Navigating the Australian property market can be an exciting and daunting experience, especially when securing a home loan.
This is where mortgage brokers come into play, acting as an essential intermediary between property buyers and lenders.
In this comprehensive guide, we’ll dive deep into the role of a mortgage broker, highlighting their responsibilities and how they differ from lenders. We’ll also explore the pros and cons of using a mortgage broker, their payment structure in Australia, and whether or not you should work with one when buying a property.
Finally, we’ll arm you with essential questions to ask potential mortgage brokers, ensuring you find the best one for your home-buying journey.
What Do Mortgage Brokers Do?
Mortgage brokers work to help property buyers navigate the often-confusing landscape of home loans.
Their primary responsibility is liaising between borrowers and potential lenders, ensuring their clients secure the best mortgage deal possible.
To accomplish their goals, mortgage brokers thoroughly assess their client’s financial situation, objectives, and requirements. This analysis enables them to understand the borrower’s capacity and preferences, allowing them to present tailored loan options that suit their client’s unique circumstances.
For example, perhaps the client has a low income but would like to see if securing a loan is possible with their borrowing capacity or if they would have to pay lenders mortgage insurance (LMI).
Mortgage brokers have relationships with a network of lenders, including major banks, credit unions, and non-bank lenders.
Their extensive network empowers them to negotiate on behalf of their clients and potentially secure more favourable interest rates and loan terms than an individual borrower could achieve alone.
Essentially, mortgage brokers help simplify the home loan process by guiding borrowers through various stages, from assessing their financial situation and goals to negotiating the best possible mortgage terms with lenders.
What is the Difference Between a Mortgage Broker and a Lender?
While both lenders and mortgage brokers are involved in the mortgage process, they serve different functions and offer varying levels of assistance to borrowers.
As mentioned earlier, mortgage brokers provide personalised services, guiding borrowers through the loan application process and offering expert advice tailored to their unique circumstances, such as finding the best interest rate on loan applications. Brokers will also require an Australian credit licence, as well as membership in well-regarded industry associations, like the Mortgage and Finance Association of Australia.
Banks, Credit Unions and Other Lenders
A lender, on the other hand, is a financial institution (banks, credit unions, non-bank lenders) that funds the home loan.
Different lenders have their own range of mortgage products with specific terms, conditions, and interest rates. When borrowers deal directly with a particular lender, they are limited to the loan options offered by that particular institution. This restriction may result in borrowers missing out on more competitive mortgage deals elsewhere in the market.
Which Option Helps You Find the Better Deal for Your Personal Objectives?
For example, if a property buyer approaches Bank A directly for a home loan, they will only have access to the mortgage products and interest rates offered by Bank A. However, if the same property buyer consults a mortgage broker, they will gain access to an extensive network of lenders, including Bank A, Bank B, and Credit Union C.
The broader selection allows the mortgage broker to identify and secure a more competitive home loan tailored to the client’s needs.
So, the primary difference between mortgage brokers and lenders lies in the scope of options and the personalised services they provide borrowers. Mortgage brokers offer a wider range of loan options from multiple lenders and help borrowers navigate the loan application process.
In contrast, lenders are financial institutions that directly provide mortgage funds, offering only their own loan products to borrowers.
You may be interested in reading our guide on Bank vs Mortgage Broker: Which Should You Choose
Mortgage Broker Cost: How Do They Get Paid in Australia?
So, will you have to meet any upfront fees with this process, like a loan application fee, or will lenders pay the broker? Well, a mortgage broker typically receives their income through commissions paid by lenders and doesn’t cost the borrower anything.
The commission structure works as follows:
The lender makes this one-time payment to the mortgage broker when a client’s home loan is settled. The upfront commission is typically a percentage of the loan amount, usually ranging between 0.5% and 0.7%.
For example, if prospective brokers secure a home loan of AUD 500,000 for their client, and the upfront commission rate is 0.6%, the broker would receive AUD 3,000 from the lender.
With a trail commission, a mortgage broker receives this commission from the lender throughout the life of the client’s home loan. Lenders calculate trail commissions as a percentage of the outstanding loan balance, usually between 0.1% and 0.35% per annum.
For example, if a mortgage broker’s client has an outstanding loan balance of $400,000 and the trail commission rate is 0.15%, the broker would receive $600 annually from the lender.
It’s worth noting that the Australian Securities and Investments Commission (ASIC) introduced new regulations in July 2020 to govern how banks remunerate mortgage broking activities to minimise potential conflicts of interest.
These regulations include banning volume-based incentives, which previously rewarded brokers for writing more loans and requiring brokers to adhere to the Best Interests Duty (BID), which mandates that they prioritise their client’s interests when providing credit assistance.
Are There Downsides to Using a Mortgage Broker?
While accredited brokers offer many advantages to property buyers in terms of more loan options and quality advice, there are also potential downsides to consider.
Limitations On How Many Lenders They Can Access
Although mortgage brokers have relationships with multiple lenders, they may have access to only some lenders in the market.
Some financial institutions, such as smaller banks or non-bank lenders, don’t work with brokers, which can limit total loan options. So, buyers might miss out on certain mortgage deals that would have been available to them had they approached the lender directly.
Conflicts of Interest
As previously discussed, lenders generally pay commissions to mortgage brokers, which may create a potential conflict of interest.
In some cases, brokers might be incentivised to recommend mortgage products that generate higher commissions, even if they are not the best fit for their client’s needs.
Although regulations like the National Consumer Credit Protection Act (NCCP) and the Best Interests Duty (BID) aim to protect borrowers by requiring brokers to prioritise their client’s interests, it’s still essential for property buyers to be aware of this potential issue.
Varying Quality of Service
Not all mortgage brokers are created equal.
The quality of service mortgage brokers can vary significantly, with some brokers offering exceptional support and guidance while others may fall short in meeting their client’s expectations.
To ensure a positive experience, property buyers should research and compare different mortgage brokers, considering factors such as qualifications, experience, and customer reviews.
Although using a mortgage broker may have potential downsides, you can mitigate many of these through thorough research and due diligence.
Should Property Buyers Use a Mortgage Broker?
Home buyers deciding whether to use a mortgage broker ultimately depends on their unique financial needs and preferences.
However, as highlighted throughout this article, mortgage brokers offer several advantages that can simplify and enhance the home loan process by dealing directly with most banks and acting as a valuable go-between.
Some key benefits include the following:
- Expert guidance
- Wide range of options
- Time and effort savings
- Negotiation power
You should consider these benefits and the potential downsides when deciding whether to engage a mortgage broker.
You may be interested in reading about the Top 4 Questions to Ask Your Mortgage Broker
Choosing the right mortgage broker and credit provider can significantly impact your property-buying experience. By thoroughly understanding the role of mortgage brokers, assessing their benefits and potential downsides, and asking essential questions during your selection process, you can ensure a successful and smooth home loan journey – as well as find the best deal amid current market trends.
Partnering with a reliable, experienced, and client-focused mortgage broker, such as The Mortgage Agency, can help you confidently navigate the competitive property market and secure the best possible mortgage for your unique situation.
Find the Right Loan Option for You with The Mortgage Agency
If you’re ready to take the next step towards homeownership, reach out to our team of expert mortgage brokers today, and let us guide you through the home loan process with personalised service and invaluable industry knowledge.