What to consider when using a mortgage broker
There are many benefits attached to using a broker, the industry they operate in is known as ‘third party’ because brokers have access to a panel of lenders, and brokers offer the public the lenders’ products. Therefore, the products are not being offered directly to the consumer from the lender. They are offered through a third party (i.e. the broker.)
There are however good brokers and not so good brokers and it is wise to consider the differences when deciding which broker to use.
Some brokers will only use the ‘big four’ banks, and one or two ‘other’ banks. This is arguably considered poor business practice, possibly stemming from poor sales skills or bad habits. The broker should really be there to offer choices to their clients, which may not always be available at a bank branch, the broker should not offer a product just because they find it easier for themselves to use a particular lender, they should choose a lender and product that best suits the client. Whilst this can be often achieved with just a few lenders, not every deal is straightforward and a good broker will think outside the square and will have relationships in place with many lenders.
A true broker, compares loans and then offers their client unbiased choices, which include the products from non-banks as well as banks. They are not purely rate driven, but rather, focus on policy, turnaround times (time it takes from submitting your loan to settlement) and choosing a lender which can provide timely communication and excellent assistance from the business development manager. The best rate is not the best loan necessarily. A client should not just look at rate but rather monthly repayment figure.
The banks incentivize many brokers by providing preferential status — which can include higher commissions and better treatment than other brokers receive, this should not be the reason a lender is chosen for the client. If it is the best loan for the clients circumstances and the preferential treatment the broker may receive will aid them in providing an excellent service then it is worth considering of course, but this would not be the case with every type of client. Occasionally a broker may submit a loan on behalf of their client to one of the few lenders they limit themselves to only to discover the lender does not have an appetite for the loan, the deal would then need to be taken elsewhere bearing in mind the client’s credit file has been tainted with what could have been an avoidable credit enquiry.
Brokers belong to aggregators, this allows them access to certain lenders whom may require minimum volume of deals submitted, and this can be achieved based on an aggregate volume by all the brokers that are part of that aggregator. Aggregators take a clip of the broker’s commission or charge a fee for the broker to belong to that aggregator, in return for typically providing a valuable set of tools for the broker such as software to compare loans, training, and support.
Why using a broker is often better than going straight to the bank
1. A good broker can compare the different servicing calculators of different lenders to try to make the deal work.
Servicing is one of the main considerations lenders use when deciding if they want to approve a loan for the applicant. The borrowing capacity varies between lenders, as does lending policy and the types of income that are acceptable (as well as the percentage of those incomes.)
Brokers can compare many choices — a service that one bank cannot offer. Be aware though, that the type of property can limit the choice of lender as well, so to save time shopping around for a loan, get a broker to do this for you.
3. Some of the reasons that I think using a broker can be highly beneficial (besides saving time in finding a lender suitable for your needs) are that they help to speed up issuance of loan documents and a better deal may be sort due to their relationships with some of the lenders.
4. Applicants themselves have been known to do silly things, such as shop around for the best rate, making enquiries and inadvertently degrading the quality of their own credit history. Each time a person shops around a credit hit on their credit history may be generated, making it less palatable for a lender to want to deal with that borrower. The good broker can shop around without submitting the loan.
5. Some lenders service existing debt at existing rates and that means the servicing calculator can work in an investor’s favour, if they have other property debts.
Some calculators do not take into account deductible interest, which can lead to a negative impact on servicing. A borrowing capacity can differ by many hundreds of thousands of dollars. Good brokers investigate all these options for you.
6. Self-employed borrowers do sometimes prefer to avoid tax rather than to increase their taxable income on paper. Had they been more honest to the taxman, it could have aided them in increasing their borrowing capacity. This could relegate them to source a ‘low documentation’ or ‘alternative documentation loan’ and, whilst these loans serve a purpose, they can be more expensive, which in turn reduces one’s borrowing capacity moving forward — and it increases the repayments on the loan. So, if a borrower is more willing to provide their tax returns, and those tax returns show enough income, they could then be eligible for a better rate, making it easier to potentially borrow more for the next investment purchase. A good broker can educate you in different lenders requirements.
7. LMI providers do ‘credit score’, which can potentially put the loan at risk of not being approved. Banks also, typically, credit score. So, again, be careful which mortgage broker you are using, as a not so good broker can lead to your loan being declined, due to that broker submitting your loan to the wrong lender, or by not using a more appropriate one.
In Summary, a good broker can save you time, money, effort and disappointment. Don’t just ask a broker how many lenders they have on their panel, this is the wrong question; rather, ask how many lenders the brokers personally uses on a regular basis. You need to consider whether you really want to deal with a broker who submits 80-90% of their business to the big 4 banks, and if they do, whether they are capable of doing the right thing by you.
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