Australia’s home loan market is huge, with nearly $390 billion in new residential loans approved over the year ending July 2018, according to the latest ABS housing stats.
That is a lot of money changing hands. Unsurprisingly, there are a lot of industries that make serious money from this substantial property trade, with mortgage broking being amongst the largest.
What is a mortgage broker?
A mortgage broker is essentially a person or institution who plays matchmaker between property buyers and lenders – i.e. helping borrowers get home loans and helping lenders get customers. Mortgage brokers work on the borrower’s behalf to arrange the appropriate finance for them to purchase their home, offering advice and guidance throughout the process. Generally, they have arrangements with specific lenders to offer particular home loan products to their clients and typically receive commissions from lenders for every loan arrangement.
Using a mortgage broker vs. DIY
More than half of all new home loans written in Australia are through a mortgage broker, a factor which drives the more than $2 billion per year in fees that they as an industry make from the market, according to ASIC.
This widespread utility speaks to the fundamental need amongst consumers for expert advice and help in navigating the process of getting a home loan. The alternative to using a mortgage broker is for people to do it themselves, which is sometimes referred to as going ‘direct’.
But what are the major differences between using a mortgage broker and going direct? Is one better than the other?
Can people access the same home loan products directly that are offered through a mortgage broker?
Does one way cost any more than the other?
Is it better to choose one way over the other depending on the type of property being purchased or the complexity of the loan (e.g. if other existing property loans need to be included in the new loan)?
And how are both buying methods being affected by the ongoing rapid march of technological development and the appearance of ‘fintech’ players in the market?
What mortgage brokers offer
Let’s start by looking at what Mortgage Brokers do best, and that is to provide convenience and comfort to consumers.
Most people have very little idea of what it takes to get a new home loan, so brokers provide convenience by helping to identify a suitable home loan (amongst the more than 1,000 available in the market), and guiding people through the process laid out by the chosen lender to ensure that the loan can be settled to meet the needs of you, the customer.
Many people view shopping for a home loan as akin to opening Pandora’s box, because there are real risks involved in getting it wrong (costs, timing, etc.).
So there is something of a fear factor that many people have, and essentially they will often look to a mortgage broker to help them navigate the process and provide them with that level of comfort in making the decision.
The cost of using a mortgage broker
But at what price and sacrifice to product choice does this convenience and comfort come? Does using a mortgage broker cost you any more than it would if you dealt directly with the lender?
On the surface of things, the answer is no.
Mortgage brokers are paid by the home loan lender, and not by the consumer getting the home loan. However, many industry pundits (particularly those on the ‘direct side’) point to the pricing of home loans accessed through the mortgage broker channel as being higher than what can be sourced by going direct.
Trying to prove this point is a real challenge, and it is at best a grey area that consumers need to be aware of. Consumers can try and navigate through this grey area by comparing the loans their mortgage broker suggests with other ‘direct’ options available to them in the market (by using free tools like home loan comparison sites).
The revenue model currently used in the mortgage broking industry is one where the home loan lender pays brokers an amount upfront upon settlement of the loan (a percentage of the loan value – usually in the vicinity of 0.6%). Lenders may also pay mortgage brokers a smaller annual payment (also based on the loan amount – usually around 0.1 to 0.15%) while the borrower remains a customer of the lender.
So this money has to come from somewhere right? Do you end up paying more? Or do the lending institutions consider these upfront and ongoing fees (paid to the brokers) as ‘marketing costs’ required to bring a new customer on board, just as they would view having to pay for an ad in the paper or in Google Adwords?
The only real true test here is for consumers to do their own research on the range of interest rates (and fees) that are available to them through both the direct and mortgage broking channels.
The other potential limitation in using a mortgage broker is that they only have a limited number of home loans (from a limited number of lenders) for you to choose from. Without going into prescriptive detail, whilst they may have quite a large range to choose from, it will not represent the whole market.
That said, in trying to get a home loan direct, many home loan comparison sites do not contain information on the entire market either, in that some only list lenders and specific products that they get paid to refer onto those lenders.
So why would someone want to try and step through the home loan process on their own?
Quite simply, it seems that it most often comes down to confidence and control.
Many consumers have existing relationships with their bank (or banks) through other products such as savings accounts and credit cards, which can make engaging directly with a home lender a somewhat simpler and less intimidating affair.
Another driver which is seeing a large number of people going direct (for their home loan) but not through their existing banking relationships, is the growth in usage of the financial blog and home loan comparison sites. Their utility, free from what some think as conflicted broker advice, is a great way to maintain complete control of the process. To do this, you have to have a fair degree of confidence in your ability to be able to recognise quality information, information which is complete and can be, in your own mind, trusted.
But as mentioned previously, it is critical to understand just how much of the market (eg. lenders and their specific home loan products) is actually listed on these sites. Secondly, understand that many of them are simply ‘referrers’ in that after you have used them to research the market and create a ‘shortlist’ of home loan product options, when you click on a particular option, you’ll simply be referred through to that specific lender’s sales teams to begin the process.
Again, this option is going to suit the type of person who has not only the time to do this, but also the confidence and the need for direct control over the process.
Outside of the financial blog and comparison site sector, there has also been a rise in the number of online lenders in the marketplace, who have built smart-but-easily-navigated technology systems that make the process of getting a new home loan both simple and easy to execute.
Just to clarify, whilst they are called ‘online’ lenders, the good ones will actually advertise on their website that they have a phone number you can call in on, to speak with their team of lending specialists (so it’s not all ‘automated’ and you can actually talk to a human being).
Savings.com.au’s two cents
The decision to go with a mortgage broker or not in your quest to get a home loan is probably more about your own individual circumstances than it is the specific merits of using them vs. going direct and doing the work yourself.
Brokers not only provide you with convenience and control, but also an ongoing contact to touch base with even after you have settled on your new loan and home.
This is because they are paid an annual fee by the lender whilst you have that loan, and hence they have a vested interest. Additionally, if you decide at some point in the future that you want to refinance with another lender to get a better deal, the broker could be able to help you through this process as well.
Alternatively, doing it all yourself is also a viable option when you’re looking for a home loan. Probably the greatest factors that should determine your choice of which resources to use here are around how much time you have (to do the research, engage with lender, etc.) and how confident you are.
Many people who are time poor but are somewhat sceptical about the limited range a broker may have to choose from will do their own research on the market ‘direct’ (eg. using a financial blog/comparison site) and then provide the broker with a list of product options that they have to try and better.
This way, the person knows (if they’re confident in their own researching abilities) that they are getting a good product and price (interest rate), and that if the broker can get a similar deal through their own network of home lenders, they also get the convenience and comfort of knowing that the process is being managed by the broker.
Of course, picking the right home loan with a great interest rate and other product features that you may be able to utilise (e.g. redraw, offset account, etc.) over the life of your loan is going to put you in the box seat to be able to save money. And that is what it’s all about.