People can obtain a mortgage either by speaking with a mortgage broker or directly approaching a bank for a home loan. So, which one is the better option for the customers?
Each option has its benefits and drawbacks, so it is tough to determine the better one among these two. This decision may depend on your financial situation, your relationship with the bank, your prior experience with either of them, among others.
Which of these options match your requirements? Let us examine the advantages and disadvantages of each.
Pros & Cons of using a Mortgage Broker
There are many benefits of using a mortgage broker for your home loan. They provide options of loan products to clients based on their situation, help save time and money for the customers as they do all the legwork on their behalf.
The benefits of using a mortgage broker are:
Convenience
A mortgage broker will do the legwork for you, such as helping you collate all the required documentation, process the lender application form on your behalf, guiding you towards settlement of a property and even provide high level thoughts and advice on the property your are purchasing. Plus, they will liaise with the bank and perform most of the administrative groundwork for you making it convenient to apply for a home loan. A mortgage broker will also help explain the loan terms to you and work through trying to provide you the best loan with the most competitive rates based on your personal circumstances, factoring in items such as your finances and credit score.
Specialists
Some consumers with particular circumstances may benefit from working with a mortgage broker. For example, borrowers with lower credit scores generally do not have knowledge of which lenders are more lenient of their situation. A
Better access to loans
A mortgage broker has access to dozens of lenders and in turn a wide range of products compared to an individual bank or lender. Brokers will provide clients favourable, low-cost and reasonable recommendations depending on their circumstances. Plus, they have more up-to-date information on the type of loans available, the lending criteria and the home loan market, which will help consumers.
Fees management
There are different fees in a mortgage, such as application fees, offset account fees, and mortgage setup fees among others. Mortgage brokers will explain all these to the clients. And, they can also negotiate a better rate and additional discount on the rates and fees with the banks.
Cons of using a mortgage broker are:
Broker Fees
A mortgage broker provides many services to the clients. However, they may charge a fee to consumers in providing these services. The good thing is, brokers legally have to disclose details about such fees or charges to you upfront.
Different interests
A broker tries to get the best deal for the client; however, the best deal for the client may not be the best deal for the broker. Most brokers usually get paid a commission by banks for every loan they write. They might be tempted to convince the client to get a loan which might land them a greater commission. It is very rare that this occurs. Additionally, the Australian Securities and Investments Commission (ASIC) introduced, the new “Best Interest Duty” legislation on 1 January 2021 which legally requires brokers to work on the best interest of clients, and they should justify their recommendations on each single application. This reduces the risk of a mortgage broker not acting in your best interest even more as ASIC can audit mortgage brokers on their justifications.
Is this the best deal available to you?
There are numerous mortgage brokers out in the market with varying degrees of experience and skills. If you have an uncommon situation, it may even challenge some of the best mortgage brokers. Whilst they will try and find the best loan product for you, there is also a risk that the loan rates or the loan terms are sub-optimal for your situation.
Overall, mortgage brokers have access to a wide range of mortgage products, allowing you to compare loan features, interest rates and charges from several banks and non-bank lenders. This ultimately saves you headaches and time. Mortgage brokers specialise in assisting home buyers to find a home loan that suits their requirements and financial situation. Data shows that mortgage broker-originated loans have accounted for 70% of the total loans and industry body MFAA has estimated that this number will reach to 75% by 2024.
Pros & Cons of going directly to a bank
Whilst data from the MFAA report shows that the number of people taking out loans directly with a bank or lender is decreasing every year, many consumers still find going directly to a bank easier. This does not necessarily mean you are getting the worst deal.
What Are the Pros of Working With a Direct Lender?
Better relations
If you are an existing customer of a bank, especially if you are a business customer with a commercial loan or a private customer, banks will usually assign a bank loan officer or someone responsible for customer experience who focuses on maintaining a good relationship with you as the borrower.
Neglected lenders
A few small lenders intentionally advertise direct to consumers and therefore cannot be applied to through any broker’s panel of lenders. These lenders will generally advertise cheaper home loan rates due to their reduced operating costs. We find that they generally target customers with high income, good credit scores purchasing an owner occupied or investment property (ie nothing complex). There are benefits in approaching these financial institutions directly as they offer competitive rates. However, you will need to then compare this with other lenders credit policies in the market to see if this is a suitable loan for you.
Better access
Some customers value a bank’s physical branches and prefer to do business in person and speak with a banker at any time during business hours.
What Are the Cons of Working With a Direct Lender?
Difficult to contact
For a general customer (not a business customer or a private customer) it might be hard to find a point of contact in a bank, and it is difficult for them to answer all your queries compared to a mortgage broker. Also, banks are supposed to work in their own best interests and are not obliged to ensure your home loan is the best loan for your whole financial situation.
Not convenient
Most banks require you to come into their office to present your documents and have them verified. It might be challenging for you if you are too busy with your work, live in a rural area or are busy with kids.
Lack of specialisation
Banks have their lending specialists who are experts in their own lending policies; however, this means they are also limited by their lending policies. For example, one lender may strictly only work with borrowers who have a good credit score. This means if you have a bad credit score and you approach that lender, despite demonstrating your finances are able to service and repay the loan, they may turn you down because of their lending policy.
It will be advantageous for a client to approach a bank for a home loan if you have a good existing relationship with the bank plus a strong credit history with a non-complex borrowing requirement. Banks like these types of clients and are likely to offer good rates and services for them. However, if you do have any inconsistencies such as financial hardship, low savings, poor credit, or unsteady or unusual employment, then it is usually not ideal to approach lending institutions directly for a loan and more advisable to approach an independent mortgage broker who is specialised and can help with your individual circumstances.
How do I know which option is best for me?
You need to research what you can obtain based on your situation. Please do not rush to any conclusion or commit to anything unless you have received options, be it a bank or a mortgage broker.
For example, if you approached a bank for a home loan and you have a few complications in your credit history. It could be tricky to navigate the bank for an approval as the lenders’ staff may not handle complex situations or know how to assess them properly. This could lead to delays in processing your application and might even lead to declining the application altogether. On top of that, there will likely be a credit enquiry against your name which in turn may impact your credit score.
On the other hand, if your approach a licensed mortgage broker who knows how to deal with your personal situations, you may have a better experience in obtaining a home loan. An experienced mortgage broker will know the lending policy of all the lenders on their panel and in turn when understanding your circumstances, they will only recommend the lenders banks who are more lenient to your situation. Mortgage brokers can also negotiate policy exemptions with the bank, which increases your chances of getting a mortgage and minimises your application being denied. It also means less credit enquiries against your name which can help protect your credit score.
Frequently Asked Questions
Do mortgage brokers work in my best interest?
Yes, according to the statutory obligation, mortgage brokers are required to act in the best interests of their clients. Banks, on the other hand, are not obliged to act in the best interests of their customers while offering credit assistance. Instead, they can work in their own best interests.
Do banks give better rates than mortgage brokers?
Surprisingly, it is the mortgage brokers due to their access to a variety of loans. They have a choice of over 40+ lenders around Australia. They can acquire good rates because of their great negotiation leverage with the banks. They will also follow up with banks at regular intervals and check whether your home loan rates are competitive or not.
Do banks or mortgage brokers provide me with more options?
Banks are at a disadvantage in this. They have multiple products of their own but are limited by the banks’ lending policy and product offerings. Conversely, a mortgage broker deals with a variety of lenders. Mortgage brokers have access to products of all these banks, which can provide you with more options in getting a home loan that is well-suited to your needs and financial condition.
Who is more likely to get me a suitable mortgage?
Banks are superior at their own lending space; however, they may lack knowledge of what’s happening in the wider market for a mortgage loan. On the contrary, mortgage brokers are experts in home loans as they specialise in them. They know the lending policies of a wide range of banks they work with and understand the home loan process very well.
Which option is convenient for customers?
Banks have lots of customers to deal with and have different contact points. Thus, it might be difficult for a client in case of delays or complex deals. However, the majority of mortgage brokers have a compact structure and well-organised customer service, making them a convenient option for customers to communicate.
Conclusion
There are different reasons to apply for a home loan with a mortgage broker or go directly with a bank. You are free to choose whichever option suits you better.
It is a well-known fact that banks have several products apart from mortgages (such as credit cards). So, they may not always work in your best interest nor understand their products in great depth. On the other hand, mortgage brokers specialise in the mortgage segment enabling a smooth home loan application process hence gaining a competitive edge over the banks.
For comparison, you can visit your bank and look for your home loan options. Also, online mortgage brokers are just a search away on the Internet, and there are high chances that there will be a local mortgage broker in your suburb. You can contact them online and compare mortgage options with them, too.
