If you are looking to buy a home, you may wonder what the difference between a mortgage broker and a home lender is.
Both are financial services to help you get into your dream home and find the best home loan for you, but there are some differences. A single lender represents one financial institution and a broker is an intermediary between the borrower and many potential lenders.
This guide will walk you through the ins and outs of using a mortgage broker, ensuring you choose a brokerage that is right for you and you're prepared with the right questions to ask along the way.
What is a mortgage broker?
Mortgage brokers help potential borrowers find a lender that best suits them. This can include looking for the best terms and rates to meet their financial needs. A broker is an intermediary between someone who wants to buy real estate (the purchaser) and those offering loans (banks and financial institutions).
Working with a broker can help you find what is suitable for you, but checking your options and weighing them before committing to one is essential.
As a brief history, in 2008, in one of the cyclical housing market crashes in Australia, the practices of brokers came under scrutiny. The question was asked if they were operating in the best interests of their clients or themselves by accepting incentives for pushing products that weren't always appropriate for the client. From that point on, brokers are required to have accreditation to ensure consumer protection.
What does a mortgage broker do for me?
A mortgage broker works as a go-between for financial institutions that offer home loans and individuals who want to buy real estate and need a loan. They are an intermediary who often works with many lenders rather than a sole organisation - therefore, they can offer a variety of options to the borrower.
The mortgage broker works with both borrower and the lender to get the borrower approved for their loan. They also collect and verify all of the necessary paperwork that the lender needs from the borrower to complete the home purchase; the borrower typically doesn't work with the lender at all and can perform the whole process through their broker.
A borrower doesn't have to work with a mortgage broker. They can work directly with a lender if they choose to, or they can do their research and work with many lenders themselves.
You can get a good indication of lenders by looking at their online calculators or researching what the right home loan may be for you.
What can I expect from my broker?
A broker will look into quite a few things for you, which will help you save time and money overall. As long as you pick a broker who can understand and cater for your goals, this can be helpful if it is your first time entering the property market.
Here is a brief look at what a broker does for their borrowers:
- Compares suitable home loan options
- A good broker will dive into your situation first and find your desired loan amount, credit history and the type of home you are looking for. This can include new homes, investments or existing property. This will help them match you with a range of lenders to ensure the home buyer ends up with the right home loan product.
- Guides you through the home loan application process
- Brokers will often help you navigate the terms, offers and deals with a wide variety of lenders before you end up with the particular lender that is right for you. They will support customers throughout the mortgage application process, managing it for the customers from submission to settlement and even beyond.
- It helps you understand complex financial agreements and terms.
- Understanding the complexities of the types of loans and the financial jargon in the buying process can be challenging. A good broker has knowledge and expertise in these areas and can help explain loan terms, requirements and other financial agreements in your journey to pre-approval. They will help you understand your best route, including any fees that may arise, like lenders' mortgage insurance or other settlement costs.
- It helps a lender understand your credit history.
- Your broker will help the lender get the information they need to process your loan application, including your income and credit score, alongside any liabilities like credit cards that may impact your borrowing power. They will help you get information from any credit providers you may have to complete your application.
How do mortgage brokers get paid?
Mortgage brokers are often paid in two ways.
- The first is an upfront commission from a lender when your home is purchased and the title is transferred to you. This is often a fraction of a percentage of the loan size.
- The second way is through trail commission, which is an even smaller percentage. It is paid for every year that your loan remains with the lender (until you refinance).
Brokers can operate under different models depending on how they structure their business. It is essential to check how they charge fees and what other lenders the broker works with to ensure you're getting the best loan options for your situation.
Mortgage brokers must disclose the fees that they charge and the incentives that they receive from a lender, be that commission or other.
Some brokers get paid the same amount, regardless of what loan they recommend. Others get higher commissions for offering certain loans.
What should I do before seeing a broker?
There are a few things that you should do before you meet with and decide on a broker.
1. Check that the broker is licensed.
This means ASIC accredits them to give you financial advice. You can check the ASIC Connect Professional Registers for:
- Credit Representative
- Credit Licensee
To search, choose the list name in the 'Select Register' drop-down menu and proceed to search.
If the broker isn't on one of these lists, they operate illegally and should be avoided.
2. Consider what a is must have and nice to have
Before you see a broker, it pays to know what you are looking for in your home or investment property.
It is essential to know your goals, including the lowest interest rates, low repayments, the ability to make extra repayments, a fixed or variable rate, low home loan application fees, low upfront costs or the ability to refinance. These will help prep you for the best conversation based on your goals.
How do I find a broker?
You can find a broker by:
- Googling brokers in your area and seeing their recommendations and reviews
- Checking online at professional broker accreditation sites
- Ask your local lender whom they work with
- Recommendations from family and friends
How to choose the right broker?
There are a few things you can do to make sure you set yourself up for success with a broker:
- Firstly the research you are doing is excellent to ensure you know what a broker does and how to work with them.
- Asking for referrals from people you trust can help you get someone with an excellent reputation
- Have a look online for complaints
- Get a feel from prospective brokers on how involved they want to be if they will help to educate you and provide a full service.
- Ask about their experience and the exact service they will provide. Also, ask for their fees, so you know if the lender or the borrower (you) is charged.
- Ask if they can help you given your exact financial situation and needs. If you are refinancing or are a first home buyer, it is essential to know that your broker can support you.
Key takeaways
- Working with a mortgage broker can save you time, money and effort in sourcing the best deals and terms on the market at a given time.
- A broker may better understand and have access to lenders than you have.
- However, a broker may not have interests that align with yours, so it is essential to ask questions.
- You may get a better deal on your loan by talking to lenders directly, as lenders pay a commission to brokers.
- When you meet with a broker, ask questions to ensure you know the deal you are signing up for and how they will help you. Ask for all their fees, the lenders they work with and their experience in the industry.
Overall your broker should be supporting your to get the best home loan deal for your needs and circumstances, so understanding what they do and what you can expect will set you up for the best success.
