Mortgage broker or direct to a bank?

What is a mortgage broker?

A mortgage broker (or mortgage adviser) is the middleman between the borrower and the bank or mortgage provider. Mortgage brokers provide value to borrowers by knowing all the lenders, interest rates and fine print, and helping to structure a mortgage that helps the borrower reach their financial goals faster.

Note: In this article we use the terms “Mortgage Broker” and “Mortgage Adviser” interchangeably.

In New Zealand all mortgage brokers are regulated by Financial Markets Authority. Mortgage brokers will usually have affiliations with a number of mortgage providers i.e. financial institutions like banks and credit unions, and sometimes other non-bank lenders. This means they can take care of the leg work for you in the refinancing or house-buying process.

A mortgage broker will usually offer their services free of charge to the borrower because they get paid their commission from the banks margin. The important thing to understand here is that you will not get a less favourable interest rate by going through a mortgage broker. In fact, it’s possible a broker may be able to get the best rate for you by negotiating with a number of loan providers.

Where a broker operates under this commission model they only get paid when you take out a loan through them. There’s nothing wrong with this model but you do need to understand that they have a vested interest in you taking out a loan.

A mortgage brokers’ job is to do the following:

• Understand your financial situation and understand what products are available in the market place.
• Use that information to hunt out the best options for you and present you with the best offers.
• Provide expertise to clients during the home buying process.
• Offer advice on whether to fix or float and how different mortgage products are suited specifically to your financial situation.
• When it comes to applying for a loan the broker should help you fill in any forms required and submit to the preferred lender..

How a mortgage broker differs from a salesman in a bank

The role that is done by a mortgage broker is very similar to the role a mortgage salesperson does at a bank or other financial institution. The main difference is that in a bank they can only sell the products from one provider (their own bank).

A broker should understand the marketplace and which lenders will be prepared to lend to you based on your financial situation i.e. if you have trouble borrowing because of your credit history, a broker will know which lenders will be willing to lend.

In both instances you will receive professional advice that will help you decide which mortgage product is right for you. There are many different mortgage products i.e. fixed, floating, revolving credit and offset, just to name a few variations, and picking the right one is key to the best use of your funds.

In New Zealand, not all banks are prepared to put business through brokers. The reason they do this is they see value in looking after customers’ total banking needs and want to keep a direct relationship with their customers. Banks are after all of your banking business and believe there is value in creating a relationship with you to look after your mortgage, credit cards, daily account management like cheque books, online banking etc. This is especially pertinent if you want to use bank products that are not covered by a broker such as credit cards, savings accounts and term deposits, to name a few.

The other side of this is that brokers do not have access to all lenders in the market place. Brokers work through organisations called aggregators, which give them access to a pool of lenders like banks and credit unions. It may be the case that the broker you are dealing with does not have access to a specific bank and hence cannot offer you their mortgage products. This is not a problem, just important that you as the borrower understand how it works and the value of shopping around.

How do I pick which one to use?

Whether you use a broker or go direct to a bank can only be decided by you based on your knowledge of the mortgage industry and your financial requirements. Just remember, it’s industry practice for both a broker and a bank salesperson to provide their services free to consumers (brokers are compensated by the institution providing the loan). Before jumping in and trying out different options, it’s important to check whether the bank or broker is able to accommodate your needs. While their services are free of charge, your credit history could be impacted if you jump the gun and apply for a mortgage through a bank that isn’t appropriate for your circumstances.

Awareness of the marketplace is key, there are not just brokers and banks out there. The New Zealand mortgage industry participants include Credit Unions, Building Societies, Finance Companies and even Peer to Peer lenders have entered the market in recent years (although more in the Personal Loans space).