Mortgages are a big business in Canada, and businesses are in it to make money. One of the ways that lenders make money on giving out mortgages is by charging interest, that you repay over 25 years on average.
Most lenders and mortgage brokers don’t charge you for their services. The only thing you’ll pay when getting a mortgage (in most circumstances) is interest – and penalties, if you decide to break your mortgage early. Everything else is free.
But depending on your lender you may run into something known as the origination fee. This is a fee that the lender charges you before you even start paying the loan, which they also charge you interest on. So you’re paying even more to borrow money. But why do some lenders charge a fee?
For most borrowers with good credit and income, lenders won’t charge you a fee. That’s because they expect to make good money off of your mortgage anyway – there’s just no need to charge you more because you could easily get a mortgage at another institution.
Lenders only want to lend money when it’s good for them. When you have good credit and income, they can rely on you to make your payments so that they get their money back. Plus, if you decide to break your mortgage contract (for example, you move into a new home) they also get paid with mortgage penalties.
When you have bad credit or a low/no income, you’ll start seeing origination fees for mortgages. Lenders suspect that you might not pay them back, so they charge something upfront to make the mortgage worth their time.
Private lenders that charge origination fees do so because it keeps the interest rate lower and adds security to their investment. By taking a fee upfront, they don’t have to charge a much higher interest rate to make up for the added risk of lending, and they also get some money back right away.
In general, brokers are free for customers. They mostly get paid by the lender that gives you your mortgage, and so you don’t have to pay them yourself.
But similarly to lenders that charge origination fees, there may be good reasons for a mortgage broker to charge a borrower as well. This is usually when the client has poor credit or no income, because those files are a lot harder to close than a “prime” client.
When files are harder, a lot more work has to go into getting them approved. A broker could spend dozens of hours trying to get a sub-prime client approved, whereas a prime client could take just a couple hours.
There’s also the risk that lenders will deny the mortgage application anyway. When mortgage applications are denied by lenders, it goes on that broker’s record with that company. If they bring too many applications that are denied by the lender, they risk being cut off entirely, which hurts their ability to shop around for the best rates in the future.
While everything is negotiable in the mortgage industry, you may find that it’s hard to lower the origination fee on a mortgage. The problem you’ll face is that you don’t have a lot of leverage in the negotiation.
Mortgage lenders like giving out money when they think they’ll get paid back, and aren’t as quick to give out riskier loans. If you’re already at the point where you need to go to a lender that charges an origination fee, you don’t have much leverage. You don’t have as many options in lenders – if you did, you’d go to a bank.
You might be able to reduce the fee by making yourself less risky, such as by bringing on a co-signer, but that’s not always possible.