Mortgage brokers are key members of your property team when buying a home or investment. However, understanding the cost of a mortgage broker and the way they add value remains a mystery to some borrowers.
I’ve pulled together some information so you can better understand the mortgage broker’s role in the process and the benefits they deliver.
The added value of mortgage brokers
The mortgage broking profession came into its own in the mid 1990s.
The deregulation of Australia’s banking industry began in the 1970s, but its outcomes really became entrenched throughout the late 1980s and into the 1990s. This was a period when the finance industry opened up new and exciting opportunities for borrowers. No longer were the big four banks and their subsidiary businesses your primary options for securing finance. Now, a range of lenders and products were available to choose from.
Of course, these increased options meant competition among lenders to secure customers ramped up considerably, and the diversity of products on offer created confusion among borrowers about exactly what deals best suited their needs.
This is where the mortgage broker flourished. As a Melbourne mortgage broker with decades of experience, I can tell you we have saved thousands of clients millions of dollars in our time.
The role of the mortgage broker is to act on behalf of their borrower client as intermediatory between them and the lender.
The broker will, in most instances, have a panel of lenders they deal with, each offering a variety of loan products on various terms. The broker is tasked with matching those loan products to their borrower’s requirements. They will seek the most competitive terms possible for the borrower by working with the various lenders to determine who can deliver the best offer.
An additional value-add of brokers is in loan application preparation and implementation. An experienced broker will work with the borrower well before the loan application is even considered. At this early stage, they can look at the client’s financials and identify where they should make changes in their spending habits or look to improve the income side of the ledger. The goal is to ensure the lender views them as a good option for a loan. The broker might advise their client to implement these budgetary changes and establish them for a set period before making any loan application.
When the time is ripe, the mortgage broker will help the client gather the appropriate information and will make the application for the loan on their behalf. The broker will also help manage the process to ensure approvals are as seamless as possible.
How are mortgage brokers paid?
While mortgage brokers can be paid directly by their borrower client, this is rare. The vast majority collect their fee from the financier once the loan is secured. In fact, a recent report estimated 85% of Australian mortgage broking businesses don’t allow their brokers to charge upfront fees to customers.
This makes for a slightly unusual arrangement – one where they are representing your interests as a borrower but have a financial agreement with the other party (i.e., the lender).
Some might argue this works against borrowers because an unscrupulous mortgage broker might direct you toward one loan product over another simply because the commission is greater. However, brokers are obliged to act in the best interest of consumers under a statute called Best Interests Duty which came into effect in January 2021, so you can proceed with confidence.
The first rule when considering a broker is to be certain you understand how much their fee is and who is responsible for paying it.
Most brokers will make around 0.8% of the total loan amount as a fee, although in some instances it may be greater. Any variations will reflect the complexity of the lending arrangement or might be contingent upon the size of the loan or the types of entities involved.
The broker’s fee may be received as either a one-off payment from the lender or could incorporate a trailing commission where they receive regular ongoing payments through the life of the loan. There may even be a mix of both.
A mix is the most common commission whereby a broker will receive around 0.65% of the loan amount as an upfront commission for the work done to secure the loan in the 1st place, and then receive around 0.15% as a monthly trailing commission, which is to provide support to clients for the ongoing life of the loan.
All in all, however, the borrower isn’t normally responsible for the broker’s fees, so using them to secure finance is relatively low risk.
Drawing on the skills of an experienced mortgage broker to help source finance will enable you to secure the best borrowing result. Just be sure to understand the service being offered and how your broker is receiving their payment.
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