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Mortgage Broker or Banks: Who Should Be Your Mortgage Lender?

by Guest on February 17, 2011

Buying a home is not something you should embark on alone, and so many of us rely on the advice from those in the business of selling home loans each and every day. It is invaluable to be able to ask your mortgage lender not only about your down payment, but also to seek advice on how to manage interest rate increases.

So is it a mortgage broker or a bank who will give you the most accurate, well rounded, and easy to understand advice when it comes to buying a home?

Pros and Cons of Mortgage Brokers

A mortgage broker does not work for a particular lender, but instead represents as many as 40 lenders. The mortgage broker is then paid a commission by these lenders when they sign up customers to new loans, however, every lender pays a commission so the broker’s recommendations are based on matching your needs to a loan product unbiasedly.

Benefits of working with a mortgage broker:

  • The service is free. While you are getting comprehensive comparative services and advice, you are not paying anything extra for this extra service. Instead, the mortgage broker is paid by the lender you choose to have your loan with.
  • Doesn’t cost you time either. While there are a lot of monetary cost involved when buying a home, the price you pay in your time should also be considered when you are looking for value. If you had to go back and forth between 40 or more lenders to compare their loan products you could spend months before you applied for preapproval, let alone could start looking at houses. However, a mortgage broker can do all of that work for you in just a few meetings, as well as help you negotiate your way through the paperwork, and helping you understand your loan and what you are entitled to.
  • Mortgage brokers are industry experts. There are specific training courses and studies which mortgage brokers undergo before they are qualified to offer you advice and match you to a loan. A mortgage broker will also help you determine the loan amount you can comfortably afford by assisting you with your budget, and applying stress rates if interest rates rise.
  • Explanations of extras. Choosing a home loan is about a lot more than saving for a deposit and picking a lender and that’s why your mortgage broker can also help you calculate the stamp duty amount you need to pay, and show you how to minimise your Lender’s Mortgage Insurance costs. A mortgage broker is also going to take the time to explain the different loan types and features so you make the right choice, rather than recommend a loan which is under promotion at the time.
  • Save you money. An interest rate that is 1% cheaper or a free 100% offset account added to your loan can potentially save you hundreds of thousands of dollars over the life of your loan, not to mention years off of your loan term, so it is worth making the time to meet with a mortgage broker to compare all of the options out there. Mortgage brokers have established relationships with their lenders and are able to negotiate these deals on your behalf, where you may not be offered the same discounts if you went in alone.
  • Ongoing service. Your mortgage broker will not just leave you to fend for yourself once your deposit has been paid and your documents signed. Instead, a broker will be there with you through the settlement period, and if you encounter issues with your lender or your loan during your term, you can speak to your mortgage broker who will explain the features, or help you find another loan which is right for your changing needs.

The drawbacks of working with a mortgage broker:

  • Limited lenders. While most mortgage brokers have an extensive panel of lenders available for you to choose from, they are still only able to recommend loans from their panel. Therefore, while a mortgage broker may have between 10 and 40 lenders to choose from, this is not the entire range of loans available to you.
  • Can be a fee. In some cases you may have to pay your mortgage broker a fee for their services as many banks have lowered the commissions they pay to brokers for bringing them loans.
  • Only the best mortgage brokers can help. The benefits of a mortgage broker only apply if you have done your research to find the best and most knowledgeable broker. Ask for testimonials from past clients, and make sure your broker is fully qualified, and has years of experience before you rely on their advice.

Pros and Cons of Bank Lenders

Going directly to your bank to secure a home loan isn’t necessarily the old fashioned way to do it because there can be many benefits to dealing direct with a lender. Just make sure you are aware of the differences and drawbacks before you potentially limit your borrowing options.

Benefits of dealing directly with your lender:

  • Up to date information. When you are looking at loan products and specials with your bank directly, then you have the current information for that day, rather than risking a delay in correspondence.
  • Negotiate directly. If you already have a relationship with your bank, you could be in a position to negotiate a better deal directly and secure better interest rates than a third party could get you.
  • No middle man. When you talk directly to your lender you are not waiting for answers or receiving information which has already passed through several communications channels. This means there is less chance of information being misconstrued and if you have a question you can ask your lender directly face to face.
  • No commissions. Although you may not pay your broker a fee, you are paying for the service through the commissions your lender has to pay the broker. Mortgage brokers receive trailing commissions which are a percentage of the interest charged on your loan, and when you go direct, you can more easily negotiate for a lower interest rate as there are no commissions to pay.
  • Add your loan to your existing financial products. If you already have other financial products with your lender such as a transaction account, you can easily set up for payments to be made to your loan account, without having to add more financial products.

The downsides to going direct to the bank:

  • Different banks have different approvals processes. This means that where your loan application may be denied by one lender, it could be accepted without issue by another. However, you don’t know which banks have the stricter lending criteria, or which are more understanding of your particular financial situation – where a mortgage broker does. Plus, each loan application which is denied goes on your credit report and can affect your ability to borrow in the future.
  • Time to compare accurately. As you make your way from lender to lender to compare loans yourself, you may think of new questions, or find out about new loan products which can change your application needs. Therefore, you would need to go right back to the first lender you spoke to in order to compare all loans on a level playing field, and this can only be very time consuming, but very frustrating too.

Alban is a personal finance writer at Home Loan Finder, a home loan comparison site.

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