What is a mortgage broker and what does a broker do?
A lot of people see mortgage brokers as unnecessary middlemen, standing in the way of you, the bank and your loan. But this depiction isn’t necessarily true.
A good broker can provide you with a better understanding of your financial situation, a greater range of loan options, and in some cases access to interest rates lower than what you would get if you approached a bank directly.
There are significant differences between brokers and banks, with brokers offering a range of benefits over your traditional financial institution for both first time buyers and investors.
Banks vs mortgage brokers: what’s the difference?
Brokers are finance professionals that specialise in finding the best-fitting home loans for their clients. They facilitate the process of getting a loan, but do not provide loans themselves.
Banks are one of the main types of institutions that issues mortgages.
Unlike bank lenders, who only have access to the loans provided by their institution, brokers have access to a large range of loan options from a variety of different lenders. This could be in excess of 2500 products in comparison to the approximately 100 offered by a bank.
A bank will run you through the types of loans they offer, but a broker is more interested in matching you with the product that best suits your needs and making sure you appear as a great candidate so banks and lenders are willing to accept your loan application. They can also negotiate with the bank on your behalf to get you a better deal.
It’s the difference between working with a salesman and working with an advisor.
Finally, a broker’s services come completely free of charge to buyers. This is because brokers are paid commission by the lenders. A broker working for a reputable firm will be paid the same amount regardless of which bank you go with, so you know they are working in your best interest.
Why use a mortgage broker?
Shelley Stone, Owner & Director of BOS Financial Services, breaks down the biggest advantages of working with a mortgage broker.
Strong negotiating power.
“First and foremost, we try and get you the best possible deal for your specific situation. We’ll negotiate on your behalf and in some cases can get you better interest rates than what the bank would offer you if you were to go to them directly. Our detailed knowledge of the market gives us that leverage.”
Market knowledge.
“Not only will we get our head around the specifics of your financial situation, we also have an in-depth knowledge of the current residential mortgage market. We’re across all of the various pricing/rate discounts. In any given week we can tell you which lenders are giving the lowest interest rates or which ones are tightening their belts."
Loan structuring and leveraging equity.
“We regularly help investors purchase property using equity. When using equity to purchase multiple investment properties, it’s key that loans are structured appropriately to ensure you gain the full tax benefits. This is called loan structuring and it’s where our focus on long-term investment property strategy analysis and management really comes to the fore.”
Mortgage broker commissions – the conundrum
Unfortunately, you can’t talk about brokers without addressing the biggest risk factor that comes with seeing one—commission.
As we mentioned, brokers aren’t paid by their clients. Instead, they’re paid in commission from banks and lenders when they sell one of their loans. As a result, some less reputable brokers may push you towards a home loan with the lender that pays them the highest commission.
The solution is to choose a broker that puts strategies in place to ensure commissions don’t drive decision making.
Shelley Stone has implemented a number of practices to ensure BOS Financial Services always have their clients’ interests first.
Business structures like this lead to more ethical and customer-focused decisions.
Things to think about
- Every application you make for a home loan decreases your credit score: This means every time you apply for a loan that doesn’t get approved, your ability to successfully apply for the next loan decreases. By dealing with an experienced, professional, reputable broker who understands the differences between the lenders’ unique credit policies ensures the first application you make has a higher chance of being approved. Esssentially, submitting applications with multiple lenders will raise red flags on your credit history and potentially sabotage your capacity to obtain a loan approval.
- Brokers have access to a wide range of home loans but not all home loans: As discussed, there are some home loans that brokers simply won’t have access to. This is because they are only able to recommend loans on their lending panel and some lenders simply don’t make their loans available through brokers. It’s a good idea to chat with your broker and find out exactly how many lenders they work with. As a rule, most brokers have access to between 20-40 lenders.
Should I use a broker?
As is always the case with these things, it is dependent on your individual financial situation. However, talking to a broker for an obligation-free chat, is a great place to start.
*Independent is not a financial advisor. The information contained in this brochure is for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before making any commitment of a legal or financial nature you should consider the appropriateness of the information having regard to your circumstances and needs and seek advice from a legal practitioner or financial or investment adviser.
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