For a lot of people who buy a home, their mortgage broker is the key person who makes things happen. But if you’re just starting out, you’d be forgiven for wondering why so many Australians finance property through a broker instead of going directly to the bank for a home loan.
What is a mortgage broker?
A mortgage broker is a finance specialist who helps borrowers get a home loan. They do this by acting as a middle-person between borrowers and lenders and facilitating deals between them.
While it’s not strictly necessary to use a mortgage broker when getting a home loan in Australia, most people do use one. They’re particularly popular with first-time buyers and borrowers with complicated situations – like self-employed borrowers and property investors.
But even for more experienced borrowers who are refinancing an existing loan, doing this through a broker can still be beneficial.
What do mortgage brokers do?
Mortgage brokers connect borrowers with lenders and facilitate home loan deals. That’s it in a nutshell, but there’s really a lot more to it. A skilled broker will work to get an understanding of their client’s needs and add value by presenting strategies and options that the average borrower would not be able to arrive at themselves.
Here’s how they do this:
Mortgage brokers meet with their clients (borrowers) and ask questions to get an understanding of their financial situation and what they are looking to achieve.
They help borrowers understand their borrowing capacity and based on that, what value of property is within reach.
In some cases, a mortgage broker may simply advise their clients how much more they need to save before being able to apply for a home loan, and what government grants and schemes may help them get their faster,
They educate borrowers on the types of loans that may be suitable for their situation, as well as the loan features that are worth considering.
A key function of a broker is assessing the range of home loan options from their panel of lenders and making recommendations to their clients on which ones may be the best fit.
Mortgage brokers’ recommendations will factor in the cost of the loan and the features on offer, but also lenders’ approval criteria and which ones are likely to be the best match based on that.
When the client has decided on a suitable loan, a mortgage broker will help them complete the loan application and submit it to the lender.
Brokers keep the lines of communication open between the lender and the borrower to ensure the loan application is approved as quickly as possible.
After helping with an initial loan, most brokers will follow up with their to make sure the mortgage is still fit for purpose. If necessary, they will help clients refinance their loan if a better deal becomes available, or if the client wants to buy another home down the track.
Why do people use mortgage brokers?
Around 70% of people who get a home loan in Australia use a mortgage broker, according to the Mortgage & Finance Association of Australia. Here are some of the reasons why they are such a popular option:
Expert advice: Mortgage brokers are experts on home loans and the lenders who provide them. For borrowers who are not confident in navigating the process, a mortgage broker can be a valuable guide.
Convenience: Using a mortgage broker can mean avoiding the hassle of needing to communicate back and forth with lenders (and sitting on hold). They’ll also take on a lot of the work involved in submitting a loan application, which can be a complicated process.
Time saved: A mortgage broker will research loan options and deal with a lot of admin on your behalf, which could be a big time saver.
Finding a better deal: Mortgage brokers have relationships with lenders which can sometimes mean you get access to better loan rates than those advertised to general customers. Brokers can also open up opportunities through their connections at niche lenders that don’t deal directly with borrowers.
Are there any drawbacks to using a mortgage broker?
A mortgage broker is unlikely to be necessary in all situations and there are some limitations to what they offer that are useful to understand.
Selection of lenders: Most brokers offer loans from a broad range of lenders but they do not have access to all providers in the market. It may be possible to find a cheaper loan by shopping around yourself.
Incentives: Brokers earn money from the lenders whose loans they sell, and can be offered extra perks by lenders if they reach certain targets. You’ll need to understand these commission structures to understand what incentives could be at play for the broker.
Finding the right broker: Like any other industry, some mortgage brokers are better than others. You’ll need to research brokers carefully (as well as then deciding which home loan is best). That's why it's worth weighing up the pros and cons of using a broker to see if their services are right for you.
How do mortgage brokers earn money?
Most brokers make money through commission they receive from the lenders whose loans they sell to their clients. There are two different types of commissions that mortgage brokers may earn:
Upfront commission: This is payment made by a lender to a broker in return for them initially signing up their client. This is generally a percentage of the loan amount.
Trail commission: In addition, some brokers earn an ongoing commission from the lender as long as their client stays with that lender. This is also usually a percentage of the loan balance.
Brokers who are employees of a mortgage brokerage are generally paid a salary by the brokerage, with bonuses paid on top based on the number of loans they settle on behalf of their clients.
Is it worth paying a mortgage broker?
It’s rare for brokers to charge their clients for their services, but in some cases brokers will instead charge a fee based on the service they provide to an individual. If the loan application is particularly complex and the work the broker does saves you considerable time and money, paying for the service may be worthwhile.
But in most cases, there will be no shortage of mortgage brokers who will offer to help at no cost to you.
Do I need to use a mortgage broker to get a home loan?
No, most lenders allow customers to apply for a home loan directly with them, meaning it’s not actually necessary to use a broker. However, if you want to apply for a home loan with certain specialist lenders (e.g. low doc home loan providers), you can only do so via a broker.