Mortgage brokers can take some of the stress away from the process of finding the ideal home loan for your needs. The question now lies in how to choose the best broker that can aid you in the process.
A mortgage broker acts as a go-between for lenders and borrowers and the right one has the tools and connections to help you find options for your home loan needs.
Mortgage brokers have access to a range of products through the panel lenders they are accredited with.
Brokers have a legal “responsible lending” obligation to ensure borrowers are not given a loan that doesn’t fit their needs, as stated in the regulatory guide from the Australian Securities and Investments Commission (ASIC) on best interests duty.
To help you in your quest to find the best mortgage broker that fits your needs, you will need to familiarise yourself with the following:
- Steps to find a mortgage broker
- Qualities to look for in a mortgage broker
- Benefits of using a mortgage broker
How to find a mortgage broker
To begin your journey to finding the best mortgage broker for your needs, you will need to follow these four steps:
Step 1: Figure out what you want and need from a home loan
A home loan is a serious business - you cannot just go to the market and choose the first one that captures your fancy. It is crucial to know that a loan may make or break your finance, making it a must for you to consult a mortgage broker.
Before reaching out to a broker, you must determine the type of loan you need. You can start by asking yourself the following questions (which a broker might also ask you):
What loan features do I want? Consider the loan features you want like extra repayments, an offset account, or a redraw facility. It is essential to determine features that may be able to save you money and provide flexibility in the long run, should you want it.
Do I want a fixed or variable interest rate? A fixed rate loan means you will have the same interest rate for a period, usually up to five years. It may make planning your monthly finance a lot easier as you will have the same monthly repayment amount over the course of the fixed rate term. On the other hand, in a variable rate loan, your interest rate and monthly repayments may vary, depending on the current interest rates in the market. This means you may pay a lower repayment should the interest rate in the market drop. However, there is also a risk that you must pay a bigger repayment should the interest rates rise.
How much can I afford for a monthly repayment? Knowing how much you can afford for repayment is one of the first things you need to consider when applying for a loan, full stop. You may risk defaulting on your mortgage if you dive in headfirst into the property market without knowing your financial capabilities and limitations. You may use our mortgage repayment calculator to evaluate how much your repayment could be.
How long is the repayment period I want? Am I in it for the long haul? It is common sense to see buying a home as a long-term commitment. However, you may want to analyse how long you are comfortable paying for a mortgage, especially if it’s not the only loan you have as loan repayments may add up and take a toll on your finances and mental health.
How much am I willing to shell out for a down payment? The amount you are willing to put as a down payment vastly affects the type of home loan and interest rates you may get. If you plan to put less than a 20% down payment of the total purchase price of your prospective home, you may have to pay for Lenders Mortgage Insurance (LMI).
Step 2: Check the broker has the correct accreditation
It may take time to find the right mortgage broker as choosing the wrong one can be costly, and you may end up with a mortgage that doesn’t really fit your needs or your financial situation. Before you meet with a broker, make sure that they have a license to give you loan advice. Your broker should be:
- Accredited under the National Consumer Protection Act
- Have a Certificate IV and preferable a Diploma in Financial Services
- A member of the Mortgage & Finance Association of Australia (MFAA) and/or the Finance Brokers Association of Australia (FBAA)
- A member of the Credit Ombudsman Service Ltd (COSL), which is an avenue for borrowers to source independent dispute resolution help
You may use ASIC Connect’s Professional Registers to find licensed brokers. In your search, use the following lists on the register:
- Credit Registered Person
- Credit Representative
- Credit Licensee
Step 3: Find out which lenders are on the broker's lending panel
A mortgage broker’s lending panel says a lot about their work and experience. Check if the broker has a range of reputable institutions. If not, you may miss out on better mortgage deals. Make sure the broker can explain how many lenders they have on their panel, how many lenders they use, and why.
As a borrower, you need to be sure that the product a broker is offering matches your needs. Ask why they’re offering a lender from their panel and know what they are offering. It doesn’t mean that a bigger lending panel is equal to better service. It may come down to what you need and want.
Make sure to ask the broker to explain all the documentation related to your loan application and contract. You may ask for a loan product factsheet and have in writing what the broker offers. This ensures that you know exactly what you are getting.
Step 4: Know the fees and charges
Most mortgage brokers may give their services for free to consumers and are paid a commission by the credit providers. According to ASIC, the method of paying commission is fairly standard:
- The broker gets a commission from banks for each successful home loan. The commission is typically divided into an upfront payment and a trailing commission paid overtime. The lender may benefit as it can spread commission expenses over time and can terminate commissions if it believes a broker has behaved badly.
- Commission rates are relatively similar across lenders, with upfront commissions typically ranging from 0.46% to 0.65% of the loan amount, about $3,000 on a $500,000 loan. Trailing commissions typically range from 0.1% to 0.35% of the ongoing loan, about $1,000 per year on a $500,000 loan. These fees are paid by the lender as a commission, rather than being paid upfront by you as the borrower.
- Lenders can also offer bonus payments, loyalty payments, and “soft dollar commissions”, which take many forms, including overseas conferences and holidays, shopping vouchers, and tickets to sporting events
- Loan aggregators can also play a role. They provide back-office support and ancillary services to brokers. Some are partly owned by banks. These banks receive a slightly larger share of loans from brokers who deal with these aggregators than from brokers who don’t.
You may ask the broker what commissions or benefits they receive. Under the legislation, brokers must disclose the commission paid to them by lenders, so make sure that they give you this information.
Keep in mind that if a broker secures you a mortgage that fits all requirements set out in the agreement you have and you decide not to accept it, you may have to pay the broker’s fee regardless.
Qualities to look for in a mortgage broker
Aside from looking at licenses and membership in broker associations, you should also make sure that your chosen broker ticks all these boxes:
- Comes recommended. The majority of mortgage brokers receive business through referrals. Ask your friends and family about their experience with their broker and get a recommendation.
- Conducts a thorough interview process. Finding a cheap rate is only one aspect of arranging a loan. A skilled mortgage broker will sit down with you to discuss your mortgage plan and goals and find a loan that is most appropriate for your situation.
- Utilises a large panel of lenders. Some brokers have key relationships with a small number of lenders and tend to place customers with lenders that they are most comfortable with. A competent broker will not only hold accreditation with a large panel of lenders, but they will also be familiar with the lending criteria and processes of numerous financial institutions.
- Possess excellent communication skills. Applying for a home loan or refinancing can be extremely stressful. However, good brokers will keep in contact with the borrower to keep them in the loop throughout the process. Diligent brokers will also keep in contact upon completion to give clients updates and news that may be of interest.
- Disclose all fees and costs upfront. Mortgage brokers work on commission, which means they receive a percentage from the lender after placing your loan. For the most part, this means they offer their services to customers free of charge. However, this is changing as more brokers are altering their service proposition and charging a fee for that service. Borrowers should always be informed of any fees associated with the broker during their initial contact.
- Sees you as a life-long customer, not a one-off transaction. A mortgage is a long-term commitment. A good broker will recognise that your needs and goals will change over time and endeavor to help you along the way.
Benefits of using a mortgage broker
Getting a mortgage broker is not, by any means, a requirement but it is important that you consider reaching out to one if you are a first home buyer. Here are the benefits of using a mortgage broker when looking for the best home loan deal.
- They have all the tools and networks to find the best options for you based on your financial health.
- They are loan experts and are far more likely to find the best deals and therefore save you money.
- They have regular contact with a variety of lenders, some of whom you may not have even known about.
- If you have been refused a loan in the past your broker can help you find a lender that is more lenient. All lenders have different credit policies and a good broker will know each lender’s lending criteria.
- They give you professional advice and guidance and can explain all the technical terms, small print, and answer all your questions.
- They can help get deals not seen in the public domain.
While it is generally believed that mortgage brokers are necessary to get the best mortgage deal, there are some disadvantages you should keep in mind.
Firstly, it’s important to remember that brokers do not have access to all credit providers, so you should take the time yourself to make sure the loan they have selected for you is suitable and competitive, or you could end up paying more than you need to.
Furthermore, there are some brokers who may not work with lenders who do not pay commissions. There are also those who may recommend certain loans from a particular lender because they receive a higher commission from them.
You should also make sure you do not engage with several mortgage brokers. A home loan application from several brokers will raise a red flag on your credit score. Avoid fishing expeditions as it could lead to you not being able to get the best deal.