The pros and cons of using a mortgage broker

Mortgage brokers can be a vital resource and close partner to your inner circle. There are a lot of people you'll need to recruit in building your team as an investor. Some of these people charge for their services, including:

• Solicitors
• Tax depreciation assessors
• Third-party mortgage document creators (Not usually used by big banks, usually a service you have to pay for when smaller lenders, credit unions, and non-traditional financiers are used)
• Accountants
• Financial advisers and planners (this is a grey area; some charge upfront fees, others work for “free” to you and instead earn commissions from the products they recommend to you – and they are legally obligated to be upfront about these)
• Valuers
• Quantity surveyors

Others do not, instead taking a commission at some point from another third party, including:

• Mortgage brokers
• Buyers’ agents
• Property development companies (those who sell off the plan, etc.)

Considering last week’s RBA interest rate cuts and rates being a hot topic, I thought it would be appropriate to focus on mortgage brokers and run through some of the pros and cons I've experienced in my investment life. They are important because they can really open doors and make properties you once thought were not viable suddenly within reach. 

Pros:

• Pre-qualification without you actually needing to apply for a single loan. One slightly scary thing to keep in mind is that every time you apply for a mortgage product with any institution and are refused finance (for whatever reason) it leaves a stain on your credit history/check. Once or twice is fine, but collect too many of them and it makes you look very bad, making your chances and getting future finance more restricted. Mortgage brokers will run software that pulls data in real time, across hundreds of lenders (at their current rates and special deals) and runs this data against your personal situation data. What does it spit out? Well, it culls the lenders who will a) even consider lending you the money you want/need b) tell you what the maximum borrowing capacity actually is and c) tell you the lenders you have the highest chance of being successful in a formal application with.
• In line with the above, brokers will indeed save you money. By putting you into the best possible product at the best rate and product, you'll usually be better off in terms of rates repayments, as a result.
• They will save you time, will (usually) come out to see you instead of you see them. This might sound small, but as you get underway with your due diligence, this is a big help, and frees up your time to do other due diligence checklist items you'll no doubt need to conduct.
• While they do not know everything about every product, they do have expert knowledge on some of the more popular products and real qualitative feedback from other clients on how these products have performed. Their insight is unbiased and raw, which is great because individual lenders will (by their nature) sell you the dream of how their product is best in market!
• Expanding on the above, brokers must always be upfront and honest about the way they make their income. Yes, they work for free to you, but someone has to pay, right? Well, brokers receive a kickback, or commission, from whatever lender you end up with, and they are upfront in telling you what this is (you'll see it line-itemed in any eventual product you sign up for).

Cons:

• They do not have a firm grasp of your full situation. Probably my biggest challenge in being a professional property investor myself is juggling my team (the list of people mentioned above). While I only recruit professionals whose quality of service and work pleases me, it is very hard to get them working together with each other (which sometimes you need to do!). A good broker will understand your other relationships and will engage with them to help confirm and qualify data.
• I know I mentioned above that they will save you money (and they will, on the interest rate of the product, which is the paramount money-saving you need), but they aren't always armed with all of the costs you'll need to pay upfront. Remember, brokers are not experts in every single mortgage product out there, by every single provider out there. If they were, they'd need to be able to rattle off facts and figures on literally thousands of products. Instead, the lenders themselves are the experts on their own products. So the con of this is that mortgage brokers will get you into a great product, but not always know upfront the full start-up costs involved (additional fees and charges beyond those in the products fact sheet may be incurred).
• While they must be transparent in highlighting the way they work in regard to commission they get from lenders, what is unknown to their customers is the level of commission and incentives given by differing lenders (both official and unofficial incentives, that is). Let me explain. If lender 'A' offers a 1% kickback of the mortgage product value as a commission, yet lender 'B' offers a 1.5% kickback, the mortgage broker, while always tasked with recommending the product that is right for your situation, will still be influenced by the bigger commission products sold to them. Additionally, the influence of prizes, lunches, gifts etc. by the lenders (“unofficial” incentives) may possibly influence/corrupt their recommendations to you. This is why when shopping for a good broker, you must check references and ideally will find one from whom a friend/colleague/relative has had positive experience.
• Because brokers won't always want to engage your other team players (accountants, solicitors, etc.), they tend to treat each investment property of yours uniquely (unless of course you're buying more than one property at a time, but most investors just do one per year or so). The problem with this is that after the first property or two, they tend to become focused on just finding lenders that will still say yes to you, and not always consider what ramifications product 'X' may indeed have on the rest of your existing portfolio. But to their credit, this should not be the responsibility of a broker – instead just remember that it's your responsibility to consider the effect that each layer of your portfolio cake has, and its weighting, on the layers below it.

So mortgage brokers may not be for everyone, or for every situation, for that matter. You need to do what is right for you, and sometimes that means going direct to a source of finance. At minimal though, you should consider a consultation with a mortgage broker to assess what their value proposition to you may be.

In my experience I've worked with and without brokers.  There is no right answer, but when you find one who is willing to treat you as a long-term customer and help you expand your portfolio in the right way, then you know you've found the best broker possible for you. And the best way to get a feeling for this is to listen to the questions they ask of you. Are they obsessed only with the “current” purchase you're making? Or are they asking you lots of questions, at consultation, about how you want to grow your portfolio? Perhaps questions about your next purchase, ball-park spend rates, whether you're looking to owner-occupy a property for any amount of time. Good brokers ask these kinds of questions because they know the value of a long-term client relationship. Bad brokers can't see past the deal they are talking you through there and then.

Cameron McEvoy is a property investor and maintains a blog, Property Spectator.