Nov 10

A good mortgage broker may soon be hard to find!

Published in mortgage brokerhome loan financehome financecheap home loan by Vicky Edema
What is happening in the mortgage broker space in the Australian finance market? With the global credit crisis continuing, the face of the home finance sector of the market is changing. Until recently Australians enjoyed sound competition between the banks, credit unions and non-bank sector. Because of the myriad of home finance packages and investment loans available a role developed for the mortgage broker. By securing the services of a good mortgage broker, a borrower could be pretty confident that he would be well looked after in the search for the right home finance. Banks who had closed down their branch offices relied on a mortgage broker to source home finance applications. This was a cost efficient process for the banks because they only paid a fee to the mortgage broker when a loan settled. A mortgage broker could put quite a lot of time into preparing a home finance application only to find that it was declined because the borrower may have had a poor credit rating. On any loans like these that were rejected, the mortgage broker received nothing. The commission paid to a mortgage broker was generally capped at .70% and was paid on all settled loans regardless of whether these had been “reworked” during the loan approval process or had been lodged without the required supporting documentation. In other words, the mortgage broker received the 0.70 on settlement regardless of whether he had actually done a professional job, prepared the home finance application properly and collated all the necessary supporting financial data etc that was required.

The banks used the services of the mortgage broker to keep their market share – a mortgage broker would generally refer a client to a traditional bank because the “brand” was known to a customer. With the global credit crisis, borrowers are preferring the banks over the non-bank sector and as a result the banks are questioning the need for a mortgage broker when business is simply “walking in the door”. Your reaction to this may be “fair enough” – why should the banks pay a mortgage broker when borrowers are coming direct? But the reality is that while the banks would prefer to deal direct, the borrower may well be disadvantaged if they do not use the services and expertise of a mortgage broker.

The banks know that immediately you are sitting down with them they are 99% confident that they will convert the interview to a sale and not necessarily at the best rate in the market. They know that without the mortgage broker borrowers are to some extent “in the dark” on what is being offered at any given time in the mortgage market. This puts the banks at a distinct advantage. I recently spoke with a borrower who was looking for home finance and approached his own bank NAB as well as a Credit Union near his place of work. Both had offered home finance to him but both had significant upfront costs in application, valuation and legal fees. The interest rate being sought was also higher than other home finance packages out there. When he discussed his home finance needs with a mortgage broker he quickly learnt that there were much better deals available – at the time one large lender was running a “special” whereby there were no application, legals or valuation fees and on the particular home finance package he ultimately went with , no monthly on-going fees either. This resulted in a significant saving for the borrower.

Unfortunately, banks are being opportunistic – they don’t want to deal with a mortgage broker if they can avoid it because they know they can generally achieve a higher rate and upfront cost when a mortgage broker is not involved. In an attempt to wipe out the mortgage broker, banks are now reducing commissions so that for a small broker it is hardly viable for him to stay in business. A god mortgage broker may soon be hard to find!
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