Mortgage Brokers are very common here in Australia and throughout the world. They help people that are looking for a loan to find the best one for their personal situation. At least that’s what they should be doing anyway.
Unfortunately life isn’t always roses and fairy tales, especially where huge sums of money are involved so today we’re going to dig deep into the world of Mortgage Brokers.
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Why Use A Mortgage Broker?
First off though let’s look at what Mortgage Brokers do and why you might use one.
Mortgage Brokers specialise in matching up people looking for a new loan (borrower) with a bank or lender that has a loan product for them.
To do this they’ll typically get a full overview of the finances of the borrower(s) wanting the loan. From here they do a lot of the leg work in analysing that financial overview and determining the best loan to suit the borrowers situation.
They also deal a lot with the bank/lender when applying for the loan doing things such as filling out paper work, chasing up the lender for updates, explaining the loan process to the borrower or just generally keeping things moving.
It’s also possible that due to business relations the broker has with lenders, that they’ll be able to get you a loan with that lender when you otherwise couldn’t have on your own. They may even be able to get you a better deal too.
So overall the benefits of using a mortgage broker are:
- They have extensive experience in analysing finances and figuring out the best loan
- They do a lot of the leg work dealing with the banks and applying for the loan itself
- They can get you loans you otherwise wouldn’t have access to normally
- They can get you better deals on loans than you otherwise wouldn’t have got
- It’s usually a free service for the borrowers
As you can see, using a broker has a good lot of advantages and it’s something MTM does recommend. Even if you already have a mortgage they can also help with refinancing too which can easily save you thousands off your mortgage.
For example you may have a mortgage at 5% and after going through a broker and refinancing it, they set you up with a better loan that’s only at 4%. If your loan is for $300,000 that’s a saving of $3,000 every year or $115 a fortnight!
Looking Under The Hood
Explaining how a Mortgage Broker works isn’t good enough for MTM though, we wanted to go deeper and investigate how exactly the industry works and how it’s paid for and incentivised. As such we got in touch with Uno Home Loans to pick their brains a bit.
We wanted to learn specifically how the mortgage broker business model works, why the mortgage broker industry as a whole even exists and take a bit more of a closer look at where their motivations are.
When you’re dealing with loans of hundreds of thousands or millions of dollars it’s very common for things to get… nasty. So in order to best know whether or not you should even use a mortgage broker service let’s dig in and see how Mortgage Brokers work on the inside.
How Do Mortgage Brokers Get Paid?
At the heart of any business is always money. Brokers provide a service and get paid for that service, but borrowers don’t actually pay mortgage brokers… so how do they get paid for the services they provide?
Uno receives upfront and trail commission from our lenders for each loan that settles through uno. This commission is paid to uno as a business – not to the adviser who wrote the loan.Uno Home Loans
As you can see, the first thing to understand about mortgage brokers is that the lenders themselves are the ones that actually pay. This makes a bit of sense too as the lender probably stands to make tens or even hundreds of thousands of dollars of interest off a borrower depending on the loan and how long they stay with them.
Considering 63% of Australians haven’t ever refinanced their loan on their current property it’s understandable that a lender would happily pay another business to get them a borrower!
But how do you ensure that your Mortgage Broker has your best interests at heart and doesn’t just recommend you the loan that gives them the biggest commission payment?
Uno recommends lenders and products based solely on suitability for a customer’s individual situation.
Advisers have no performance metrics related to loan or commission size and there are no volume incentives for writing certain amounts with particular lenders.
Unlike many traditional brokers, there is no link between the size of loans uno’s advisers write and individual remuneration. This link – as we have seen with the Royal Commission – is open to exploitation from a small number of bad apples.
Uno’s advisers are paid salaries and are eligible for a quarterly bonus of less than 25% based on a balanced scorecard which includes customer satisfaction. We believe this model promotes better customer outcomes.Uno Home Loans
Obviously Uno’s responses sound solid and should be what’s expected across the board. However given how hidden many businesses can be with their commission schemes and business relationships this is a serious point of concern.
So when seeking out a mortgage broker always make sure to ask these questions and know exactly how they determine which loan to recommend you and how the person you’re working with is paid.
While mortgage brokers can provide a fantastic service, borrowers need to make sure they aren’t being “recommended” a loan simply because it gives the biggest commission payment. This practice is very common in the investment world where financial advisers will simply push clients to invest in the funds that give them the biggest kick backs.
How Much Do Mortgage Brokers Get Paid?
While it’s obviously fair that brokers doing all the above work should be compensated for their efforts we wanted to find out roughly how much each “loan recommendation” is potentially worth to the company.
The mean commission Uno receives for a settled loan is in line with the industry generally, around 0.65% upfront and 0.15% trail on the balance of the loan.Uno Home Loans
This amount translates to $2,600 upfront and $600 trail for a $400,000 loan. Given how bureaucratic, long and complicated loan applications and settlement can be this isn’t too outrageous I think.
It could easily take many, many hours of work from multiple people to maintain the database of loans, the business relations with the lenders, the physical meetings with the borrowers, the chasing up with the lenders about the loan, the paperwork management not to mention the general business expenses themselves.
Getting The Best From Mortgage Brokers
As stated Mortgage Brokers have a number of really good benefits for borrowers. They’re also free which is a great, especially when you’re trying to save up as much money as you can to buy a house!
To get the best from them though you must make sure that they’re working in your best interests. Some important questions you need to ask them are:
- How do you ensure that you have the borrowers best interest at heart and don’t just recommend the loan that gives the biggest commission payment?
- How diverse is your lender and loan database?
- Why exactly are you recommending this specific loan?
- Can I see a list of other loan options you found?
- How does your commission for this loan compare to others you haven’t recommended?
At the end of the day you may very well be able to find a cheaper / better loan all by yourself by simply searching online. However there are plenty of cases where borrowers have additional requirements that make the process more difficult to navigate. For example you may own your own business or work part time which can severely reduce the availability of certain loans.
Either way, hopefully this peak inside the industry will help the next time you want to get a loan or refinance your existing one. I’d also like to thank Uno Home Loans for answering our questions and note that this post is not in any way sponsored by them.
If you still have other questions please shout them out in the comments below and we’ll do our best to investigate them further. Otherwise let us know your experiences with mortgage brokers and whether they were helpful and saved you money… or perhaps not so good of an experience.
The benefits include: 1) How to pay off your mortgage faster than 99% of people with one hour a month of work 2) How to get rid of your debt and have the freedom to spend money on the things you love, guilt free 3) Clear outline of how to setup your expenses, mortgage and general finance 4) How offset accounts work and how to get the same result without being gouged by the big banks 5) How to cut through the crap and focus on the things that truly matter when taking down a mortgage 6) How to adjust the strategy so it works for you, even if you have kids, even if you only have one income 7) How to do all of these things and maintain a normal social life (and never be cheap).