Need to know
- A mortgage broker can be a great help in securing a loan and doing a lot of the legwork
- Be prepared to shop around for a broker and look for one with experience beyond the minimum qualifications required to practice
- Mortgage brokers are paid in commissions from the institutions that lend you money, and they're not legally obliged to find you the best loan
Choosing a mortgage will probably be the biggest financial decision you'll make in your life – and one of the trickiest to navigate. There's a vast array of mortgage loans available, each with different loan conditions.
A good mortgage broker can help you navigate this complexity to find the loan that best suits your needs.
But the broking industry is controversial. A number of inquiries have found problems within the industry, such as brokers pushing borrowers into loans that are bigger, riskier and take longer to pay off, and brokers not finding loans any cheaper than what you'd get going straight to the lender.
If you do want to use a mortgage broker to get a home loan, follow our tips on how to find a good one.
1. Do your homework
Be prepared before you start looking for a broker. Look for potential loans online and get a clear idea of the type of loan you want. That way you'll be in a strong position to assess the recommendations of the broker.
Then phone several brokers to compare what each can offer. Use our list of questions to ask a mortgage broker to help you assess their offering and service.
Remember that a broker isn't obliged to provide you with the 'best' or even a 'high-quality' loan
Remember that a broker isn't obliged to provide you with the 'best' or even a 'high-quality' loan. They're only legally required to provide a 'not unsuitable' loan. Be prepared to scrutinise their recommendations.
It's also important to remember that brokers don't necessarily find borrowers lower interest rates or cheaper priced loans. If you get a better quote from a bank than your mortgage broker, consider dealing directly with the bank.
2. Know how they get paid
Rather than charging you for their services, most brokers get paid commissions directly from the banks for arranging their loans. This has the potential to affect the quality of advice a broker might provide.
There are two types of commission the broker gets:
- An upfront commission is a percentage of the total value of the loan, so the larger the loan, the greater the pay-off for the broker. So be wary of a broker recommending a larger loan than you've budgeted for.
- A trail commission is a percentage of the mortgage that brokers continue to receive over the life of the loan. The issue with trail commissions is that brokers have no obligation to provide any service to you during the life of the loan, and the less ongoing work brokers do, the better it is for them – they're getting paid for doing nothing.
3. Check educational qualifications and experience
As a starting point, make sure the broker is licensed to provide you with a loan. They should have their own Australian Credit Licence or be qualified to act as an authorised credit representative.
Ask your mortgage broker what qualifications and experience they have. While financial advisers have to achieve minimum education standards which now includes a university degree for new advisers, mortgage brokers only need to have a Certificate IV in Finance and Mortgage Broking and they can start working.
The key to finding a good mortgage broker is to shop around.
Look for brokers that go above this standard. Most members of the Mortgage & Finance Association of Australia (MFAA, a professional association for brokers) will have a diploma, and some brokers have other qualifications such as degrees in finance, economics or accounting.
A CHOICE investigative journalist took an online Certificate IV course and became a certified mortgage broker. He found that "being a good salesperson and closing the deal" was the overriding theme of the short course.
4. Ask about their lender panel
Brokers are restricted by the list of banks they can access – this list is known as the "lender panel". Where many brokers only offer loans from their panel, a good broker will have a wide range of lenders on their panel and will regularly draw on the full range, depending on the borrower's circumstances.
We've found that some brokers only have nine banks on their panel, while some have more than 50. If a broker has a limited number it can be a red flag that suggests they're focusing on a small variety of lenders and could be limiting your options.
Despite claims of scanning the market, many brokers funnel mortgages to a small group of banks.
But it's not just about the number of lenders on a broker's panel, it's also about the broker using the wide range. Despite claims of scanning the market, many brokers funnel mortgages to a small group of banks. On average, brokers send 80% of their loans to only four banks.
So ask your broker for the top 10 banks they send loans to and what percentage of loans they send their way. This should tell you if they actually are scanning market.
It may look like a broker sends loans to different banks and is scanning the market, but in reality they may be sending 50% to CBA, 40% to Westpac, and then 1% to each other lender.
A good broker should easily provide you with this info.
5. Check their ownership structure
Ask your broker who owns them. In many cases, they're owned or part-owned by big banks. In fact, seven out of every ten loans arranged by brokers come from bank-owned aggregators (this is a business that acts between the banks and the brokers, such as Aussie Home Loans).
These commercial ties can distort the quality of advice and incentivise brokers to sell you loans that flow straight back to the bank that owns the brokerage.
Take Aussie Home Loans for example. They're owned by the Commonwealth Bank (CBA), and they funnel two in every five loans back to CBA. They often do this under the guise of 'white-label loans'. White label loans are branded with a different name, obscuring the fact that they're actually from a big bank.
Be wary if a broker claims to provide 'special access' to the banks that own them
Be wary if a broker claims to provide 'special access' to the banks that own them. This may simply be a tactic to sell you into a loan from that bank. A good broker won't be influenced by their ownership structure and will recommend a wide range of loans from across the market.
6. See if your broker explains your options clearly
There are many types of loans on the market. A good broker should present you with a number of options and clearly explain their reasons for recommending specific loans.
Be especially wary of brokers selling you risky interest-only loans. These loans have a cheaper repayment for the first few years, but that's because you're only paying interest and nothing off the principal (the loan itself). When the interest-only period ends, typically after five years, you're going to be up for much higher repayments. These loans may suit your financial needs at the time, but be extra careful as they can leave you in financial hardship.
A good broker won't pressure you into purchasing a loan
Also, a good broker won't pressure you into purchasing a loan. Stay away from any broker who's putting the hard word on you to sign anything before you've received full and adequate information about your options.
In 2015, CHOICE undertook a shadow shop of mortgage brokers. Our borrowers encountered "pressure sales tactics, inappropriate advice, lack of commission disclosure and upselling with little consideration of risk". In one example, a person was looking to buy a $600,000 investment property, and the broker recommended taking two loans with a combined value of over $1 million.
7. Get it in writing
Credit assessment
A broker is legally obliged to follow responsible lending laws and shouldn't sell you into an inappropriate or risky loan. Brokers must assess your income and expenses along with your financial objectives and expectations. This is all contained in a document called a credit assessment. Make sure to request a copy – brokers only have to provide it if you ask them.
It pays to double check this document to see that what you told your broker matches up with the written assessment. The banking royal commission caught out many brokers lying on these documents to sell people into loans they couldn't afford.
Credit guide
A broker is legally required to provide you with a document called a credit guide – so make sure they do. It provides the broker's contact details and a record of the commission the broker will get if you go ahead with the loan. The credit guide also lets you know who to contact if you have a problem or complaint with the broker.
It's important to hang on to these documents and read them carefully to make sure the broker has accurately captured your financial position and your financial objectives.
8. Shop around for a cheaper loan
A mortgage should never be 'set and forget'. Regularly shopping around for the best available loan can have real financial pay-offs. The ACCC has found that simply renegotiating with your lender to pay the same interest rate as a new borrower can save you up to $850 a year for an average-sized loan, and even more for some borrowers. Switching banks can save you tens of thousands of dollars over the life of the loan.
What to do if you're not satisfied
If you think you've been sold a loan that's inappropriate for your needs, follow our guide to lodging a dispute with your broker.
Knowing what to ask can help you find a good broker.
Questions to ask your mortgage broker
- How will you be paid? Do you earn more if I borrow more or choose a particular lender? Most brokers receive a percentage-based commission for their work. They're paid by the bank, not you. This introduces two risks – that you'll be encouraged to borrow more, and that you'll be encouraged to go with a particular lender. Some brokers have a self-imposed rule to receive the same commission for every loan, which reduces these risks to you – but doesn't remove them.
- Is your business owned by or associated with a lender, like a big bank? Research shows that broker companies owned by big banks send more loans back to their parent company. Steer clear of these broking companies unless you want a loan with the big four.
- What's your experience with the lending market and what training have you done to understand home lending? Look for brokers who've been members of the MFAA for more than one year – members need to meet a high education standard to belong, and will have a bit of experience after 12 months.
- How many lenders are on your panel? This will let you know how many loans a broker can look at for you – some have lots of options but others offer a surprisingly limited selection.
- How many lenders did you send loans to in the last year? What are the top 10 banks you send loans to? What percentage of the loans you secure do you send to each of these? Some brokers send most loans to just four lenders. Look for a broker who has used a lot of different lenders. These brokers will be more likely to genuinely scan the market and find a loan that fits your circumstances.
- Are you a member of any broker clubs or tiered service arrangements? Broking clubs have a controversial history – they were previously used to reward the best salespeople with high-end perks like cruises to the Caribbean. Industry has promised they've stopped this practice, but it's worth asking what benefits your broker may receive from a club.
Stock images: Getty, unless otherwise stated.
