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If you’re considering using a mortgage broker for an approval and backing out at the last minute, check your contract first. It could cost you otherwise.
One recent borrower learned this the expensive way after ditching his mortgage broker and going with another. He did so after the first broker, lender and lawyer expended considerable effort to secure his approval and close the mortgage under time constraints.
After learning of the cancellation, the broker, Graeme Moss of Verico Fair Mortgage Solutions, billed the client for a $2,911 broker fee, which the client had agreed to upfront. The client refused to pay and the case went to small claims court. On June 21, an Ontario judge ruled in favour of the broker.
Mortgage Broker News reported that the case closed quickly, due largely to wording in the broker contract, which included this line: “I agree that failure on my part to accept these [mortgage] funds will result in the fee noted above to be payable by me.”
For typical mortgages, borrowers don’t pay a cent in broker fees. Instead, the lender pays the broker when the mortgage closes. But it’s a different story if the mortgage doesn’t close.
From the Broker’s Perspective
It’s becoming increasingly popular for brokers to offer deep discounts on rate comparison sites like this one. That’s forcing these brokers to rely on extreme efficiencies to remain profitable—since the revenue per deal is so much smaller than normal.
It’s becoming increasingly popular for brokers to offer deep discounts on rate comparison sites like this one. That’s forcing these brokers to rely on extreme efficiencies to remain profitable—since the revenue per deal is so much smaller than normal.Why do brokers charge cancellation fees? Quite simply, it’s to recoup processing costs and deter frivolous applications.
Cancelled approvals cause wasted money and wasted time—time a broker could spend with other clients. They’re also expensive for lenders, who must pay rate hedging and underwriting costs even if a deal doesn’t close. For that reason, lenders try to deter cancellations by barring inefficient brokers from getting their best rates and/or compensation. That’s a problem because, if a broker can’t maximize their compensation, they can’t “buy down” rates as much for their clients. So inefficiency ultimately hurts mortgage shoppers too.
Note that cancellation fees aren’t allowed everywhere. In B.C., for example, the province’s mortgage regulator prohibits brokers from charging such fees. In Ontario and most other provinces, cancellation fees are fair game.
From the Client’s Perspective
We all like to keep our options open. That’s understandable. But eventually, every borrower has to commit to something.
We all like to keep our options open. That’s understandable. But eventually, every borrower has to commit to something.If you’re a mortgage client outside of B.C., be aware of cancellation clauses. They’re becoming more and more frequent. If you don’t like the thought of them, you’ll find that they’re less common with traditional brokers (who charge a bit more for advice and flexibility) than online discounters.
For some folks, it’s tempting to use one broker’s approval as leverage over another. But cancelling an approval that you requested—solely to get a better rate elsewhere—is bad karma if nothing else. And it’s certainly unnecessary in this day and age.
All you really need to do is comparison shop before applying. If you feel it appropriate, use one lender’s or broker’s quotes as leverage to get a better deal elsewhere. But avoid requesting an approval unless you’re sure you want to proceed with that lender and broker. That way you’ll get a great rate, sidestep any cancellation fees and escape an uncomfortable confrontation with your broker.
22 Comments
Good on Graeme for coming up with an airtight contract that held up in court. Just goes to show how important a good contract is, particularly when clients come along who think they can take advantage of broker services (without closing a deal) for free.
Broker, there are two sides to this. I’ve had experience with many brokers who tried to push me to use their services to hold a rate because it was “free” and didn’t “force me to close the deal with them”, only to find out it wasn’t really free when looking carefully at the fine prints. Many brokers are using very aggressive tactics to get clients. I’ll agree, though, that ultimately a client is responsible for reading the fine prints and knowing what he/she’s agreeing to.
I’m starting to wonder how prevalent these broker/client disputes are, and if more open communication about the process right from the get go would avoid many of them. I think it’s a good idea for both parties involved to openly discuss the topic of compensation in the event that the deal doesn’t close, and if the broker has invested significant time and resource, rather than leaving it strictly to the fine print.
I have signed an exclusivity agreement with a broker and the broker told me they will match if any lower rate available in the market. Now there is lower rate available and the lender is a direct channel my broker does not want to help me. am i stuck with the broker ?
Hi Shaun, It depends on the language in your broker’s agreement. What is the exact wording of their rate match policy?
You can paste it here or use a program like this to paste a link to a screenshot: https://app.prntscr.com/en/index.html
My broker got me approved with a lender but I am not happy with the deal. I never signed anything at all. We did correspond by email and I didn’t see any fine print anywhere. They said they did a lot of work to get me this. Can they make me pay a fee?
Hi Allie,
Since the story is about cancellation fees I’ll assume that’s what you’re referring to. If you did not contractually agree to paying a cancellation fee OR if you live in a province that prohibits cancellation fees (e.g., B.C.) then you should not have to pay a cancellation fee. If they try to make you pay one, ask them for a copy of the contract you signed (signed with ink or e-signature) that binds you to it, and then review those terms.
Hi, I signed service agreement with a broker. It says basically I have to pay $500 cancellation fee unless I get BETTER rate from others.
One week before closing, I got a rate from my existing lender. Since they don’t want to lose customer.
The new rate it self is same. But existing lender’s rate is home equity. My Broker is regular mortgage.
My understanding is that it is better rate.
But the broker is saying need to have lower rate.
Do you think I will eventually end up paying fee?
Thank you,
Kieun,
I have seen some of these cancellation fee policies and they usually require a lower rate, like 0.1 percent lower or something. Maybe if you share the exact wording here people can give you an opinion.
Hi,
Exact wording is as below.
—————————————————————
Broker will complete many hours of work and incur various expenses to make sure you get the best rate for your mortgage. Because broker is going to do that work, you agree that even if the transaction does not go ahead you will pay broker and administration fee of $500.00 unlsess;
A. You receive a better written rate to you directly from and institutional lender(for example a bank or credit union)
—————————————————————
When I see same rate, but one is regular mortgage, and other one is HELOC, wouldn’t any one think that HELOC has better rate?
Better rate would mean purely number?
To Kieun:
Did you ask your existing lender if it can beat the rate by 0.01% to make it official?
This is not legal advice but personally I think that if “better” is not defined in the agreement it can be construed as “better for your needs.” Websters says it means “more advantageous or effective,” which your HELOC rate definitely would be given your fact case.
Would you save money by staying with your lender? If so, that too makes the HELOC rate “better.”
If all else fails, threaten to post your experience online and with the regulator if they try to coerce you into an inferior mortgage and come after you for the fee.
Thank you for reply,
Bank did not give me rate any lower.
So I have to pay fee or go to the court with the broker. Not decided which way yet.
Besides that I guess I can review about the broker later for other people who does not know about cancellation fee.
i’m now considering in cancelling my application thru a broker, during my initial meeting with him said they will only charge me .75% broker fee instead of the 1.5% being a return client. Initial disclosures was sent to me and i did sign it and it has 1.5% to which i pointed out to him that it needs corrections. he said okay but sign first so we can submit asap to get the lowest rate that came in. As we are nearing closing he sent me another disclosures and it has the same 1.5% fee to which i declined to sign unless corrected. he is now denying that it was discussed .
i have few more issues with him and now considering withdrawing my application. i don’t remember what were all the documents i signed but the one that recently came in has this:
“__x__ i will pay you directly upon my signed acceptance of a commitment ___ or at closing ___, a fee of__1.52O%__ % of the loan amount or $ _4590___.
i didn’t read anything about fee cancellation on my documents
Does it mean they can charge this to me even if we don’t close?
Acceptance of commitment means what and when? Upon signing those documents or at closing day?
Any feedback will be appreciated. thank and stay well.
Hi Mae,
“Commitment” refers to the lender’s conditional agreement to loan you money. It’s something you sign before closing.
It never makes sense to sign something that binds you to fees you’re not comfortable with. But if what you say is true, tell the broker this was not what you understood to be the agreement and that you do not wish to proceed. Cite dates of discussions and any proof you have to support your claim of 0.75%. Confirm from the brokerage’s “broker of record” that it will release you from any fees.
If he/she declines, you’ll need to chat with a lawyer to assess your options.
thank you for your clarifications.
i read and read and read it multiple times and this is how it is written:
“__x__ i will pay you, directly, upon my signed acceptance of a commitment ___ or at closing _x__, a fee of__1.52O%__ % of the loan amount or $ _4590___.
It is marked x at closing. My understanding with this is we should get to the closing table?
I have a copy of the initial papers works of estimates stating the 0.75% credit when i met him in his office and also screen shot text messages where responded “okay” when i reminded him.
I live in BC but the loan broker, XYZ mortgage, is in ontario. Does that make a difference with respect to brokerage fees and cancellations?
A bit of background, I was going to get a 35,000 consolidation refinancing loan at 10% from XYZ mortgage to pay off numerous credit card debts that I’ve battled for years and signed the paperwork but was then able to secure a 2.5 % loc from a bank here in BC so am being charged $6000 in cancellation fees by XYZ mortgage. This seems high and perhaps not worth cancelling even for the lower rate. Any suggestions or assistance would be appreciated.
Just curious, if I signed a cancellation agreement with a broker and it states I need to show a “lower written rate”, I received a HELOC with the same rate from a financial institutions, also refinancing instead of renewing. Am I committed to pay the cancellation payment.
Hi Chris, Unfortunately we can’t give personal legal advice related to contracts here.
I contacted a mortgage company to initiate a refinance loan on my residence. After considerable time on the phone things went south. Even though I had only a car and house payment, she kept insisting that I add the car payment to the loan. After the third time and after being on the phone for about an hour, I told her forget it and hung up. Now they are trying to charge me $500.00 for cancelling, a charge they never mentioned when we were trying to complete the loan. Is this legal? We were still on the phone and nothing had been settled yet, loan amount, payment, interest rate, etc.
Hi Jackie,
We can’t give specific legal advice but in general:
* if it’s a prime mortgages, there is usually no justification for a cancellation fee — unless perhaps it’s a deep discount broker
* one must sign (or e-sign) an agreement stating they agree to pay a fee if they don’t move forward; otherwise a fee cannot apply
* moving forward is generally defined as submitting an application to the lender at the client’s request
* not all provinces allow such fees (e.g., BC and NB)
Does this help?
Oops, I forgot to add that I also sent an e-mail cancelling this application. They had not spent anything yet as we were still on the phone and hadn’t finalized anything.
Hi
Mortgage broker is charging me 1% of loan amount after i back off from the approval they got. I haven’t signed a commitment letter yet. I am canceling it before signing commitment letter. I have sign a agreement which has clause stating that ‘’Our fee is 1% of the Mortgage loan amount paid by the borrower once the loan gets approved even if borrower decides to wothdraw his application after the loan approval.’’ same words nothing altered they had spelling mistake too *wothdraw*