Use a Mortgage Broker

I read a stat the other day that quoted 60 per cent of all home and investment loans are completed by mortgage brokers. I assume the remaining 40 per cent of people go to their bank directly. The community’s preference to use a broker to assist them in choosing the right bank and loan to meet their needs seems clear.

It is expected the Royal Commission into banking misconduct will hand down its findings and recommendations sometime next month. There is genuine concern that one of the recommendations will be to change the manner by which mortgage brokers are paid, moving them away from the current “commission and trail” model to a “fee for service” model similar to that recently forced upon financial advisory services. In my opinion, such a move would devastate the industry, restrict competition amongst lenders, limit product choice and disadvantage consumers.

Currently, mortgage brokers are remunerated by the lender eventually chosen by the consumer by way of a modest commission and a “trailer”, a small percentage of the loan amount payable over the life of the loan. This system works well because the consumer pays nothing for the advice and expertise of the broker who can provide detail of hundreds of loan products across dozens of lenders. The alternative is for consumers to go bank shopping themselves, with most people lacking the time to do so and expertise to fully understand and compare each product on their own.

Media reports of weeping lenders on the brink of financial ruin because of “dodgy brokers” have popularised calls for changing the current system to force consumers to pay brokers for their services. Most brokers would struggle to command such fees and consumers would be inclined to tread a path of least resistance, stay with their current lender and be disadvantaged by an environment of less competition.

Since brokers arrived, the margin between the cost of the banks’ funds and that charged to the consumer has shrunk significantly due to the enhanced competition they bring to market. No one would expect banks, justifiably driven by profits, to maintain these margins in the face of lessened competition.

Like all industries, the quality of brokers does vary and it is advisable to choose an experienced broker that enjoys a good reputation. Since the Prudential Regulator turned the screws on lending, the resulting credit squeeze has made it much harder to obtain finance. The current rate of finance decline is at a whopping 40 per cent and a good broker can help navigate consumers around applications to improve the chances of approval.

There have been a few brokers that have sought to unfairly manipulate the current system to the disadvantage of consumers but these types are quickly discovered and moved out of the industry. The poor behaviour of the very few should not justify changing something that benefits the majority.

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