How Mortgage Brokers Operate

"Mortgage broker", "loan broker", and "lending manager" are terms used to describe the professional who brings borrowers into contact with lenders.

• What is a mortgage broker?
• What does a mortgage broker do?
• How is a mortgage broker paid?
• Commission disclosure
• Insurance protection
• Professional accreditation and support
• Industry experience

What is a mortgage broker?

The way it used to be

Previously, it was up to the borrower to research the different loan products offered by a particular bank, and then to compare these with the loan products offered by that bank’s competitors.

The process was labour-intensive for the borrower in terms of going from bank to bank, and than having to pore over brochures and booklets at home. But it was also a very cumbersome and expense process for the lenders, who had to employ senior staff and maintain offices for home loan interviews.
The home loan analyst

During the early 1990’s a new service appeared. Borrowers with existing home loans could pay to have an analyst to check the home loan, and compare it with other home loan products offered by alternative lenders.

The borrower would pay for this service – sometimes a few thousand dollars, but could save many times that switching to a better product.
The home loan adviser

As more consumers became aware of the importance of “shopping around” for home loans, demand grew for a new type of finance professional. This person needed some experience in the banking industry, and a good knowledge of the home loan products available. Most importantly, however, this person had to be able to “showcase” the loan products offered by a number of different lenders.

Home loan “advisory” services emerged. A borrower could now obtain advice on home loan products. However, there was often a problem with regard to the independence of the home loan adviser.
Outsourcing by lenders

Following overseas examples, lenders realized that overheads could be reduced if the home loan interview and preliminary processing tasks could be outsourced to brokers. Lenders found that the payment of commissions to brokers provided an incentive for brokers to seek accreditation and to research the loan products of those lenders who paid attractive commissions.

It was recognized, however, that the payment of commissions could be used as a means of influencing the operations of less professional brokers.
The professional home mortgage broker

In recent times, with the formation of self-regulating bodies such as the MIAA and the FBAA, and with oversight and occasional intervention by ASIC and ACCC, the home mortgage broker is recognized as a professional.

Most mortgage brokers adhere to a code of professional ethics, as well as rules set by legislation and the lenders themselves.

Bias can still be a problem in some circumstances, and a number of larger franchised broking groups actually trade on their claims of "unbiased" or "impartial" service.

What does a mortgage broker do?

A mortgage broker acts as an impartial 3rd party. The borrower wants to find a home loan, and lenders want to find customers. The mortgage broker assists the lender by learning about the lender’s loan products, and staying up to date with the range of products and any changes.

The broker also learns about the lender’s requirements, so that loan applications are pre-qualified – in other words, when the lender receives a loan application from a broker, the lender can expect that all of its criteria have been met.

The broker assists the borrower by maintaining an up to date knowledge of a range of different lenders. When a borrower explains his or her requirements to the broker, the broker is able to tell the borrower which lenders provide products that will satisfy the borrower’s requirements, and explain the differences between them.

It is through this process of taking instructions, and providing information, that the broker assists the lender to make an informed decision as to the lender and loan product that best suits the borrower’s requirements.

How is a mortgage broker paid?

Mortgage brokers are paid by way of commissions, usually an “up-front” commission (0.30% to 0.70% of the total loan amount) and a “trailing commission” (0.05% to 0.25% of the loan balance, calculated annually and paid monthly).

Some lenders don’t pay commissions at all, and a brokerage fee is charged to the client. These are generally confined to commercial loan products.

Although the commission paid to the broker is based on the value of the loan, it is not the borrower who pays it. The commission is borne entirely by the lender, so that a loan product available through a mortgage broker will cost no more than if the borrower applied for it through the lender direct.
The cost of the commission paid by a lender is a much cheaper option than maintaining offices and lending staff.

Most lenders pay similar commissions, so bias in this regard is unlikely to be a problem. The differences in commissions offered by various lenders has more to do with the raising of a lender’s profile, and attracting brokers to training and accreditation courses. This ensures that the lender remains relevant in a competitive environment.

Commission disclosure

A mortgage broker’s clients are entitled to enquire about the commissions paid by various lenders, and to satisfy themselves that the commissions paid are not a factor in the presentation of various loan products.

Any person who is paid a commission, including mortgage brokers, must declare the fact that a commission is being paid. The receiving of secret commissions is a serious offence.

Insurance protection

All reputable mortgage brokers carry professional indemnity insurance, also known as PI insurance. PI insurance covers the mortgage broker in the event that some mistake on the part of the mortgage broker should result in financial loss to the client.

Professional accreditation and support

Reputable mortgage brokers will be accredited with a professional body. The two most prominent professional associations for mortgage brokers are the Mortgage Industry Association of Australia (MIAA) and the Finance Brokers Association of Australia (FBAA). Real Choice Mortgages is a member of both of these organisations.

A reliable support organisation is also important, as loan brokers must be kept informed of changing products, rates and rules. In the case of Real Choice Mortgages, Lawfund Australia provides a wide range of broker support services. These include regular updates on loan products (often in excess of 4 emails per day!), newsletters, and lender liaison.

Industry experience

In order to ensure that our clients receive the best in professional guidance and assistance, all Real Choice Mortgages personal lending managers are members of the Finance Brokers Association of Australia (FBAA), and Lawfund Australia.

They are all experienced lending professionals (often ex-bankers), who have been trained, accredited and fully equipped by the members of Lawfund's panel of lenders in the product range and lending policies.

You have the peace of mind that comes with the knowledge that your lending manager has not only gained the accreditations necessary to qualify as a mortgage broker, but also has the knowledge and skills that come only with experience.

Ready to talk home loans? 1300 139 284 Just ring us, and let us know your requirements. We will have one of our Personal Lending Managers make immediate contact with you to discuss your specific needs and the available options - Quick, Easy, Personal. You can also CLICK HERE to access our online form.