Summary: More than 50% of Australians use a mortgage broker - like Mortgage Choice or Aussie Home Loans - to arrange their property loans. These borrowers are persuaded that mortgage brokers are the best way to find the cheapest offer and most suitable product, as well as provide expert advice. Amazingly, this is supposedly "at no cost to you" - the borrower - as the lender pays the broker.
In this post, I demonstrate that the vast majority of these borrowers would be better off by tens of thousands of dollars by using an independent comparison site like Mozo not a mortgage broker and learning how to think through major financial decisions themselves and identify the best option. If you're unwilling to do this mental "legwork" for one of the biggest financial decisions of your life, it's likely you'll always be an easy meal for financial parasites in every aspect of your life.
Despite their best efforts, there may be some people who still need personal assistance. You could start by talking directly to the lowest cost mortgage providers that have branches or phone advisors. However, you'd be best off consulting a financially-savvy relative or friend. Have them over for dinner or buy them a meal in return. It's a lot cheaper than needlessly paying several thousand dollars in broker commissions.
Gain: In just the first 5 years, save $6,800 in broker commissions on a $400,000 loan or $13,600 on a $800,000 loan. Plus from the 6th year onwards: $1,200/yr for a $400,000 loan or $2,400/yr for a $800,000 loan.
How borrowing via a mortgage broker is marketed:
Here's how Mortgage Choice, Australia's biggest mortgage broker, explains the value of using a broker:
The reality of borrowing (especially large sums) is very different:
- Sensible borrowing shouldn't be complicated with options, features, bells and whistles. These are mostly just devices to distract you from minimising the cost.
- You do need to understand it yourself if you want the best outcome (financial education not product sales "advice").
- The most useful, unbiased financial education won't be obtained from anyone selling a product or service.
- If you really struggle with the maths or making personal finance decisions, you should work on this before taking on hundreds of thousands of dollars of debt.
- A universal principle of economics is: there are no free lunches. Anyone indicating you can get something of value at no cost is dishonestly trying to hide how they make their money from you.
- The upfront cost of a mortgage broker is ~0.065% of the loan amount. Trailing commissions are typically 0.15% to 0.2% for each year the loan remains with the provider. The borrower is the only source of revenue in any loan so the more parties there are taking a cut, the more likely it is the borrower is paying more than they need to.
- So not only are mortage brokers at full cost to you but the costs are considerable. The upfront mortgage broker cost is around 0.065% of the loan value. This equals $2,600 on a $400,000 loan or $5,200 on an $800,000 loan.
- The borrower is also funding trailing commissions to the mortgage broker as long as that loan remains with the lender. In the table below, you can see the typical trailing commission rates start at 0.015% and go up to 0.02-0.03% in the first five years. On a $400,000 loan from NAB this equals $600 + $600 + $800 + $1000 + $1200 in the first five years. Trailing commissions continue past the 5th year at the same rate.
- On a typical $400,000 loan the actual cost of a mortgage broker to the borrower is around $6,800 over just the first 5 years. The bigger the loan, the bigger this cost gets. On a typical $800,000 loan the cost to the borrower is around $13,600 over just the first 5 years.
- There are no worthwhile loan products or deals only available via mortgage brokers that the borrower couldn't get themselves directly from the loan provider. Mortgage brokers are just a channel for selling products from multiple vendors but they do not offer a unique loan customisation service.
- Given a borrower can obtain a wider range of products directly from loan providers and efficiently via comprehensive product finder/comparison websites like Mozo, each borrower should ask themselves whether the personalised service they would be getting is worth several thousand dollars.
- If at the start you don't feel you have the knowledge or maths ability to effectively evaluate loan products and choose the best one for your circumstances, you should see this as a critical opportunity to obtain these important skills as they are necessary to save money and make smart financial decisions throughout your life.
. If you're unwilling to do this mental "legwork" for one of the biggest financial decisions of your life, it's likely you'll always be an easy meal for financial vultures in every aspect of your life.
- The proof of whether any mortgage broker is costing you money is whether they can offer you a deal equivalent to the cheapest loan in the market. The cheapest of the online-only arms of the major lenders is a good comparison. In Australia, UBank (the online-only arm of NAB) is always worth comparing against as it will be very close to the best value.
So how should you get a mortgage?
1. Go to a truly independent, comprehensive mortgage product comparison site. E.g. Canstar - Home loans or Mozo - Home loans
- Many commercial comparison sites only list loans which they receive money to promote. Other sites like Finder.com.au can be useful but are not completely impartial as they do not list all products as they make money from specific providers
2. Filter the listings to shortlist the products with the most sensible and suitable options
3. Make a shortlist of the best value products and talk to the provider about any queries
With guidance from the best, independent personal finance journalists or bloggers you can also take shortcuts to quickly identify some of the most reliably competitive providers.
In Australia, UBank products (backed by NAB) are either the best or very close to it so are always worth considering or comparing any alternative against.
Currently new owner occupiers paying principal and interest loans can get them at 3.99% which is the cheapest available with minimum fees and all essential options/flexibility.
See: UBank - Home loan interest rates
Further Info:
Choice Magazine
> Mortgage broker investigation
Mozo
> 4 things mortgage brokers will never tell you
Canstar - Home loans
Mozo - Home loans
Finder.com.au
> Home loans
ASIC MoneySmart
> Home loans - Using a broker
Uno Home Loans
Barefoot Investor
> The Forty Thousand Dollar Phone Call
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