What does a mortgage broker do and should you get one?

You can walk into your nearest bank or lender, trawl through the options online and apply for a loan without leaving your seat, or seek out a mortgage broker.

But what exactly does a mortgage broker do? And why would you consider using one?

What is a mortgage broker?

A mortgage broker is a financial adviser who specialises in finding home loans for their clients. They crunch the numbers and highlight the option that best suits their client’s personal situation. Some also manage the application process on their client’s behalf.

According to Jeremy Fisher, managing director of Sydney-based mortgage brokers 1st Street, a mortgage broker prioritises your interests above all else.

“What a mortgage broker typically does is put the customer hat on and look at what is the most suitable lender or product for the customer, based on their needs,” he says.

“They’ll sit down with the customer and spend an hour understanding exactly what they want to achieve and what their plans are, and then obviously look to provide them with the most suitable lender or product, depending upon their circumstances.”

What does a mortgage broker do?

A mortgage broker is essentially a middleman between you and the lender. They assess your finances and borrowing power, and then come up with a list of home loans for you to choose between. However, while they will pick options from a number of different lenders, they likely won’t consider all of them, as many brokers won’t work with credit providers unless they pay a commission.

Fisher says a good broker will not only determine how much you’re able to borrow from various lenders, but also the maximum amount that you should borrow, based on market trends and fluctuations.

“We sit with them, understand their situation, do analysis of all their expenses, their incomes, understand their plans, and then look and research around the various lenders that are suitable,” he says.

“We make sure a client can afford it if rates go up to 7% or 8% and how that is going to impact on their lifestyle, or how it will impact if they get a loan tomorrow, versus what they’re paying in rent today.”

“Many times I’ll talk clients down from what their expectation was before they walked in, around how much they want to borrow, because it doesn’t make sense financially and would have put them under financial stress.”

Should you use a mortgage broker?

Armed with a detailed understanding of the market, mortgage brokers often help their clients find a better deal than they would if they simply walked into their nearest branch. But there are some downsides to using them, too.

Pros

1. Find you the best deal

It stands to reason that a person who lives and breathes home loans should be able to find a better deal or interest rate than someone who’s either searching for the first or second time. 

2. Will manage the paperwork

Once you give the green light to one of the broker’s suggest home loan options, they’ll fill out all the forms required to get your loan pre-approved with that lender.

This not only frees up time, but provides you peace of mind, as enlisting the expertise of a mortgage broker will ensure that all the i’s are dotted and t’s are crossed.

3. They’re independent

As they will be at pains to point out, most brokers are independent, meaning they don’t favour any one lender, and will seek out the best possible deal or rate from the dozens of lenders with whom they’re accredited.

“Irrespective of whether they work for a franchise group or a smaller business, they’re independent from a particular lender,” Fisher says.

“As a general rule, all mortgage brokers are accredited with 20 to 40-plus lenders.”

What’s your loan strategy?

Cons

1. Some brokers simply choose the lender that pays the most

Customers don’t pay their broker, lenders do. And so some brokers simply choose the lender that pays them the most, rather than the mortgage that best matches their client’s needs.

This payment system came under scrutiny during the recent banking royal commission, with Commissioner Kenneth Hayne recommending commissions paid by banks be replaced with upfront fees paid by the customer.

He wrote in his final report that this would reduce the incentive for brokers to encourage borrowers to “take as large a loan as [they] can afford, regardless of whether the borrower needs to borrow, or is wise to borrow, that sum”.

2. Switching brokers could affect your credit rating

If you’re unhappy with a particular broker’s service and decide to take your business elsewhere, you may end up tarnishing your credit rating.

This is because each time a broker submits a loan application on your behalf, it’s sent to the credit bureau. Should they receive a high number of enquiries on your behalf, this will raise a red flag and affect your rating.

Things to consider before getting help from a mortgage broker

• Standards across the industry vary greatly, so you should only work with accredited brokers who are registered with the Australian Securities and Investments Commissions (ASIC) and have an Australian Credit Licence. Membership to well-regarded industry associations is an added bonus.
• Ask friends or family for recommendations, as they will likely give more reliable, honest feedback than online reviews or testimonials.
• Ask your broker how many lenders they work with. The higher the number, the more likely they’ll be able to find a mortgage that works for you.
• Some brokers charge fees, while others don’t, so make sure you ask your prospective brokers about this before you engage their services. This will allow you to work out which one offers the best deal, and will prevent unwanted surprises down the track.
• While you’re on the subject of fees, discuss commissions, too. If they are a member of the Mortgage and Finance Association of Australia (MFAA), they are required to disclose this information under the MFAA Code of Practice.
• A broker will only be able to help you find a good loan for you, if you know what you’re looking for. So make sure that you collate as much personal financial as possible and have a rough idea of your future plans before approaching a broker.