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5 reasons why I deal with Mortgage Brokers over Banks

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Mortgage brokers write 60% of all loans in Australia as I’m writing this, compared to 0% 30 years ago.

Banks vs Mortgage Brokers?

There arguably hasn’t been a more divisive time to ask this question if you live in Australia. The finance industry will be turned on it’s head if recommendations from the recent Royal Commission Report are implemented. Without getting caught up in the the small details, this report was a result of an investigation of misconduct in the banking, superannuation, and financial services industry. The biggest and most controversial recommendation from the report affects the way Mortgage Brokers will be paid for their services — ironic, considering the banks were the biggest culprits triggering this investigation in the first place.

I’ll explain — at the moment if a broker writes a loan for $500,000 they get paid an upfront commission of approximately $2500-$3000 by the lender (not the customer). They then receive a trail (an annual rebate paid by the lender) of around $750 per year (give or take). So as it is right now, anyone getting a loan through a broker doesn’t directly pay the broker. The proposed changes would mean that this method of payment be abolished in favour of a negotiated fee between the broker and customer. This change is causing the most controversy because no-one knows what this fee will be, and whether or not anyone is prepared to pay it — I suspect they won’t.

I’m not a financial planner or financial advisor. I’ve got zero qualifications and I have no business offering anyone ‘legal’ advice. What I do have is 13 years of my own experience in buying, holding, developing, and selling property — and during this time I’ve learnt some harsh and valuable lessons about the world of lending. The following piece is my opinion based on these learnings and why I would rather deal with a Mortgage Broker.

  1. The market doesn’t lie

This is a good place to start — 30 years ago no-one considered using a Mortgage Broker to get a loan, and so their contribution to writing loans was 0%. As I write this today, Mortgage Brokers have become a big player in the lending industry — so big that they now write more than 60% of all approved loans in Australia. I can’t see how an entire industry can grow that exponentially to have more market share than their banking counterparts, unless they are doing a better job on average. Something I’ve learnt is that money talks and people vote with their wallets. Clearly the market has spoken.

2. More products at their disposal and stronger competition

A Mortgage broker’s job is to understand your situation and provide a solution by offering different viable options. If I have a problem (I need a loan), I’d rather have someone in my corner who has access to many more solutions that might actually give me a better outcome. The problem with banks (and I’ll elaborate on this in point 3) is that they can only offer you what’s on their menu. To all my vegan friends reading this, imagine walking into a steak house and ordering a meal? I know this may seem extreme, but banks are limited to the type of products they can offer because they offer less choice. I found I can have the best of both worlds when dealing with brokers — as they may offer me a solution from one of the big banks, but not before scouting the market for other options. This creates stronger competition by keeping the big four banks honest.

3. More creative and investment savvy

Let me tell you a story about my first property development. At the time my partner (now beautiful wife) and I had 4 properties between us and we were ‘advised’ to refinance all these properties to one of the big four banks. This was an expensive exercise but seemed logical because we could cross-callaterise the security and leverage the equity from all four properties. We needed the finance to build two new homes and this decision seemed to make sense at the time — so I thought. It was at this point I learnt a very harsh and valuable lesson about the world of lending. I had pigeon-holed myself because after knocking down my partners investment property and subdividing the land, this particular bank decided I was too high a risk to lend further funds — sorry no cash here. I then had to ring my wife and explain how I demolished her investment property, turned it into two vacant blocks of land, and couldn’t get funds to do anything — she wasn’t very happy!

Enter a creative and savvy broker. I was desperate to find a solution, and had I listened to the ‘advice’ and recommendation from my bank I wouldn’t have found one. My broker was able to look at my entire situation from a birds eye view and unentangle me from the web I was caught in. In the end we got the cash to build both homes because my Mortgage Broker had access to more solutions, which coincidentally happened to be a product from another major bank!

4. Up to date information about new and changing products

The best solution today may not be the best solution tomorrow. A good Mortgage Broker is worth their weight in gold because they understand this and always have their finger on the pulse. In the fast changing economy that we live in, there are new products and services being introduced to the market faster than ever before. I’ve lost count the amount of times I’ve called my broker for advice before making a decision. A good Mortgage Broker will not just write you a loan, they will take the time to understand your plans, goals, and aspirations for the future. This process is invaluable because it can not only save you thousands, but will better position you for financial success.

5. Higher quality service and ongoing service

A mortgage broker’s income is relative to the quality of service they provide — this is because they don’t make a wage or get paid by the hour. The only way they can run a sustainable business is through producing good results for their clients, taking the time to develop relationships, and then servicing those relationships. Don’t get me wrong, I’m sure there are some great bank lenders out there, but on average their level of service doesn’t have to be as high because they make a wage. They may receive additional bonuses for hitting certain targets but it’s not the same as producing a result to make an income.

I’m not sure what’s going to happen in the future, but I believe we need Mortgage Brokers to survive and thrive. If the recommendation to change their payment structure is implemented, then I believe it only gives more power to the big four banks. Only time will tell.

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