Choosing a mortgage is one of the most significant financial decisions of your life. It’s an important step, whether it’s your first mortgage or one for an investment property. With many loan terms lasting 30 years, you want to make the right choice, so you’re not stuck with burdensome payments for the next few decades.
This is where a mortgage broker enters the picture. Not everyone uses a broker to secure their home loan. However, if you’re looking to reduce your mortgage stress, unsure where to begin applying, and would just quite like additional support, then using a mortgage broker might be a good idea.
Yet, you need to make sure you choose the right mortgage broker. With so many working hard to secure loans for home buyers, how can you determine which one is right for you? We’ll share how you can narrow down your choice and questions to ask your broker so that you can go ahead and buy your dream home.
What is a Mortgage Broker?
Mortgage brokers act as intermediaries between you (the borrower) and the financial institution. Before approaching a bank or lender, they consider your financial situation and borrowing power. The broker will present you with your home loan options and advise you on the application process.
Why choose a broker
Firstly, let’s establish the reasons for choosing a broker. After all, if you’re confident in your ability to find a mortgage, then you may not think seeking the advice of a mortgage broker is the right option. So, here are the benefits.
- Experience – mortgage brokers are experts in their industry. They know the ins and outs of all financial aspects of home loans; they can advise you on the local area’s property market.
- Expertise – a broker can offer you a range of credit products that suit your situation. They’ll do the hard work researching, so you don’t have to.
- Protection – loan rejections can harm your credit score. A mortgage broker will ensure you only apply for loan options you are eligible for.
- Often free – mortgage brokers are often paid in commission by lenders, therefore, costing you (as the borrower) nothing.
What do you want?
So you’ve decided to use a mortgage broker. The next question is, how do you find the right one? Brokers specialise in different areas. The first thing to ask is, what do you want? You need to figure out your financial situation, whether you have any particular needs (e.g. foreign nationals might require specialist lenders), and what kind of loan product you want.
It’s a good idea to check how much you can reasonably afford to borrow. Your mortgage broker will advise you on this, but it’s never too early to get an idea. What’s your borrowing power? How much can you afford to repay each month?
You also need to determine how much you can put down as a deposit. Most lenders will require at least 20% of the property value as a downpayment. Any less, and you might have to pay Lender’s Mortgage Insurance or LMI.
Your broker will want to know your financial situation and what you’re looking for. The clearer your understanding, the more your broker will help you. In addition, while establishing your mortgage wants and needs, you may discover particular aspects that determine how you find a mortgage broker.
Secondly, you need to do your online research. You should have an idea of what you can afford. Now, you should look at the different loan options available. Look at variable and fixed loans, interest-only loans, offset accounts, and redraw facilities.
Put together a list of questions to ask your mortgage broker. They can advise you on what you might be eligible for and whether they’re appropriate for your financial situation.
In Australia, all brokers have a BID (Best Interest Duty) legal obligation to act in the best interest of their clients by comparing lenders and finding the deal that’s most favourably suited. A good mortgage broker will explain to you why their home loan recommendations are suitable. After that, you should then be able to question these recommendations. If you get a better quote from the bank, you’re free to go direct.
How do they get paid?
When choosing your mortgage broker, one of the first things you should establish is how they get paid. Instead of charging you for their services, most brokers get paid a commission by the lender. There are two ways mortgage brokers get paid. They get an upfront commission which is a percentage of the total loan value. Brokers also receive a trail commission. This is a percentage of the mortgage that the broker will continue to receive over the loan term.
Generally speaking, if the broker is upfront about how they receive their commission, then they’re likely to be more trustworthy. If your mortgage broker is secretive about how they get paid, this is a red flag.
It’s worth keeping in mind that if you do not accept the loan your broker offers you, then you might have to pay the broker’s fee yourself. Not all mortgage brokers require this; you should check their expectations before enlisting their services.
Education, qualifications, and experience
You also need to establish your broker’s educational qualifications, experience, and licensing. At the very least, they should have an Australian Credit Licence or be qualified as an authorised credit representative. While brokers don’t need to have a degree in finance and mortgage broking, those that do are likely to be more qualified.
Here are some qualifications you should look out for to ensure that they are educated enough to offer relevant loan advice:
Accredited under the National Consumer Protection Act
Has Certificate IV and preferably a diploma in Financial Services
To understand their experience level, look out for testimonials from previous clients. Any good broker should have these listed clearly on their website.
Finally, check if they’re members of the Mortgage and Finance Association of Australia. While it’s not a requirement for mortgage brokers, it suggests that they’re above the standard.
Mortgage brokers each have a lender panel. This is a list of each credit provider they can access. Lenders on the panel will often offer lower interest rates, an offset account, and other features to applicants.
Many brokers only provide loans from their panel. Therefore, how many lenders they have on their panel suggests the range of products they can offer.
If the broker has a limited number of different lenders, then this could be a warning sign that they’ll restrict your options with only a small variety of lenders.
Yet, how many lenders they have isn’t your only consideration. Some brokers might have an extensive range of lenders on their panel but send most of their loans to a few banks. To ensure that they have your best interest at heart, ask your broker about the top 10 lenders they send loans to and what percentage of loans they send their way.
Do they explain your options clearly?
Another easy check to ensure your broker is on your side is to ask them questions. If they explain everything clearly and comprehensively, it suggests that they will provide the relevant advice.
When your broker presents you with a particular product, ask them to explain its loan features. Question their reasoning for offering you this specific credit product. How does it suit you now? How will it benefit you in the long term?
For example, if a broker suggests you apply for an interest-only loan, it might save you money in the long term but cost you more overall. For some people, this could suit them. However, your broker must explain how and why it’s the best option for you.
Similarly, question why they recommend a particular lender. Remember to establish how the lenders pay your broker as this could affect their advice.
Credit Assessment and Credit Guide
Mortgage brokers are legally required to conduct a credit assessment and give you a credit guide. If they do not complete either, they are probably not a good broker.
The broker must complete a credit assessment to ensure that they do not sell you a risky loan. They analyse your income, expenses, personal objectives, and expectations. This is all recorded in a credit assessment document. Ask your broker for a copy as they are not required to provide it otherwise. It’s worth checking that this document correlates with what you told your broker.
If it does not match your actual situation, then the broker will be able to get away with selling you a loan that you cannot afford.
The credit guide is a document that the broker must give to you legally. Essentially, it’s a record of the broker’s contact details and the commission they will receive if you continue with the loan. It should also list how to make a complaint against the broker. Don’t lose these documents as they could come in handy later.
Never settle for the first mortgage choice. Shopping around and researching different loan products will benefit you and your finances in the long run. Even if your broker finds you a deal you like, it’s worth negotiating to see if they can offer the same interest rate as other lenders. This is where using a mortgage broker is advantageous.
Brokers are experienced at negotiating. They’ll have the expertise to present your financial position in the best light to different financial institutions.
Questions to ask mortgage brokers
So, you’ve established that your potential mortgage broker is experienced, qualified, and can explain your options to you clearly. Here are some further questions to ask to ensure they’re right for you.
What will the borrowing costs be?
While you might not have to pay a broker’s fee, you might have to pay other costs, such as a loan application fee, a property valuation fee, and Lender’s Mortgage Insurance. This is on top of the interest charges. Your broker should explain these different costs and how they will vary depending on the home loan products they offer you.
Are there any hidden costs?
Similarly, your broker should explain any hidden costs down the line, for example, a hefty early repayment fee.
How many loan products can you provide for my case?
If your broker only offers you a short selection of loans, then they’re likely not looking at every relevant credit provider.
Can I refinance my loan?
While this might not seem important now, one day, you might want to refinance. How flexible is your home loan? Can you make extra repayments? Could you easily switch to a different lender?
Choosing the right mortgage broker is a difficult decision, almost as hard as choosing the mortgage itself. However, remember that if you do your own research, question your broker over their choices, and ensure that they are qualified and have an Australian Credit Licence, then you should be safe.
Finding the right broker will save you time, money, and stress. They act as the go-between, keeping you from doing all the heavy lifting. You just need to ensure that you can trust your broker.
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Is it worth getting a mortgage broker?
Your mortgage broker works to find you the best home loan for your financial and personal objectives. As industry experts, they will save you time researching and offer tailored advice about your lender options. You should do a few checks to ensure that they’re the right broker for you.
Is it better to use a mortgage broker or do it yourself?
While you might be able to find a good home loan yourself, a mortgage broker will save you the hassle of researching home loans. Most brokers don’t cost anything to the borrower, so there’s little to lose. Make sure that you shop around for brokers to find the right one for you.
Should I speak to multiple mortgage brokers?
It’s a good idea to consult several brokers to see whether they suit your situation. Make sure you ask them about how many lenders are on their panel, how they’re paid, and whether they’re licensed.
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