Borrowers should shop around for best mortgage broker, not just the best loan: Broker

Borrowers are inclined to use a mortgage broker because they can recommend products from as many as 30 different lenders, but according to Sydney mortgage broker Tony Harris, many brokers will only recommend loans from one or two of their favourite lenders.

Speaking as part of a recent Property Observer webinar, Harris says it is very important how borrowers go about selecting a mortgage broker.

Harris says one of the first questions borrowers ask is: “How many lenders can you recommend?”

But the answer they get can be something of a red herring as he let listeners in an a little-known industry secret.

“A lot of brokers have 25 to 30 lenders on their panel, but in reality they are probably only writing loans through two or three lenders,” says Harris.

“The reality is that some brokers are wedded to certain lenders over others because they are comfortable with them and they understand their loan criteria,” he says.

Under the ASIC-enforced credit regulations, brokers must also ensure that a loan is ‘”not unsuitable” by making reasonable enquiries about a borrower’s financial situation, as well as their requirements and objectives.

“So the first question is how many lenders can you recommend, but then the next question is how many loans have you written so far and how long have you been in the industry,” says Harris.

Harris says borrowers should quiz brokers about the different lenders on their panel.

“If you feel you may be missing out on a few lenders, quiz them more

“Ask them: ‘Why are you recommending this lender? What is it about them? Do they offer good service levels?’

“It’s OK if they have a favourite lender and can explain why, but make sure you drill down and ask those questions.

“If it is compelling reason and they are good answers, by all means go with that broker.”

Borrowers should also be aware that brokers are paid by lenders through an upfront commission of around 0.5% to 0.7% of the loan balance and recurring annual “trail” commission of between 0.15% and 0.2% of the loan balance until the loan is discharged.

Unscrupulous brokers might be tempted to recommend one lender over another because of better commission rates.

In addition, some lenders offer brokers the opportunity to earn bonus payments and other incentives by meeting certain performance metrics such as loan volume targets or if additional financial products such as insurance are taken up by a borrower.

Listed mortgage broker Mortgage Choice averages out the commission payments from all the lenders on its panel so that its loan writers are paid the same rate regardless of lender – eliminating the risk of a broker favouring one lender over the other for the wrong reasons.

This averaging out of commissions was highlighted as part of Mortgage Choice’s annual results presentation last month.

Harris also delved into the issue of brokers charging an upfront fee.

He says this has become more prevalent in the current slow credit growth, weak property market and tighter margin environment post the GFC.

But Harris says brokers that charge a fee need to offer more than just filling in a loan application form.

“They need to be able to hold your hand and guide you through the process.

“At the end of the day, you get what you pay for.

“If you can find a broker that does not charge a fee and can provide a great service that may be a great way to go as long as you believe they are going to do everything for you and not just recommend one or two lenders because they are their favourites.”

Harris also recommends that borrowers ensure the broker is a member of the Mortgage and Finance Association of Australia, the peak industry body representing mortgage brokers, which works closely with regulators ASIC and APRA.

ASIC provides a free broker licence check on the credit section of its website.

“A broker can have their licence under own name or company name or work under someone else’s licence,” says Harris.

For more tips from Tony Harris on using mortgage brokers and refinancing your mortgage, watch the free Property Observer webinar.