Lee Dittmer and Michelle Coleman dispel some of the most common myths and misconceptions about mortgage brokers.
Despite being around for a good part of the decade, mortgage brokers remain some of the most misunderstood players in the property investment game.
There's still a lot of confusion about exactly how a broker works, how they get paid, and why anyone would want to use a broker rather than going directly to the bank.
Let's have a look at the options people have when it comes to organising the finance for their new property purchase. Hopefully we can dispel some of the common broker myths.
Option 1: Going straight to the lender.
When deciding which bank to use for their mortgage, most people start with the bank that they do their personal or business banking with. You can make an appointment at the local branch, or you call their customer service number and ask to talk to someone about a loan.
Like most call centres, you have to go through the automated service until you get to the right department. Once there, you don't know anything about the qualifications of the person at the end of the line. Have they got any lending experience, or are they just ticking off the boxes? And will you ever get the same person when you try to call them back?
And this isn't limited to just the call centre - surely it can't happen if you are dealing with the bank in person? How many times do lending managers change? How do you know how long the person you are talking to has been in their position?
Again, we know of many, many instances where clients have gone directly to their branch, only to be told the wrong thing. Now we aren't saying that this is exclusive to bank staff, we also know of instances where a broker has given incorrect information; however there are different processes that we all have to follow.
When Lee worked for a bank, she could approve a loan without having anyone oversee it. A client could then go out and purchase a property. Once this was done, the application would be sent to the lending department for documentation and final sign off. There was a limit to what could be done at the branch level, and what still had to go through the full process. So if an error had occurred, it was picked up without any repercussions to the client. The ability to approve a loan was not an automatic process, but earned over time. Brokers cannot approve loans. The money and the terms are not theirs. Therefore the application will be checked by the lender. The lender will process the application and arrange a credit check. If it is approved, the client can go out and purchase a property, confident in the knowledge that the hard work has been done.
Of course, we've just made a huge assumption. You've walked into the branch knowing exactly what all the other lenders will do for you. You know how much they will lend you and what their interest rates and costs are. You must already know that they have the most suitable loan for you, right?
If you don't, then your bank won't tell you if theirs isn't the best. They only have their own products to choose from.
Are you going to walk into every lender's office in your neighbourhood? What about the lenders who don't have branches that you can walk into you? You may have missed out on one of the best loans available in the market - all because they don't have a front door! You can do some research on the internet and look at what someone else can do for you, but even then:
Where do you start?
• What happens if something comes up in one discussion and you then want to check it out with the first lender you spoke to? Are they all going to be able to speak the same language? (it's a pity, but there is a lot of jargon out there, and not everybody understands it)
• Are you comparing the right products? There are lots out there.
Your friends may all have a mortgage with a particular lender, and they might keep telling you how good it is. Are your circumstances different to your friends? Most likely. What is good for one household may not be the best thing for yours.
• You don't know what you don't know - this is where a good broker comes in handy.
Option 2: Going through mortgage brokers
Let's start by defining what a mortgage broker does. A good mortgage broker will sit down with you and ask questions about your situation (which banks will also do) but they will also ask a few more. Mortgage brokers have a wide selection of lenders (not just one) and will choose one or several options that meet all of your requirements. They also know that each lender has different policies and will match you to the right one. This is why they will usually ask more than 'what do you earn', 'what debts you have', etc. One of the key benefits of working with a broker is that they have to keep abreast of all the changes that are going on with the lenders.
Lenders lend to different people at different times. They have to understand your particular situation and make sure that the lender's policy and product is the best suited for you, and get it right the first time. Let's suppose that you went directly to the bank and they declined your loan. It's not because of you, it's because of their lending policies. It's a hard thing to hear, and sometimes people feel embarrassed. What you don't know (and the lender won't tell you) is that another lender will happily lend you the money. A mortgage broker minimises this risk, and will find the right lender for you. As with dealing with lenders or call centres, if you don't know what a broker's experience is, you won't have any idea of what their credentials are when you start talking to them. A reputable broker (or should we say, a licensed broker) needs to have their licences, insurances, credit checks and police checks done before they can obtain a broker's accreditation and work with different lenders.
There have been a lot of recent developments relating to legislation that affects brokers. All brokers must now have completed their Certificate IV, and many lenders are also imposing certain conditions on the quality and quantity of submissions of loans from brokers. More importantly there will be national regulations in place in early 2010 to help protect consumers and monitor how brokers conduct themselves. This will bring all states into line, as states vary at the moment on their rules and regulations.
In Western Australia, this strict regulation has been in place for some time - the rest of the country is just catching up. The legislation will ensure brokers disclose the commission percentage that they get paid. Full disclosure: we believe this is a good thing, even without this legislation. You can, at any time ask what your broker is going to get paid for
arranging your loan.
The mother of all myths: Commissions
So with all the other benefits of using a mortgage broker, there are elements of the community that tell you that the broker is going to cost you more and that you end up paying for their services in the long run. Most brokers earn their income from the lenders. They receive an upfront commission and also a trailing commission. So if the lenders pay brokers for doing the loan, surely the brokers have to pass that onto the consumer? There are certain situations where this is indeed the case. But at the moment, there are only three firms offering rebates to their borrowers. Compare this to going directly to a lender. They have to spend money maintaining branches, and have huge marketing and staffing costs. In some cases it costs lenders less to pay brokers than to cover all these overheads. With standard residential lenders, the amount of commission payable has changed a lot in the past 12 months and vary slightly from lender to lender. Some lenders have reduced the commissions that they pay brokers by 40%. Can you imagine getting a pay cut of 40% doing the same work, if not more? Because of this, some brokers charge a small fee for their services now to fill the gap. It's a heated topic in the mortgage industry so watch this space.
Your broker will tell you exactly how much they would get paid by each lender if you have any doubts. They should also be able to give you a full list of each lender on their panel and what each commission is. As a general rule of thumb, you can assume brokers are getting approximately 0.55% of the upfront loan amount. If trail commission is paid within the first couple of years, then it would probably be approximately 0.165% of the loan amount, paid monthly. Also note that the trailing commission is a diminishing amount, as it is paid based on your loan balance. As you pay your balance down, so the trail commission reduces.
Brokers can also specialise in certain markets - investors/first homebuyers/retirees. Make sure that the broker you are talking to has a track record within the area that you need help with. Again, we have seen too many instances where a specialist with first homebuyers has suggested something to a property investor and then found that they can no longer keep moving in the direction that they want, and vice versa. We should add that this can happen when dealing directly with banks as well!
Good brokers rely heavily on their reputation. So the differences in commission would not be considered as part of the selection process at all, only what works for the client. This is because if the broker does the right thing by the client, they will earn more in extra commissions from all the repeat business and referrals.
Brokers aren't all dodgy. They don't cost you more. Brokers help you choose the most suitable lender, taking into account the product and the policy. They help lodge the application and monitor its progress. A broker acts as your advocate and looks after you in the lending maze. And it won't cost you extra at all. A reputable mortgage broker should only add to your experience.
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