Banking on a mortgage broker

I still remember the good old days when I first started investing in property. In those days home buyers or property investors could approach their local bank manager, whom they often knew on a first name basis, to apply for a loan.

Fast-forward 30 years you can apply for a loan over the internet. In fact, only a few years ago banks were prepared to lend you 80, 90 or even 100% of the value of the property you were planning to purchase and you didn’t even have to provide proof of income. The process has become less personal with a larger selection of lenders and literally hundreds of lending products to choose from.

However, since the GFC the lending process has become more stringent and definitely a lot more complicated. Add to this the confusion of continually changing lending criteria from the various lenders and various interest rate hikes from the Reserve Bank and many property investors are understandably feeling overwhelmed by the thought of looking for a loan.

As a result, using a mortgage brokers has become more popular. Mortgage brokers act as “go betweens”, advising clients about their borrowing options and then negotiating loan deals on behalf of their clients with different lenders, and now mortgage brokers are involved in approximately 40% of all loans in Australia.

There are many benefits when using a mortgage broker rather than going it alone. A broker can:

• Give you access to numerous lenders, a variety of loan products and a comprehensive understanding of the different finance packages available. This is something you just won’t get by speaking to a bank manager.
• Take the time to understand your personal requirements and your long-term goals to determine what type of loan would suit you best.
• Act as an advisor, providing professional expertise and guidance. This is of particular benefit to investors who may not meet the “standard” lending criteria.
• Conduct all the necessary legwork on your behalf to obtain the best loan product. This is time consuming but means you can also access lesser known lenders and products that may not be as widely promoted to the general public.
• Completing all of the paperwork on your behalf. When you see the amount of paper work involved this is a huge bonus as it ensures you meet the lender’s requirements and have your application processed as swiftly as possible.
• Provide advice and assistance throughout the term of the loan and help with future needs such as refinancing.

But using a mortgage broker is not for everyone. They are particularly useful for:

1. First home buyers and first time investors who are often confused as to where to start in the mortgage maze.

2. Investors with a number of properties wanted to increase the size of their property portfolio as they will often get more finance by accessing multiple lenders through a broker than they will by getting all their loans from the one bank.

On the other hand, if you are a serious investor with say over $10 million in loans or you run a business, you are likely to get a better deal using a bank’s business lending managers.

So how do you choose a good mortgage broker? How do you find someone who is going to help you get the banks to say yes?

Before I explain, it is probably worth mentioning that brokers are paid on a commission basis by the lenders whenever they send business their way.

This has caused some to question who the broker is actually working for. On the one hand their job is to find the best loan product for you – the borrower, and on the other, the banks are paying them commissions.

That’s one of the reasons it is important to “qualify” the broker before you engage their services, finding out a bit more about them, how much knowledge they have and how they can help you, because like many professions, there is a vast difference between the quality of the service and advice you will receive.

You see, currently the barriers to entry in this industry are still relatively low and while there are some very professional brokers around, many mortgage broker work from home and only write a few loans each month. These brokers may not have the depth of experience to help you reach your investment objectives.

To assist you in your hunt, here are some things you should consider when looking for the best broker for your property lending requirements;

• Make sure they are upfront about the commissions they earn. You need to know whether they have any biases towards certain lenders who might pay them a larger percentage for passing business their way.
• Understand who the broker is working for. Most mortgage brokers work for a company or act as franchisees. It is important that the broker you are dealing with is reputable, experienced and professional.
• Brokers generally have access to their own “panel” of lenders; they usually do not have access to every lender or loan product available to the market. Make sure your broker uses a wide variety of lenders rather than just a handful.
• Do not be mistaken – a mortgage broker cannot act as your financial advisor. They are not qualified to provide financial advice.

Finally, here are the 10 questions you could ask to “qualify” your mortgage broker before engaging their services;

1. Do you have industry accreditation? Your broker should belong to an industry body that regulates their practices, such as the Mortgage and Finance Association of Australia (MFAA). As a member of such organisations, they must abide by certain rules of conduct and you are covered by dispute resolution processes and ombudsman services if required.

2. What qualifications do you have as a mortgage broker? Ensure your broker has an industry qualification and/or some formal education and training. Find out how long they have been in the finance industry and the extent of their knowledge and experience. This is particularly relevant for property investors as structuring this type of loan can be much more complicated than a simple home loan

3. How do you decide which loan is right for me? Your broker must be willing to listen to your requirements and understand any personal and financial circumstances that could impact your loan application or influence the type of product you should obtain. In general they should not chose a loan for you on interest rates alone, but based on a range of criteria

4. How are you paid? You should ask your broker how their remuneration works and what type of commission they are paid.

5. Do I have to pay you? Some mortgage brokers request a fee from you up front, and while there is nothing wrong with this, make sure you understand what you get for this fee.

6. Who is on your panel of lenders and why? Find out how many lenders your broker has access to and why they deal with them specifically.

7. Do you lend money? Some brokers have access to loan products through their own company, which is not necessarily an issue as long as they do not recommend their own products without disclosing this to you or if they do not represent the best possible deal for your situation.

8. Are you covered by professional indemnity insurance? Ensure your broker’s insurance is up-to-date.

9. What will you do with my personal details? You are providing your broker with highly sensitive information about your personal, professional and financial situation, so make sure they will handle your information in compliance with the Privacy Act.

10. Can you provide me with references from past clients? It is always a good idea to get feedback from clients that your broker has recently assisted. This is the best way to gauge their standard of service and success at matching the best loan with the applicant.

To me the conclusion is clear: most property investors should have an investment savvy mortgage broker on their side, helping them deals with the banks. But I must also declare that I may have a little bias as I have a shareholding in a leading investment finance brokerage Metropole Finance.

Have you had problems getting finance lately? Have you used a broker? Tell us by leaving your comments below.

Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. For more information about Michael visit www.metropole.com.au and www.PropertyUpdate.com.au.