stub that shows your current salary or hourly rate, a letter from your employer detailing your position at the company, your salary, and how long you’ve worked there, or a recent notice of assessment from the Canada Revenue Agency (CRA) if you are self-employed. 
• Proof of assets: Mortgage lenders strive to calculate a buyer’s net worth, which is partially determined by your assets. So if you have major assets, such as a car, boat, or a second property like a cottage, you will need to provide proof. 
• Information about your outstanding debt or financial obligations: If you have outstanding debt or other loans like student loans, car loans, credit card balances, lines of credit, or child or spousal support, you will need to show this. Never attempt to hide information about your debt. Mortgage lenders will likely find out when reviewing your credit history and it will reflect poorly on you if you try to conceal it.
• Proof you can afford the down payment and closing costs: Mortgage lenders may also want to see proof that you can afford the closing costs, down payment, and future mortgage payments on a home. To show this, some borrowers provide bank account or investment statements.

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Once the mortgage lender has reviewed your documentation, they will either approve or deny your pre-approval application. If they approve it, they will provide you with a mortgage pre-approval letter detailing the maximum loan you may be approved for and the terms of your loan, including your interest rate. This information is crucial to homebuyers, as it helps them determine how much they can reasonably afford to spend on a home. If your application is denied, you can ask the lender for more information and work on improving your financial standing before you begin house hunting. 

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Please note that getting pre-approved for a mortgage is free of charge and there is no limit to the number of pre-approvals a homebuyer can apply for. In fact, we recommend that homebuyers apply for pre-approval with several lenders to ensure they get the best rate possible.

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Mortgage Pre-Approval versus Mortgage Pre-Qualification

When shopping for a mortgage, homebuyers may see the terms “mortgage pre-approval” and “mortgage pre-qualification.” While they sound similar, they are not the same. It’s important to understand the key differences when buying a home.  

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A mortgage pre-qualification is considered a precursor to a mortgage pre-approval. It is more casual, requires less documentation, and provides the buyer with a very rough idea of how much mortgage they will qualify for. Mortgage pre-qualifications may be conducted by phone or online and can take as little as 15 minutes. 

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In contrast, mortgage pre-approval is a more involved process, one that is only worth going through if you are serious about buying a home. Mortgage pre-approvals are the result of a more thorough investigation into a buyer’s financial status. A greater amount of documentation is necessary, which allows the mortgage lender to provide a far more precise estimate.

The Difference Between Banks and Mortgage Brokers

Now that we’ve got the basic terms down, like mortgage loan and mortgage pre-approval, it’s time to dive into the topic of the hour: the difference between banks (mortgage lenders) and mortgage brokers. 

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Banks are an example of a mortgage lender or direct lender. If a buyer chooses to apply for a mortgage through a direct lender, chances are they are applying for a mortgage with a bank. Direct lenders are the ones responsible for approving or denying your mortgage application and providing you with a loan if approved. 

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In contrast, mortgage brokers act as a middleman between the borrower and the direct lender (that is, the bank). Mortgage brokers have existing relationships with dozens of mortgage lenders, and therefore can be useful tools for prospective buyers. Mortgage brokers function independently of lenders, allowing them to put a prospective homebuyer’s needs first. Further, some lenders have special relationships with brokers, in which they will only consider mortgage applications submitted through a mortgage broker.  

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Continue reading for an in-depth overview of mortgage brokers versus banks, including the pros and cons of each option.

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Why Use a Mortgage Broker?

Mortgage brokers have risen in popularity in recent years. Why? A number of reasons. Disillusionment with big banks following the 2008 financial crisis mixed with the convenience and potential savings they offer has made brokers the go-to voice for homebuyers seeking mortgages. 

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Mortgage brokers are licensed professionals who have relationships with a diverse list of lenders. Their goal is to help borrowers find the best mortgage rate possible. To do this, mortgage brokers, who work independently of direct lenders, get to know the needs of their clients. They ask borrowers about their housing needs, financial standing, credit history, and the type of mortgage they’re looking for (fixed, open, closed). From there, the mortgage broker does all the heavy lifting, contacting local mortgage lenders and negotiating on your behalf to obtain the best mortgage rate.

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Beyond the convenience of having someone handle this complex and tiresome process, mortgage brokers can offer their objective expertise. Unlike banks that are trying to sell you their product, mortgage brokers work for their clients. They also have access to a large network of potential lenders, ranging from banks and credit unions to trust companies. As mentioned, they may even have access to certain lenders that cannot be accessed directly by the borrower. Ultimately, mortgage brokers are experts in all types of mortgages, not just a single bank’s mortgage product. This way, they can offer their objective opinion on the best mortgage for you. They can also help you find a specialized mortgage if, due to a low income or lacklustre credit history, you are unable to secure a loan from a traditional lender. 

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Finally, working with a mortgage broker can save you money, which is another reason buyers choose this route. Shopping around is crucial to finding the lowest possible mortgage rate and that’s exactly what mortgage brokers help with. So if you’re looking to save on mortgage interest without having to contact dozens of banks or credit unions, working with a broker might be a wise decision. Plus, working with a mortgage broker does not cost anything to the buyer. Rather, the broker receives a referral fee from the lender you ultimately choose to purchase a mortgage product from. Therefore, a broker’s fee is dependent on you finding a mortgage, which means you can rest easy knowing they will try their hardest to find the right loan for you.

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The Pros and Cons of Working With Mortgage Brokers

We break down the pros and cons of working with mortgage brokers below. 

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Mortgage broker pros

• More options: Brokers have relationships with a wide range of lenders, from banks to credit unions. This increases your odds of finding the lowest rate, as well as better terms like prepayment privileges or more advantageous penalties. 
• Specializations: Mortgage brokers are experts at finding mortgage products for all kinds of clients, including those who cannot obtain a loan from a traditional lender. If you have bad credit or a low income, going through a mortgage broker could open up more opportunities.
• Time and money savings: A good mortgage broker will do the work for you, shopping around on your behalf in an effort to find you the best mortgage at the lowest rate. 
• Exclusive rates: Some mortgage brokers offer exclusive rates to borrowers, ones that you could only get by going through a broker. 
• Objective expertise: Mortgage brokers work independently of mortgage lenders, which means you can count on them for objective, unbiased advice. 
• No cost: Hiring and working with a mortgage broker is free of charge to the buyer. The broker gets paid by the lender when the buyer finds a mortgage. Therefore, the prospective borrower has little to lose with this business model.
• Superior customer service: Nowadays, most modern mortgage brokers offer 24/7 customer service, allowing customers to speak with a representative over the phone or online at the drop of a hat. 

Mortgage broker cons

• Discounts are not guaranteed: While some mortgage brokers might be able to offer exclusive rates, this isn’t guaranteed. Therefore, working with a broker won’t always save you money. 
• No access to certain lenders: Some mortgage lenders refuse to work with mortgage brokers. So if there is a specific lender you are interested in, you might have to apply with them directly. 
• There’s a middleman: Mortgage brokers essentially function as middlemen. There is nothing inherently wrong with this, but if you prefer to deal directly with the party granting you the loan, you may not enjoy going through a broker.

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Why Get Mortgages Directly Through Mortgage Lenders?

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Obtaining a mortgage through a mortgage broker undoubtedly has many benefits, as described above. However, working with a broker isn’t the right decision for everyone. For some, getting a mortgage directly through a mortgage lender, such as a bank, makes more sense. 

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Applying for a mortgage directly through a bank comes with several perks. First, borrowers might find that dealing with a lender directly offers a greater level of comfort and security, especially if you already have an existing relationship with that lender or even a specific representative from that lender. For example, if you’ve had a bank account with a certain financial institution for years or even decades, you might be inclined to apply for a mortgage with them directly. Plus, your existing relationship may give you leverage, allowing you to obtain a lower mortgage rate. 

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While banks may not have the same motivation to give their clients the lowest or most advantageous rates the way brokers do, they still want to sell you a mortgage product. Mortgage lenders like banks know that selling a mortgage to a client usually ensures a long-term relationship with that client. So to entice clients, they may offer special perks like cash-back bonuses, lowering the eligibility requirements for a home equity line of credit, or even paying the home’s appraisal fee.

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The Pros and Cons of Working With Banks

The pros and cons of working with mortgage lenders, such as banks or credit unions, are as follows:

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Mortgage lender pros

• Comfort and security: If you have an existing or longstanding relationship with a certain lender, obtaining a mortgage directly through them might feel safer and more secure. 
• Potential savings and perks: Mortgage lenders may offer certain perks to entice borrowers, such as paying for an out-of-pocket expense like the home appraisal fee or waiving personal banking fees. 
• Brick-and-mortar locations: Some borrowers prefer to deal with lenders in person at a physical location. Most mortgage lenders, especially if you choose to go through a bank or credit union, have brick-and-mortar locations across Canada. In contrast, many mortgage brokers are online-only, meaning the only way to speak with a broker is over the phone or online. 
• Long-term stability: Canadian financial institutions are among the safest and most stable in the world, so obtaining a mortgage directly through a bank means you won’t have to worry about anything going wrong.