A finance broker (or mortgage broker) is a third party that helps to connect you to a lender, with the goal of getting you the best deal (or rate) that they can. Is it really worth hiring a finance broker though, when applying for a loan?
Dealing with banks sucks, and I have found that using a broker has saved me so much time, money and stress. A finance broker is an independent third party that helps connect you to lending products suitable for your personal circumstances, and can usually get you a much better (and quicker) deal than trying to go directly through the banks yourself. But it’s not all sunshine and happiness, there are some things you should know before using one1.
What is a finance broker?
Finance and mortgage broking services are third parties who will negotiate on your behalf to banks or other lenders to secure finance for your property construction, development or property purchase. They have access to a much wider range of lending products that retail consumers (mortgagees) can get, which means you usually get a better deal in a quicker time-frame than if you tried to negotiate with the banks directly yourself.
I find they are also pretty efficient at collating your information and dealing with banks, and I prefer just dealing with one point of contact. In my opinion, this makes them much more hassle-free and convenient, ultimately making it the less stressful option.
Mortgage brokers are licensed financial service providers in Australia. To make sure your mortgage broker is licensed, check out the Australian Securities and Investment Councils register2 to ensure they have the appropriate Australian credit licence as a Credit Registered Person, Representative or Licensee.
A good mortgage broker will sit down with you to discuss your options, explaining and understanding;
- Your financial situation
- Your wants, needs and goals
- How much you can afford to borrow
- Explaining different financial products and mortgages, as well as their associated features such as: re-draws vs offsets, Lender’s mortgage insurance3, interest rates, fees and charges
- What your repayments will be
- A limited discussion of the risks of your investment
- The loan application process from start to settlement
- How to manage your mortgage, including potentially switching down the track to get a better deal.
Finance and Mortgage Brokers most commonly get paid a commission from the lenders (banks) for arranging a customer for them, so home buyers don’t directly pay the broker out of their own pocket. This is a win-win situation, since they usually get you a better deal than you would be able to gain for yourself.
Some people explain that this efficiency comes from the fact that the lender does not need to waste money advertising to attract your business. Further, when brokers sniff out or organise a good deal or product with lenders, they can direct a torrent of new customers their way and thus benefit from the economy of scale. Lenders know this, and so offer lower prices to the brokers.
However, mortgage brokers don’t always just get paid on commission, sometimes they charge you a fee-for-service too. Since the Royal Commission inquiry5 into financial affairs and banking, and the subsequent APRA crack-down on irresponsible lending, some mortgage brokers have had to revise their fee schedules. This has meant lots of brokers shifting away from the ‘trailing edge commission’ style of payment and more into charging upfront fees to their customers.
To be sure, ask for a copy of the PDS or terms and conditions of service from your mortgage brokers. If you want to make sure you’re getting the best deal, simply ring around and see what they are all charging.
“The important thing to remember about these commissions is that each lender can offer different rates. So, if your mortgage broker stands to make a 0.3% commission from one lender and a 0.7% commission from another, they may take this into consideration before recommending a mortgage to you. However, brokers are obligated to be transparent around these facts, so you can question a choice if you’re concerned.”mozo.com.au/home-loans/resources/guides/mortgage-broker-fees 4
What can a Finance Broker offer?;
My mortgage broker has personally managed to save me;
For those three reasons alone, for me personally, I strongly prefer not dealing with a bank individually ever again, and I will most likely always use a mortgage broker in the future.
Saving money with a finance broker
I was personally able to secure an Interest only finance for my Investment Property construction through my broker with a 4.2% interest rate. The closest product I could see elsewhere was at 5.5%, so a 1.3% difference is a massive saving and helps my bottom line. This makes the deal more cash-flow positive, and I believe lowers my level of risk. You can find an interest-only mortgage calculator online at MoneySmart.gov.au6
Saving time with a finance broker
I am a fairly busy person usually – between running a website business, family commitments, writing on the blog, learning language and music, socialising with friends, keeping physically fit, reading, and just relaxing at home, I do not have time to jump through all the hoops that lenders throw at me.
My Mortgage broker keeps an up to date library of all my personal and financial details. They might ask me to update certain documents from time to time (which is tedious and annoying), but it doesn’t take much time. They filter out the bullshit that comes out of lenders, and then summarize it and explain it to me succinctly. This service is almost invaluable.
Saving Stress with a finance broker
As I have previously mentioned, I am probably a bit of a stress head sometimes. Having an expert team member on my side to help me navigate this confusing, convoluted, and sometimes corrupt industry really helps me rest easy. I don’t have to constantly be thinking about trying to get the best deal or managing my mortgage since it is all outsourced.
An interview with a Finance broker
I got in touch with a local finance broker in Sydney who had worked with some friends doing mortgage brokerage for them, and I asked him some pointed questions about exactly what a finance broker does and about his experience in the industry.
Can you tell us a bit a bit about yourself?
“First of all, I am a proud father of three kids who keep me very busy with all of their after-school activities. As far as my work life, I am a Chartered Accountant by trade, later becoming a Tax and Real Estate Agent. I naturally fell into mortgage brokering which I am very passionate about and it certainly goes hand in hand with my qualifications and experience. I have been in the property and finance industry for the past 19 years and still love assisting people to get in a better financial position. Spectrum has been operating for over 38 years, of which I have been co-owner for the past 9. And despite living in Sydney for the past 20 years , I still consider myself a proud Queenslander!”
What services do you provide as a finance broker?
“We provide loans for people to buy their own home or investment property. In addition, we can help people with car loans/leases, commercial loans, SMSF loans as well as personal and business loans. Part of our service is to monitor clients regularly to ensure they stay on the right path with a loan to suit.”
How should someone choose a finance broker?
“Like any professional relationship, you should look for things like experience and educational qualifications but just as importantly it should be someone you like working with. This is a potentially lifelong relationship so it should be with someone you feel comfortable with personally. Certainly, if they have been referred that is a good start. A broker should be able to offer multiple options and be able to explain clearly how these options are going to meet your needs and requirements. It is also important to ask about their lender panel. A good broker will have a wide range of lenders to choose from which will ultimately give the client more options. Reviews and client testimonials are powerful indicators of the service provided.”
What questions should we ask our finance brokers?
“It’s good to understand how they get paid – upfront/trail commissions, fee for service. There is more on this later. Other questions to ask:-
- Are they independent?;
- Do they have their own Australia Credit Licence7 (ACL) or are they acting as an authorised credit representative under someone else’s ACL?
- Are they a member of a dispute resolution scheme such as the Australian Financial Complains Authority?
- How are they going to support you after the loan settles?”
How are finance brokers able to get better deals for clients?
“Firstly, we are aware of all the rates out in the market for the client’s situation including any specials currently on offer. And secondly, due to the relationships we have with lenders in the market, we are able to negotiate a good interest rate based on the application itself and how strong it is. Having said that, in a lot of cases it is more about finding a solution than necessarily the best rate. The fact that I am a tax agent means that we are always looking at the best structure tax-wise for the client.”
How does a finance broker get paid?
“Finance brokers are paid an upfront commission by the bank for the business they bring to the bank. Some mortgage brokers also charge a fee to the client if there is additional work involved. These commissions are paid out only after the settlement of the home loan. The commissions are actually based on a percentage of the loan amount used and the net amount of money in the offset.”
What is a trailing edge commission, or a clawback?
“Put simply, lenders like long-term loans and they will continue to pay the broker an ongoing (or trail) commission as long as the client stays with the same mortgage and doesn’t fall into arrears. This ensures that brokers choose the right loan in the first place and maintain an ongoing relationship with their clients via regular mortgage health checks.
‘Clawback’ is a fee charged by the banks to the mortgage broker for home loans that are paid or refinanced within the first two years of settlement. Again, it varies from lender to lender but the bank will typically clawback 100% of the upfront commission in the first 12 months of the loan and 50% between 12 and 24 months.”
Can you change brokers once you start with one?
“Yes. You aren’t tied to a broker so if they aren’t delivering what you are after, change.”
As a Finance broker, what are your best tips regarding property investments?
- “Do your homework. This will not only enable you to make your own mind on the best option for you but you will understand what other “experts” may be saying;
- Work out your budget. There is no point investing if it causes you financial stress.
- Work with professionals. Everyone has their own expertise and it’s important to leverage off that;
- Find the right property and strategy for you: Invest to reinvest or Invest for passive income
- Do it with discipline. Property investing is a long-term game, keep at it!”
Where can people find out more about your finance broker services?
* CaptainFI Disclaimer: I am not recommending or suggesting anyone use Spectrum mortgages and I have no affiliation with the company, but I did agree to give them a mention on the blog for taking the time to answer my questions. If you do decide to check them out, let them know you found out about them here and perhaps in the future I can organise some kind of discount code.
A finance broker can save you time, money and stress. They can potentially get you a much better deal from some lenders that is suitable for your needs, and they usually don’t cost you a thing – you don’t really have anything to lose by getting a quote at least. Just make sure you shop around to ‘keep the bastards honest’ and compare quotes and products (loans) they might recommend.
A common criticism I have heard about finance brokers is they only deal with certain lenders that will pay them a commission, and you might actually be able to get a better deal through particular lenders directly. This is why you should do your homework and shop around, and don’t be afraid to have a difficult conversation with your finance broker – ask them why you should go with their solution and not with the better rate you might have found. If they are a good broker, they might be able to contact that lender directly and even start up a new relationship and get you an even better deal!
Hot tip though – There is a bit of an unwritten rule among brokers to ‘not step on each other’s toes’ so they might get a bit annoyed if they find out you are shopping around between different brokers – I have even heard of brokers who stop working with clients that they had deemed to be ‘too much hard work’.
Another alternative is to just sell everything and slow travel, just like The Nomad Numbers!
- ‘Mortgage Brokers: Advantages and Disadvantages’, Angie Mohr, Investopedia. Published: August 12, 2022. Accessed online at https://www.investopedia.com/financial-edge/1112/advantages-and-disadvantages-of-using-a-mortgage-broker.aspx on Sep 13, 2022.
- ‘Lenders Mortgage Insurance’, Insurance Council of Australia. Accessed online at https://insurancecouncil.com.au/articles/lenders-mortgage-insurance/ on Sep 13, 2022.
- ‘Mortgage broker fees’, Olivia Gee, Mozo. Published: October 29, 2021. Accessed online at https://mozo.com.au/home-loans/resources/guides/mortgage-broker-fees on Sep 13, 2022.
- ‘Misconduct in the Banking, Superannuation and Financial Services Industry’, Royal Commissions. Accessed online at https://www.royalcommission.gov.au/banking on Sep 13, 2022.
- Interest-only mortgage calculator, MoneySmart.gov.au. Accessed online at https://moneysmart.gov.au/home-loans/interest-only-mortgage-calculator on Sep 13, 2022.
- ‘Credit licensees’, ASIC. Accessed online at https://asic.gov.au/for-finance-professionals/credit-licensees/ on Sep 13, 2022.
- ‘Clawback confusion: Is it ever ok to charge clients?’, Mackenzie McCarty, Australian Broker. Published: August 13, 2013. Accessed online at https://www.brokernews.com.au/news/breaking-news/clawback-confusion-is-it-ever-ok-to-charge-clients-178194.aspx on Sep 13, 2022.