Should You USe a Mortgage Broker?

*This post may contain affiliate links. This means if you purchase through the link I will receive a small commission at no cost to you. It is the way sites like this are funded, but does introduce a conflict of interest.  

*I have no financial relationship with the mortgage brokers mentioned. I have not used them for my own mortgages, they are just examples.

So you’ve finally saved up that first home deposit! Exciting times, the next step is to decide whether you really want to buy a home, and how much you want to spend.

The vast array of options in choosing a mortgage can easily become overwhelming for home buyers.

“Even the once simple home mortgage now has so many flavours and styles and variations that it is difficult for people to make a decision”

Scott D. Cook

Many recommend using a mortgage broker to cut through the confusion.

Mortgage brokers have knowledge, experience and access to a wide range of different loans. They can help narrow down the huge selection advise which type of loan is best for you. And the service is (superficially at least) free to the consumer. Seems like a no-brainer!

Using a mortgage broker is a great idea for many, but as usual, it’s unwise to hand over complete responsibility and understanding to a professional with a clear conflict of interest.

With the extreme complexity of home loans and their fee structures, many will never know if your mortgage broker really had your best interests in mind.

Step 1. Decide How Much You Should Borrow

The first thing you usually come to on a mortgage broker’s website is a calculator to work out how much you can borrow. This is generally not how you should decide how much house you can afford. The higher the loan written, the higher the mortgage broker commission. It is obviously in the mortgage broker’s interest to organise as large a loan as possible.

The largest loan possible may be appropriate for some. Some borrowers are expecting an increase in income in the near future. Others are aware of risks but want to maximise exposure to a good capital growth area as part of their overall strategy.

For others, taking on a manageable mortgage repayment is more important. Make sure you have worked through your own budget and calculated how much in monthly mortgage repayments are acceptable. Take into consideration your top priorities. If the most important thing to you over the next 10 years is travel, make sure you have budgeted for your top priority!

Mortgage Broker Commission Provides a Conflict of Interest

Banks pay your mortgage broker upfront and trailing commissions for organising a loan.

The Royal Commission found loans provided through brokers rather than banks directly were:

  • More likely to interest only
  • Have a higher loan to income
  • Have higher loan to value ratios
  • Incur higher interest costs
  • More likely to default on their mortgages, due to the higher leverage taken

As a result, the Royal Commission recommended a change in the compensation model for brokers. It was suggested a more transparent fee paid directly by the consumer should replace the commission fee model.

The mortgage broker industry objected loudly to this. Consumers were generally unwilling to pay a fee for mortgage broking, and would instead go to the big banks directly. The end result would be a loss of competition. The result of this is usually increasing fees, meaning the consumer would be the biggest loser in all this.

Don’t Worry the Law Now Says that Brokers have to Act in a Clients best interes

Since January 2021 a mortgage broker must legally act in the client’s best interest! I’m unsure how much this actually does to protect consumers, but it is a law most would have assumed was already in place.

Step 2. Decide Whether Using a Mortgage Broker is Right for You

A Mortgage Broker May be Able to Get you More Money

These there are certain situations in which a broker’s qualifications and experience are an important asset to a borrower.

  • If you want to maximise leverage (and have carefully considered the risks)
  • Your credit score is not idea
  • You are self-employed
  • You want LMI waived for a loan over 80% (accessible for ultra low risk borrowers such as doctors, lawyers, accountants)

Brokers have experience dealing with the different lenders and will know which are likely to lend more based on personal circumstances. This will help you target your application for the most likely loan, avoiding pointless credit enquiries damaging your credit rating.

Can a Mortgage Broker Provide a Pre-Approval?

A mortgage broker can give you a rough idea of whether your loan is likely, but this is not a pre-approval. The broker will help you apply to the lender chosen for a pre-approval, and then liaise with the bank to finalise the actual loan once you have purchased.

You May be Able to get Cheaper Basic Loans Online Yourself

If you want a basic, no-frills loan, the cheapest way may be to find this through an online loan provider. These are usually not on mortgage broking lending panels.

You May Want to Stick with Your Bank

If you have a misguided sense of loyalty, stop. Your bank does not reciprocate. But if there are other features you love with your bank that you cannot get elsewhere, you could go directly to the bank. It’s unlikely to save you any money though, the bank just increases its profit margins.

Step 3. Choosing a Mortgage Broker

Check Qualifications and Credit License

It’s easy to assume a mortgage broker with a certificate on display has appropriate qualifications and work experience.

I am surprised to discover I could become a qualified mortgage broker with a 3 day workshop! After this brokers are registered with one of the professional bodies and provided with ongoing educational support on the group. Brokers need a credit license which can be checked here.

The minimum qualification to become a mortgage broker is a certificate IV in finance and mortgage broking. Many brokers have a diploma in finance and mortgage.

Do the checks. If those involved in Melissa Caddick’s scheme had just done some checking, they wouldn’t have lost all their money. In Melissa Caddick’s case, she was supposedly working under another advisor’s AFSL, which is not uncommon. Search online to check the advisor’s license. Make a phone call if you can’t find the information. ASIC only seem to catch up with fraudsters after a few years of stealing clients money.

Minimise and Be Aware of Conflicts of Interest

Is the broker independent or owned by a bank? They are supposed to divulge this information. My own experience (pre-Royal Commission) is this “divulged” in page 135 in size 6 font at the bottom of the page. It’s worth asking the question directly who the broker is affiliated with.

If they are owned by Westpac (such as RAMS) you want to be aware of this potential conflict of interest.

Minimising Commission Motivation

  • Same Commission Broker

Some brokers (eg Mortgage Choice) are paid the same commission no matter which lender they recommend. This reduces the risk of them recommending one lender over another for financial compensation.

  • Cash Back Broker

Others (eg isharebrokers) offer to share the commission with you when you write a loan with them. It is worth exploring in further detail the compensation model for the broker. Do they receive the same compensation for each lender or is there still a conflict of interest? Don’t confuse cashback mortgage brokers with mortgages that offer cash back to incentivize you to loan from them. Immediate cash back (or airline points) should not change your loan preference. It is a gimmick to sell the product. Your long-term mortgage costs are what you should look at when comparing costs.

Are they Experienced in Helping People in Your Situation?

If you have a special circumstance, you will want a mortgage broker is experienced with this situation. If you are looking for an LMI waiver, are self-employed, are a property investor planning to own multiple properties or have poor credit, look for a mortgage broker with expertise in this area.

How Many Options are Compared on Lending Panel?

In order to get one of the best products for your home loan, you will want a broker with lots of options to choose from.

How many loan providers can your mortgage broker compare? How many loan providers have the broker actually written loans for over the past year? This is probably a more accurate representation of the options that are being compared.

Personal recommendations

Online reviews and personal recommendations can help identify potential brokers to choose or avoid. Remember, the recommendations should come from someone with similar circumstances if yours are special.

Transparency

How will your potential present the lender choices? You need to have the options presented so you can make an informed comparison of fees and interest, as well as other features.

Mortgage brokers can be a great ally in finding and securing the best loan for you. But you need to be a little informed about what you are looking for in a loan, in order to make an informed decision. You also need to select your broker carefully to make sure they have the right qualifications, experience and connections to do a great job.

Your wealth accumulation journey starts as soon as you make the first step. Subscribe to Aussie doc for a weekly email to keep you up to date on track to your goals.

Aussie Doc Freedom is not a financial adviser and does not offer any advice.  Information on this website is purely a description of my experiences and learning.  Please check with your independent financial adviser or accountant before making any changes.

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