Do We Need Mortgage Brokers?

For decades, prospective homeowners have looked to mortgage brokers to help them find the best deal on a mortgage product and ensure they find a product that’s right for their needs.

Not only are they trusted in helping to set up an initial mortgage, but they are also relied upon to keep changing the mortgage product over the years as the needs of homeowners change.

Yet, while mortgage brokers are trusted worldwide by first-time buyers and veteran homeowners alike… Do we need them? And are they getting us the fair deal we trust them to?

Peeking behind the curtain

In recent years, we’ve had a peek behind the curtain at mortgage brokering practices. And said insights have often portrayed mortgage brokers in a less than flattering light, especially when a line is drawn between mortgage brokers’ practices and the property lending bubble that precipitated the global financial crisis of 2007-2008.

Anyone who’s seen Adam McKay’s biting satire The Big Short will have seen an image of particularly greedy and shortsighted mortgage brokers lining their pockets at the expense of their clients and the more excellent economy.

They get big fat commissions from the banks whether their client can pay the mortgage, so why should they care whether their client loses their home?

How mortgage brokers are remunerated

To understand whether or not it’s worth enlisting a mortgage broker’s services, it’s worth looking into how they are reimbursed. This is not always clear, unlike a real estate agent whose commission is fully disclosed.

Mortgage brokers are remunerated in several different ways. Sometimes, they are paid on a commission-only basis by the lender. Some will charge a fee to the borrower, and some do both, plus an additional fixed fee.

Why does it matter?

How mortgage brokers are remunerated goes a long way to explaining their practices (it certainly did before the financial crisis).

If they are paid hefty commissions by one bank while another pays them a more modest commission, they’re more likely to be inclined to sell a product by the bank that pays them more, regardless of whether their product is suitable for the customer’s needs.

In this light, how can we be sure they will act in our best interests rather than their own?

Property Investors

For investors, this may not matter as much. They will be inclined to use a mortgage broker to help them borrow as much as possible because their rental income will be more than an owner-occupier’s mortgage payments on the same property.

Owner Occupiers

For owner-occupiers who will only ever buy a handful of properties in their lives at the most, it’s a slightly different kettle of fish. Owner-occupiers need to consider how their financial circumstances will change and how their mortgage product can help them maintain a balanced household budget without their mortgage payments subsuming their income.

Are Lenders Listening?

It’s worth keeping in mind that banks are slowly but surely changing. It’s taken over a decade for increased regulation of global financial services industries to kick in (at least in ways that are meaningful to most of us). Suffice it to say banks are certainly less cavalier regarding whom they lend to and how much they lend.

They are also increasingly wary of paying out fat commissions for mortgage brokers.

This means that more and more mortgage brokers are charging a flat fee to their customers rather than relying on banks’ heavy commissions.

This is potentially a double-edged sword for Australian buyers. They will have to face higher upfront costs, but in return, they have greater assurance that the broker’s interests will align more with the buyer’s interests.

The pros and cons of using a mortgage broker

So, as we can see, whether we need mortgage brokers is pretty nuanced and depends mainly on our circumstances.

Pros

One obvious pro is that hiring a mortgage broker can take much of the legwork out of searching through the myriad products on the market.

Buyers will also be more likely to borrow more if they go through a mortgage broker rather than directly to the lender. Once again, this is a double-edged sword.

Understandably, owner-occupiers may be tempted to buy a home at the upper end of their budget.

However, they may face mortgage payments that become untenable if they lose their jobs, take a pay cut or face a long period of sparse work if they are self-employed.

Cons

In terms of cons, unless they are evident and transparent in how they are paid, you cannot be sure they are acting in your best interests. If a bank pays them on commission, they will be more inclined to push that bank’s products rather than the best ones for you.

Remember that the larger your mortgage, the more a mortgage broker could get paid. Don’t let a broker push you to borrow more than you feel comfortable with.

The bottom line

Whether to go through a mortgage broker or apply directly through the lender depends on your circumstances, the kind of property you have your eye on, and whether you can live within your means if you buy at the top end of your budget.

If your broker is transparent about how they are paid and has earned your trust, there’s a good chance that you trust them to act in your best interests.