For decades prospective homeowners have looked to mortgage brokers to help them to find the best deal on a mortgage product and ensure that 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 all over the world by first-time buyers and veteran homeowners alike… Do we really 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 greater economy.
They get big fat commissions from the banks whether their client can actually pay the mortgage or not, so why should they care whether their client ends up losing 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 remunerated. This is not always clear, unlike in the case of a real estate agent whose commission is fully disclosed.
Mortgage brokers are remunerated in several different ways. In some cases, 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 right for the needs of the customer.
In this light, how can we be sure that they will act in our best interests rather than their own?
For investors, this may not matter as much. They will be inclined to use a mortgage broker to help them to borrow as much as possible because their rental income will be more than an owner occupier’s mortgage payments would be on the same property.
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 think about how their financial circumstances will change and how their mortgage product can help them to maintain a balanced household budget without their mortgage payments subsuming all of 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 to say, and banks are certainly less cavalier when it comes to whom they lend to and how much they lend.
They are also growing 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 greater upfront costs, but in return, they have greater assurances that the broker’s interests will be more aligned with the interests of the buyer.
The pros and cons of using a mortgage broker
So, as we can see, the question of whether or not we need mortgage brokers is fairly nuanced and depends largely on our circumstances.
One obvious pro is that hiring a mortgage broker can take a lot 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 go for a home at the upper end of their budget.
However, they may find themselves facing 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.
In terms of cons, unless they are evident and transparent in how they are paid, you cannot be sure that they are acting in your best interests. If they are paid on commission by a bank, they will be more inclined to push that bank’s products rather than the products which are best for you.
Keep in mind that the larger a mortgage you get, 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
The decision of 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 him or her to act in your best interests.
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