Mortgage suitability for clients: Are you doing enough?
With the recent rise in interest rates, industry conversations are naturally turning to the effect on Canadians trying to get a mortgage. And as much as potential home buyers may have had their frustrations about the mortgage stress test in recent years, that will help them cope with this rise in rates as their mortgages come up for renewal.
With mortgage suitability coming into focus in the industry, are you doing enough when finding lending options for your clients? And are you protecting yourself in the process?
Your commitment to principles of mortgage suitability protects your clients and your business and contributes to the health of the national economy.
Defining mortgage suitability
The Mortgage Broker Regulators’ Council of Canada (MBRCC) is a forum for Canada’s mortgage broker regulators to work together to address regulatory trends and issues.
Consistency across the provinces benefits both brokers and the public, and mortgage suitability is an area where broker practices impact borrowers. In its Mortgage Brokering Product Suitability Review, the MBRCC found that broker understanding of mortgage suitability varied, but three main themes emerged:
- The appropriateness of the mortgage considering the borrower’s needs and circumstances.
- The affordability of the mortgage/the borrower’s ability to repay.
- The most appropriate option(s) is based on the products and lenders available to the mortgage broker.
On November 23, 2023, the MBRCC issued its Principles for Mortgage Product Suitability Assessments. The goal is to support mortgage brokers while they recommend suitable mortgages to their clients and provide further consumer protection.
Processes and practices to promote mortgage suitability
Mortgage financing options for your clients range from traditional banking (Big Five lenders in Canada) to alternative mortgage options through smaller Charter 1 banks (that also fall under OSFI regulations like Bridgewater Bank). There is also private lending, which does not have the same regulatory framework as chartered banks. As a mortgage broker, you must understand and explain these differences to your clients, including information about regulations, risks and fees when discussing mortgage suitability.
Ensuring mortgage suitability protects brokers as well. According to Antoinette Leung, head of financial institutions and mortgage brokerage conduct at the Financial Services Regulatory Authority of Ontario, some of the most common consumer complaints FSRA receives involve a failure to adhere to two principles in the national Code of Conduct for the Mortgage Brokering Sector: Suitability and disclosure.
Selecting a suitable mortgage option
While it will ultimately be your client who chooses from the available mortgage options, you play an essential role in presenting the pros and cons of each option. In fact, you have a professional responsibility to understand your client’s circumstances and inform them about what they should expect.
Every deal is different. Following the principles will allow you to present your clients with suitable mortgage products in Canada.
Know your client
Obviously, you will be evaluating a person’s financial situation as you look for mortgage products, but you’ll need to look beyond that to help clients that don’t fall into traditional income and employment categories. In addition to their ability to afford the payments, clients come with different personal circumstances, financial and life goals, and comfort with the risk that must be factored into their mortgage solution.
Often, a self-employed person, or someone working in the gig economy, may not have the stable employment and income that the big banks like to see. If you are following mortgage suitability principles, you will account for the specific situation of the client related to income, as well as the possible circumstances they may encounter, such as missing a payment.
Know the products and prepare options
Not all clients will qualify for a mortgage from the big banks. This is where your relationships with alternative lenders and reputable private lenders can benefit your clients. A diverse portfolio of lenders you work with gives you better options for your clients.
Some alternative lenders, like Bridgewater Bank, have robust capital requirements and risk management principles of a federally regulated bank. This offers stability and gives clients security in knowing acquisitions are less likely. As a broker, it’s in your best interest to use alternative lenders that have that backing to protect your clients and your reputation.
Depending on your client’s situation, be prepared to discuss the pros and cons of each option. Does your client expect to have more stable employment soon? Perhaps they will need an open mortgage so they can switch to a mortgage with more favourable terms. Some lenders offer lower interest rates for clients who do not plan to take advantage of pre-payment benefits. Is your client not risk-tolerant? A fixed-rate mortgage might make them more comfortable.
And what happens when the current mortgage term comes to an end? What are the next steps? It’s important to plan a mortgage exit strategy.
Disclose and document
As mentioned above, one of the most common consumer FSRA complaints relates to disclosure.
Your client needs to be informed about and understand the fees applied to their mortgage, including loan fees, breakage fees, and impacts for renewal options.
While most brokers are diligent about disclosing important information to clients, documentation seems to be lacking. When having these client conversations, document decisions and options and provide them back to your clients, especially when meeting virtually. Your openness and transparency will continue to reinforce why mortgage brokers are so crucial in this economy.
Consider developing a checklist that you go over with the client that they can initial to acknowledge that you have gone over the essential points that will affect the client now and in the future. In short, it’s important to manage client expectations.
Promote financial literacy
It’s helpful for your clients to have a basic understanding of financial literacy concepts—including budgeting, saving and investing. Literacy in the matter of mortgages is more complicated. Ensure your clients understand the ins and outs of mortgages so they can make an informed decision.
New licensing and education requirements in Ontario
Ontario introduced new requirements in 2023 to better protect consumers and investors. The changes will help ensure borrowers receive appropriate mortgage suitability advice and product recommendations when dealing with private mortgages. Changes include:
- A new licence class for mortgage agents.
- Enhanced educational requirements for brokers and agents working with private mortgage lenders and working on raising capital.
The two licensing classes for mortgage agents will be:
- Level 1 – Agents are authorized to deal and trade in mortgages with financial institutions or approved by the Canada Mortgage and Housing Corporation (CMHC) approved lenders under the National Housing Act.
- Level 2 – Agents are authorized to deal and trade in mortgages with mortgage lenders, including private individuals.
This increased oversight is positive because it provides clients with increased stability and confidence, knowing that private lenders and brokers are being governed to a higher standard.
Details about these changes can be found here:
Important note: These new rules also apply to individuals licensed in other provinces who are seeking a licence in Ontario.
If you have questions about how our mortgages can help your clients, contact us and talk to one of our underwriters or business development managers.