Engaging a mortgage broker to help with getting your home loan can make a lot of sense. You have one point of contact, and if the broker is good at what they do, they can find the right loan for your needs and budget without you having to do lots of legwork shopping around.
Brokers are particularly valuable for borrowers with more complex loan requirements where their advice on how to present a case and ensure the borrower can get finance can prove valuable.
It’s not surprising then, that more than half the new home loans taken out in 2015 were settled through mortgage brokers and their growth is expected to continue.
But how do traditional mortgage brokers arrive at their recommendations?
It often comes as a surprise to borrowers to learn that brokers are under no legal obligation to find the best loan for their needs. After completing a credit assessment, verifying your information and confirming your objectives, they are merely required to ensure the loan is not unsuitable. It doesn’t have to be the best available, or even offer a competitive interest rate.
As the influence of brokers grows, a spotlight is also being shone on how and why they make their recommendations. And it appears the process is not as transparent as it could be.
In its 2015 Shadow Shopping of mortgage brokers, consumer group Choice found plenty of room for improvement in the advice on offer. The Australian Securities and Investments Commission is also investigating the industry, and in particular is looking at how commissions affect the quality of advice given to consumers.
It should be no secret that mortgage brokers receive commissions from the lenders they recommend. Commissions can vary, but generally a broker will earn 0.65 per cent of the loan value as an upfront payment when you sign up for your mortgage, plus around 0.15 per cent a year “trail commission” for the life of the loan.
Brokers are required to reveal their commissions on your credit proposal but Choice found very few volunteered this information at the start of the process. Only two of the 15 brokers in the exercise explained early on that they receive commissions and revealed which lenders they deal with, putting the onus on borrowers to ask for this information if they want to know how the advice may or may not be influenced.
But in reality, commissions in themselves don’t play a major role in steering brokers to recommend one loan over another, as most commission rates are fairly standard, says Vincent Turner, CEO of unohomeloans.com.au – a website that gives customers the tools to broker their own mortgage.
Brokers often do prefer particular lenders, but for reasons that are less transparent.
Vincent Turner, uno CEO.
Despite having a wide array of lenders on their panels, Turner says most brokers do the bulk of their business with two or three lenders. Brokers who do more business with a lender tend to get preferential service from that particular lender.
Sometimes this takes the form of better service or help with the broker’s business. Some commissions are also volume-based and depend on how much total business the broker directs in the lender’s direction.
Dealing with just a couple of lenders can also make life easier for the broker. He or she knows how the lender works, what its credit policies are, and how to get a loan approval through smoothly. If Bank X and Y are offering comparable products, but the broker has a relationship with Bank Y, it is more likely to get the recommendation.
Often, an honest broker will let you know that while X and Y have comparable products, he or she would prefer that you went with Y because it would mean less hassle for everyone. But the danger, says Turner, is that it becomes an automatic recommendation, rather than the best one.
“There’s a saying that if you only have a hammer, everything starts to look like a nail,” he says.
Don’t forget too, that the person you are dealing with may be paid on a different basis. A lot of people can take a cut of the commission pie, from a home loan aggregator (a wholesaler who provides the broker with the software to compare loans) through to the broker’s head office, franchisee, the person actually writes your loan, and even administration staff. While the person or company at the top of the chain might be getting the standard commission, those further down could be incentivised quite differently.
A loan writer, for example, might receive a higher commission or bonus for selling you a larger loan or meeting a specific target. These sorts of payments are less likely to be disclosed.
Comparison sites are one way borrowers can do their own research and check that the loan being offered is competitive. But Turner says what borrowers really need is real transparency – access to the same software that brokers use in making their recommendations so they can make their own decisions.
We’ll help you get a better deal on your home loan. Search, compare and settle your home loan in the one place. Get started at unohomeloans.com.au.