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Buying a house is likely to be the biggest purchase a person makes in their life, and the terms of the long-term financial commitment can have a significant impact on day-to-day finances.
Choosing the wrong type of loan for your circumstances or changing economic conditions can result in higher than necessary repayment costs, or even mortgage stress.
A mortgage broker can help the buyer to make the right choice and can explain all the different options available, including government schemes, grants or mortgage insurance discounts. And with interest rates hovering around 6% for variable loans, it pays to find a professional who can find the right deal for you.
In fact, A McKinsey report from 2023 revealed that some 70% of loans written were initiated by a mortgage broker.
How Do Mortgage Brokers Work?
A mortgage broker arranges a home loan for a property buyer by acting as a go-between between buyer and lender.
Mortgage brokers are legally required to act in the property buyer’s best interests when suggesting a loan for you—this was a direct recommendation of the Hayne Royal Commission.
Part of their responsibility is to explain the different buying terms so that the buyer understands the situation they are considering. They will also set out the types of loans and their respective conditions that are available to the lender in their specific circumstances.
When You Should Use a Mortgage Broker
“I recommend seeing a broker a year before you’re planning to buy a house,” says mortgage broker Danielle Broderick, director of Cobblestone Financial.
At a minimum, it should be three months before. A broker can steer you in the right direction by telling you what the lender will be looking for when they assess your loan application.”
For example, a lender will review three months of bank statements, and an account that was overdrawn or issued with a late payment fee will be an automatic red flag.
It could result in a higher interest rate on the loan due to being a riskier borrower, or even having the loan application rejected.
Most people are unaware that buying lotto tickets regularly is also considered a red flag, cautions Broderick. With a heads up, the prospective loan applicant maximises their chances of successfully obtaining a mortgage.
How Is a Mortgage Broker Paid?
A mortgage broker is usually paid by the lender when the mortgage agreement is completed, and the borrower does not pay anything.
Their payment consists of an upfront payment upon settlement and what is known as a “trail commission”, which is ongoing payment that continues over the life of the home loan.
In exchange for the ongoing payments, Broderick undertakes annual assessments with her clients to ensure that the loan is still meeting their financial needs. If it is falling far short, she may suggest that the mortgage holder undertakes refinancing to obtain a different interest rate, for example. A broker is not compelled to have regular check-ins, however.
Some brokers are paid higher or lower fees for certain products, while others receive a flat fee.
The upfront commission is typically between .46% to .65% of the total loan amount. The trail commission is paid each month and it ranges between .1% to .35% of the value of the home loan.
Some brokers are starting to charge the borrower a fee in addition to charging the lender. This is because a significant amount of effort can be undertaken only for the borrower to walk away before legalities are entered into. This leaves the broker unpaid.
Pros and Cons of Using a Mortgage Broker
One of the main advantages to using a broker is that they are bound to act in the borrower’s best interests, whereas a bank or other type of lender is not. They are free to prioritise their own commercial outcomes, which could mean presenting the most expensive option to a customer. A broker who is audited and found to have breached the best interests’ duty will be fined or could even have their operating licence removed.
Nevertheless, this duty falls short of what the Hayne Royal Commission Report had in mind, which recommended that trailing commissions be severely limited to a shorter time-frame (rather than the life of the loan) and that consumers, rather than lenders, pay the broker upfront. The Morrison government planned to introduce these recommendations but capitulated to lobbying from the industry, and backed down from these more substantive reforms.
Chief executive of the Mortgage and Finance Association of Australia, Anja Pannek, told the AFR recently that trail commissions for brokers were “often misunderstood”.
“When a broker originates a loan for a lender, they originate future value, future [net interest margin],” she said. “The way that the lender compensates a broker is to pay a component of the future value upfront, and the remainder is paid as a trail. That’s the structure of broker remuneration, and it helps the broker run their business on an ongoing basis.”
On the plus side, it’s helpful that mortgage brokers are familiar with the different loans and government schemes—although not all brokers participate in every scheme. For example, some lenders do not require certain professions to pay mortgage insurance.
A mortgage broker will also provide a far more personalised service that takes into account individual financial circumstances. They may be available on weekends and in the evening, whereas most banks will not.
“It’s impossible for a consumer to know what an individual bank’s lending policy is,” explains Broderick. “And a lender is not required to know each other’s policy. Even if they did, it’s not up to them to tell you that you would be better off going with another lender.”
Mortgage Broker Vs Bank
A bank will provide the borrower with the options they can offer—that could be just two or three loan products. A mortgage broker, by contrast, will know dozens of loans and policies, and will suggest those which are most advantageous to the lender.
If a potential borrower is turned down by a bank because they do not qualify for its lending program, the person may be discouraged from trying again—when in fact a mortgage broker could have told them that they may be approved by a different lender with a different policy.
Furthermore, the record of the rejected loan application will be stored on the person’s credit file and will have a negative impact on it if there are multiple applications.
One advantage to going directly through a bank is the number of backup staff they have on hand to assist you. Some brokers are one-person teams, and if they get sick, for example, there may be a delay.
How Much Should a Mortgage Broker Cost?
As mentioned above, most of the time, the loan applicant does not need to pay the mortgage broker a fee, because the lender pays the broker a commission.
Some mortgage brokers may charge a fee that they feel compensates them for the time spent on a customer, such as by calculating the number of hours they will invest in preparing an application.
How To Choose a Mortgage Broker
Broderick recommends reading online reviews about potential mortgage brokers, and to seek recommendations from friends and family. She gets many clients from recommendations given via online investment groups on Facebook and other social media platforms, however, no matter where you find your recommendation, it is important to check whether the broker holds relevant professional licences.
Potential brokers will ask you to provide a number of details about your financial circumstances so that they can ascertain the best loan options and your eligibility for any government grants or schemes.
When you speak with a broker, ask them questions about the pros and cons of the different loans.
Get a written quote from the mortgage broker that outlines all the important aspects of the loan, such as the term of the loan and the interest rate, and how much mortgage insurance will cost (if applicable).
Different grants and schemes are available in different states, so choose a broker who has worked with clients in your state.
Frequently Asked Questions (FAQs)
What licence does a mortgage broker need in Australia?
A mortgage broker must operate under an Australian Credit Licence (ACL). They must hold a recognised qualification in finance, such as a certificate, diploma or bachelor-level qualification in a subject like business, mortgage broking or finance.
If you’re new to industry, you need a mentor for two years, and brokers must join an industry association, as well as obtain individual lender accreditations with each lender.
A mortgage broker also needs to be registered with the regulator, the Australian Securities and Investments Commission (ASIC) and have a membership with Australian Financial Complaints Authority (AFCA).
How much do mortgage brokers make in a year?
The average annual mortgage broker salary in Australia is $110,000. Estimates vary considerably, however, with some professional associations suggesting the average salary is $142,000 before costs.
It goes without saying that the more expensive the home, the higher the commission the lender pays to the broker.
Why should I pay for a mortgage broker?
There is no compulsion to pay for a mortgage broker, and most mortgage brokers do not charge a fee for the service they provide. They are paid by the lender upon settlement, and receive a trail commission for the life of the loan.
Do banks pay mortgage brokers?
Yes. Mortgage brokers are paid by banks or lender in two ways: via an upfront fee, as a percentage of the loan written, and as a trailing commission for the life of the loan, which is also a percentage of the loan.
