How Mortgage Brokers Rip You Off: What You Need to Know

A mortgage broker is an intermediary between you (the borrower) and the lender. The broker feeds off the fee they get from the lender, and some unscrupulous brokers may not offer you the best deal to make more profit out of your mortgage application. But how do mortgage brokers rip you off, and how can you avoid that? Let’s find out.

How Mortgage Brokers Rip You Off in Canada

Mortgage brokers in Canada take 1% to 2% of the mortgage amount from the lender. So, if the mortgage you qualify for is $450,000, they’ll make $4,500 to $9,000 from your deal. However, in order to make even more profit, they may negotiate a higher mortgage rate with you in exchange for getting a higher fee (i.e., yield spread premium) from the lender. Consequently, you’ll end up paying more interest over the life of the mortgage.

Common Rip-Offs of Unethical Mortgage Brokers: What to Watch Out For

There are several ways a broker can exploit your mortgage application to make more profit. These exploitation techniques aren’t exactly illegal, as the brokers have your consent and signature. So, watch out for the following common rip-offs.

Hidden Fees and Inflated Charges

The broker may not disclose all the costs and claim their services are free. However, only when you submit your application do you find out that your mortgage costs are higher than estimated due to fees, such as administrative or processing costs.

Steering Towards Higher Commission Products

Another way a mortgage broker might rip you off is by recommending a mortgage that gets them higher commissions. In other words, they may dismiss a mortgage plan that suits your financial situation just to make more money.

Misrepresentation of Loan Terms

An unprincipled mortgage broker might also lure you into accepting a certain mortgage plan by not explaining all the terms or ignoring some details. They may even use some legal jargon to perplex you and persuade you that the terms offered work best for your interests. This often includes misrepresentation of interest rates, repayment terms, or payment penalties.

Collusion with Appraisers or Lenders

Mortgage brokers work with several different lenders, but they might be tied to lenders that offer higher commissions. Therefore, they might talk you into borrowing from a lender with which they have colluded. The same thing is possible with appraisers; the broker might collude with the appraiser to inflate the value of the home you want to buy. As a result, you incur higher repayment or get a loan you can’t afford.

Warning Signs That Your Mortgage Broker May Be Ripping You Off

If you encounter some unusual behavior when negotiating a mortgage plan with the broker, it’s better to halt the deal and find another mortgage broker. The following signs are some red flags that the broker isn’t quite straight with you:

• Rushing you to sign a contract.
• Being vague about how they get paid.
• Having many bad reviews and complaints.
• Not providing written estimates or contracts.
• Giving promises that seem too good to be true.
• Being vague about the contract's fees, rates, or terms.
• Encouraging you to nudge the numbers on the application form.
• Steering you toward a specific lender without giving you other options.

How to Avoid Getting Ripped Off by Mortgage Brokers

Working with mortgage brokers isn’t scary if they’re transparent and legit. You can make a fair deal with the broker under the following circumstances.

Understand How Brokers Are Paid

Don’t hesitate to ask brokers about how they make a profit out of finding you the best mortgage plan. The broker combs through your financial records, and they shouldn’t mind answering your questions about their share of profit.

Verify Credentials and Licensing

Mortgage brokers in Canada are regulated by governmental organizations. You should check their license to avoid being scammed. You can check the legitimacy of the mortgage broker through the Financial Services Regulatory Authority of Ontario.

Demand Full Disclosure of Fees and Terms

Ask the broker to give you a list of all fees you must pay for the mortgage application. They shouldn’t abstain from giving you a written guarantee that you won’t have to pay any fees that aren’t mentioned in the documents.

Read and Understand All Documentation

Buying a house is probably the biggest purchase of your life, and you don’t want to make this purchase without understanding all terms and conditions. If you can’t make heads or tails of the contract terms, make sure to get expert advice from a lawyer or real estate agent.

Report Suspicious Activities

If you observe suspicious activities, you can report the broker to related regulatory bodies like the Real Estate Council of Alberta (RECA) or file a complaint to the Canadian Mortgage Brokers Association (CMBA).

Frequently Asked Questions

What not to say to a mortgage broker?

Don’t disclose anything beyond what’s required in the legal documents. For instance, don’t tell the broker about your maximum budget because they might entice you to choose a mortgage plan you can’t afford to repay.

What are the disadvantages of using a broker?

Mortgage brokers work with several lenders, but not all of them. So, your options will be limited to the lenders that work with that particular broker. Also, the broker might be tied to a certain lender and try to steer you toward that lender despite better options being available. Lastly, a broker might overcharge you by not disclosing the full costs (hidden fees) of the mortgage application.

What is a red flag in a mortgage?

The most important red flag is vagueness in the contract terms. If a broker tries to perplex you with the terms and conditions and dodge your questions, you should pull out of the deal.

What is considered a suspicious document?

If the numbers in the documents don’t match your financial situation and spending power, you should take caution when making a deal with the broker. Suspicious documents may include inaccurate income statements or altered credit reports.

The bottom line

Mortgage brokers are the intermediary between you and the lenders. Since they work with various lenders, they can offer you different mortgage plans. However, some brokers aren’t sincere, and they might push you toward a mortgage application that benefits them without considering your interest. You should ensure everything is transparent and the broker is licensed to avoid being ripped off by the broker.