10 questions to ask your mortgage broker

Getting a home loan can be a highly stressful experience, what with all the jargon and paperwork, not to mention the big dollars at stake.

That’s why a lot of people use mortgage brokers – in fact, a majority of people who take out a home loan now do it through a broker rather than going direct-to-lender.

But that presents its own challenges, because while some brokers are experienced professionals who will provide great service, others are poor operators who will leave you with a bad taste in your mouth. So how do you separate the good from the bad?

To make the process easier, here are 10 questions to ask while you’re shopping around for brokers and then deciding which home loan to select.

What to ask a broker

  1. How much experience do you have?
  2. How many loans have you written during that time?
  3. What sort of clients do you specialise in?
  4. Why should I choose you rather than another broker?
  5. How much hand-holding will you do during the buying process?
  6. How quickly will you respond to my messages?
  7. What happens if you don’t respond to my messages within that timeframe?
  8. How many lenders are on your panel? And who are they?
  9. Why did you choose those particular loans?
  10. What are the pros and cons of each loan?

First, drill down on their level of experience

  1. How much experience do you have?

This is a good place to start, because a more experienced broker will generally be more knowledgeable than a less experienced broker.

Press the broker to give you a specific answer, such as “Five years” or “I’ve been a broker since 2013”, rather than something vague like “I’ve got a lot of experience”.

  1. How many loans have you written during that time?

This is a good follow-up question to ask, as it will give you a better understanding of the mortgage broker’s experience.

For example, imagine two brokers joined the industry in 2013, but that Broker A had written 500 loans during that time and Broker B had written 300. In that case, even though both parties would be able to claim five years of industry experience, there would actually be a clear difference in hands-on experience.

  1. What sort of clients do you specialise in?

Another important question to ask. That’s because while most brokers focus on ‘plain vanilla’ clients, others might focus on, say, sophisticated investors or borrowers with credit problems.

To continue our hypothetical example, Broker A might have done 450 vanilla loans and 50 bad-credit loans, while Broker B might have done 50 vanilla loans and 250 bad-credit loans. So if you were a borrower with credit problems, you might be better off with Broker B.

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Next, probe them about their customer service standards

  1. Why should I choose you rather than another broker?

Organising finance and purchasing property can be complicated and stressful, so you want to know you’re in safe hands. That’s why, before you settle on a particular broker, you should challenge the broker with this particular question.

Don’t let the broker get away with vague statements like “Because I’m the best” or “Because I provide great service”. Use follow-up questions to demand detail. “What specific things make you better than other brokers? What, specifically, do you do to deliver great service?”

  1. How much hand-holding will you do during the buying process?

The reason for this question is so you can discover whether the broker will closely guide you through what is a complicated and stressful process – or expect you to figure it out for yourself.

  1. How quickly will you respond to my messages?

If a problem arises during the loan application process, you’ll want your broker to respond quickly – hence this question.

Again, demand a specific answer – “Within three hours”, say, rather than “Quickly”.

  1. What happens if you don’t respond to my messages within that timeframe?

This is a logical follow-up question. Again, insist on a specific reply.

And once you’ve received answers to questions #6 and #7, ask if the broker would be willing to put both claims in writing. That will indicate how seriously those claims should be taken.

How to find a mortgage broker

There are two types of mortgage broker in Australia. The first kind are affiliated with franchise groups, such as Aussie, Loan Market, Mortgage Choice, Smartline and Yellow Brick Road. The second kind work as solo operators or as employees of finance companies. Regardless, they’re all bound by the same regulations. Brokers generally belong to one of two big industry associations. Click here to find a broker who is part of the Mortgage & Finance Association of Australia or click here to find a broker who is part of the Finance Brokers Association of Australia.

Finally, ask them about lenders and loans 

  1. How many lenders are on your panel? And who are they?

You probably know that mortgage brokers organise loans through a variety of lenders. But what you might not realise is that different brokers work with different lenders – and that brokers can’t work with a particular institution unless they’ve received accreditation from that institution.

That’s why you want to discover which lenders the broker works with. Brokers generally have between 10 and 30 lenders on their panel; some might have as many as 40. Bear in mind, though, that there are about 150 home loan lenders in Australia, so even brokers with big panels will be accredited with just a minority of lenders.

  1. Why did you choose those particular loans?

Assuming you do engage the services of a particular broker, the time will come when that broker presents you with several home loan recommendations. Naturally, you should then ask the broker to justify their selection.

The broker should then explain why those mortgage loans are best suited to your unique circumstances. The explanation might touch on several things:

  • Interest rate (e.g. 4.50 per cent)
  • Interest rate type (variable or fixed)
  • Interest rate structure (principal and interest or interest-only)
  • Loan features (e.g. offset account, redraw facility, extra repayments)
  • Loan fees (e.g. upfront fees, monthly fees, discharge fees)
  • Loan-to-value ratio, or LVR (which might influence whether you have to pay lender’s mortgage insurance, or LMI)
  1. What are the pros and cons of each loan?

Now that the broker has presented you with a shortlist of home loans, you’ll need to choose your favourite. First, though, ask question #10. That way, you’ll be making the most informed decision.

 

What are the pros and cons of using a mortgage broker?

Pros
  • Brokers work with a range of lenders
  • They negotiate with lenders on your behalf
  • They get paid by the lender not by you
Cons
  • Brokers work with only a minority of lenders
  • It’s in their interests to stay friendly with lenders
  • They might force through a loan to earn a commission

 

 

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Learn more about home loans

What do mortgage brokers do?

Mortgage brokers are finance professionals who help borrowers organise home loans with lenders. As such, they act as middlemen between borrowers and lenders.

While bank staff recommend home loan products only from their own employer, brokers are independent, so they can recommend products from a range of institutions.

Brokers need to be accredited with a particular lender to be able to work with that lender. A typical broker will be accredited with anywhere from 10 to 30 lenders – the big four banks, as well as a range of smaller banks, credit unions and non-bank lenders.

As a general rule, brokers don’t charge consumers for their services; instead, they receive commissions from lenders whenever they place a borrower with that institution.

How can I get a home loan with bad credit?

If you want to get a home loan with bad credit, you need to convince a lender that your problems are behind you and that you will, indeed, be able to repay a mortgage.

One step you might want to take is to visit a mortgage broker who specialises in bad credit home loans (also known as ‘non-conforming home loans’ or ‘sub-prime home loans’). An experienced broker will know which lenders to approach, and how to plead your case with each of them.

Two points to bear in mind are:

  • Many home loan lenders don’t provide bad credit mortgages
  • Each lender has its own policies, and therefore favours different things

If you’d prefer to directly approach the lender yourself, you’re more likely to find success with smaller non-bank lenders that specialise in bad credit home loans (as opposed to bigger banks that prefer ‘vanilla’ mortgages). That’s because these smaller lenders are more likely to treat you as a unique individual rather than judge you according to a one-size-fits-all policy.

Lenders try to minimise their risk, so if you want to get a home loan with bad credit, you need to do everything you can to convince lenders that you’re safer than your credit history might suggest. If possible, provide paperwork that shows:

  • You have a secure job
  • You have a steady income
  • You’ve been reducing your debts
  • You’ve been increasing your savings

How do I take out a low-deposit home loan?

If you want to take out a low-deposit home loan, it might be a good idea to consult a mortgage broker who can give you professional financial advice and organise the mortgage for you.

Another way to take out a low-deposit home loan is to do your own research with a comparison website like RateCity. Once you’ve identified your preferred mortgage, you can apply through RateCity or go direct to the lender.

What is a bad credit home loan?

A bad credit home loan is a mortgage for people with a low credit score. Lenders regard bad credit borrowers as riskier than ‘vanilla’ borrowers, so they tend to charge higher interest rates for bad credit home loans.

If you want a bad credit home loan, you’re more likely to get approved by a small non-bank lender than by a big four bank or another mainstream lender.

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

Who offers 40 year mortgages?

Home loans spanning 40 years are offered by select lenders, though the loan period is much longer than a standard 30-year home loan. You're more likely to find a maximum of 35 years, such as is the case with Teacher’s Mutual Bank

Currently, 40 year home loan lenders in Australia include AlphaBeta Money, BCU, G&C Mutual Bank, Pepper, and Sydney Mutual Bank.

Even though these lengthier loans 35 to 40 year loans do exist on the market, they are not overwhelmingly popular, as the extra interest you pay compared to a 30-year loan can be over $100,000 or more.

What is an interest-only loan? How do I work out interest-only loan repayments?

An ‘interest-only’ loan is a loan where the borrower is only required to pay back the interest on the loan. Typically, banks will only let lenders do this for a fixed period of time – often five years – however some lenders will be happy to extend this.

Interest-only loans are popular with investors who aren’t keen on putting a lot of capital into their investment property. It is also a handy feature for people who need to reduce their mortgage repayments for a short period of time while they are travelling overseas, or taking time off to look after a new family member, for example.

While moving on to interest-only will make your monthly repayments cheaper, ultimately, you will end up paying your bank thousands of dollars extra in interest to make up for the time where you weren’t paying off the principal.

Who has the best home loan?

Determining who has the ‘best’ home loan really does depend on your own personal circumstances and requirements. It may be tempting to judge a loan merely on the interest rate but there can be added value in the extras on offer, such as offset and redraw facilities, that aren’t available with all low rate loans.

To determine which loan is the best for you, think about whether you would prefer the consistency of a fixed loan or the flexibility and potential benefits of a variable loan. Then determine which features will be necessary throughout the life of your loan. Thirdly, consider how much you are willing to pay in fees for the loan you want. Once you find the perfect combination of these three elements you are on your way to determining the best loan for you. 

Are bad credit home loans dangerous?

Bad credit home loans can be dangerous if the borrower signs up for a loan they’ll struggle to repay. This might occur if the borrower takes out a mortgage at the limit of their financial capacity, especially if they have some combination of a low income, an insecure job and poor savings habits.

Bad credit home loans can also be dangerous if the borrower buys a home in a stagnant or falling market – because if the home has to be sold, they might be left with ‘negative equity’ (where the home is worth less than the mortgage).

That said, bad credit home loans can work out well if the borrower is able to repay the mortgage – for example, if they borrow conservatively, have a decent income, a secure job and good savings habits. Another good sign is if the borrower buys a property in a market that is likely to rise over the long term.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

What's wrong with traditional ratings systems?

They’re impersonal 

Most comparison sites give you information about rates, fees and features, but expect you’ll pay more with a low advertised rate and $400 ongoing fee or a slightly higher rate and no ongoing fee. The answer is different for each borrower and depends on a number of variables, in particular how big your loan is. Comparisons are either done based on just today or projected over a full 25 or 30 year loan. That’s not how people borrow these days. While you may take a 30 year loan, most borrowers will either upgrade their house or switch their home loan within the first five years. 

You’re also expected to know exactly which features you want. This is fine for the experienced borrower, but most people know some flexibility is a good thing, but don’t know exactly which features offer more flexibility than others. 

What is the flexibility score?

Today’s home loans often try to lure borrowers with a range of flexible features, including offset accounts, redraw facilities, repayment frequency options, repayment holidays, split loan options and portability. Real Time Ratings™ weights each of these features based on popularity and gives loans a ‘flexibility score’ based on how much they cater to borrowers’ needs over time. The aim is to give a higher score to loans which give borrowers more features and options.

They’re not always timely

In today’s competitive home loan market, lenders are releasing new offers almost daily. These offers are often some of the most attractive deals in the market, but won’t get rated by traditional ratings systems for up to a year. 

The assumptions are out of date 

The comparison rate is based on a loan size of $150,000 and a loan term of 25 years. However, the typical loan size is much higher than that. Million dollar loans are becoming increasingly common, especially if you live in metropolitan parts of Australia, like Sydney and Melbourne. It’s also uncommon for borrowers to hold a loan for 25 years. The typical shelf life for a home loan is a few years. 

The other problem is because it’s a percentage, the difference between 3.9 or 3.7 per cent on a $500,000 doesn’t sound like much, but equals around $683 a year. Real Time Ratings™ not only looks at the difference in the monthly repayments, but it will work out the actual cost difference once fees are taken into consideration. 

I can't pick a loan. Should I apply to multiple lenders?

Applying for home loans with multiple lenders at once can affect your credit history, as multiple loan applications in short succession can make you look like a risky borrower. Comparing home loans from different lenders, assessing their features and benefits, and making one application to a preferred lender may help to improve your chances of success

How do I know if I have to pay LMI?

Each lender has its own policies, but as a general rule you will have to pay lender’s mortgage insurance (LMI) if your loan-to-value ratio (LVR) exceeds 80 per cent. This applies whether you’re taking out a new home loan or you’re refinancing.

If you’re looking to buy a property, you can use this LMI calculator to work out how much you’re likely to be charged in LMI.

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.