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.
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.”
“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. Again, this is where a bigger broker is advantageous. Clarity, for example, has more than 14 brokers and we’re all constantly sharing information about the trends we’ve noticed when working with lenders. We’re across all of the various pricing/rate discountes. In any given week we can tell you which lenders are giving the lowest interest rates or which ones are tightening their belts."
“Smaller brokers who typically only deal with three or four lenders have limited scope to understand what is occurring across a large, complex marketplace.”
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.
Mark Edlund has implemented a number of practices to ensure the brokers at Clarity always have their clients’ interests first.
“Our brokers don’t earn commissions and we deliberately make sure our brokers’ salary structure is totally unrelated to the commission rates lenders pay the business. Instead, all of our brokers are paid salaries and have the opportunity to earn a bonus which is calculated based on a number of performance criteria including customer satisfaction, regulatory compliance and production.
They get paid the same regardless of which bank their clients sign with. In addition, our employees get awarded bonuses based on how well they comply with legislation.
Marketing strategy also comes into play here. We rely on referrals for new business—70% of our new clients come to us because a family member or friend recommended us. This keeps us very motivated to make sure you have an excellent experience. Customer satisfaction is key to our success, not commission rates.”
Business structures like this lead to more ethical and customer-focussed 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. Clarity’s brokers have access to over 50. The more lenders a broker works with, the more options you will have.
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. At Independent, our sales team work closely with Clarity Home Loans to help buyers get into their dream homes sooner.
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