Few of us are confident wheeling and dealing for the best home loan.
Being on first-name terms with your bank manager used to be a sure-fire way of planning your financial future. These days, though, many people have little need to visit the bank where their accounts are held.
Millions use internet banking and eftpos and this arm’s-length approach is becoming the norm when negotiating housing loans.
It’s hard to believe that the go-between services of mortgage brokers have been available in Australia for only the past 17 years. Yet today, they are involved in setting up 40 per cent of all home loans.
Brokers have become hugely popular because they give their clients access to numerous lenders and a variety of products.
A good broker will provide you with detailed advice on your borrowing options and an understanding of the different finance packages available. You won’t get this “helicopter view” by speaking to a lone bank manager.
Phil Naylor, the chief executive of the Mortgage and Finance Association of Australia (MFAA), says consumers like the idea of having someone else do the legwork involved in applying for a loan.
“Consumers can see they have access to a much wider range of loan products and lenders and that it’s hard for one person to sift through that information,” he says.
Many people think brokers provide unbiased advice. This is true up to a point – they are required under the new National Consumer Credit Protection Act to do a preliminary assessment of each client’s financial circumstances and then recommend only “suitable” loans.
Brokers are also governed by industry codes of conduct. However, they earn their income from commissions paid by lenders. It’s important to ask how these commissions work and how they influence the financial products and loans that are offered.
With the onset of the global financial crisis, many banks reduced the commissions paid to mortgage brokers for directing loan business their way. The leading banks also became more competitive, with non-bank lenders and brokers pitching for home loans.
During the past three years, loan finance has also become harder to secure and lending criteria has been tightened. These are key factors that have helped boost the popularity of brokers, because few people have the stomach to deal with lenders that continually change their lending criteria.
Investors prefer to use brokers, particularly those with a number of properties who are keen to increase the size of their portfolio.
This is because they will get more finance by accessing multiple lenders through a broker than if they obtain all their loans from the one bank.
People should take care to canvass all their borrowing options, says competition law expert Frank Zumbo, an associate professor with the University of NSW.
“Consumers need to shop around, be on their guard and play hardball when they are negotiating a loan, whether it is with a mortgage broker or directly with the bank,” he says.
“You are going to be paying down any loan for quite a while, so you have to ask all the questions before you go into it. Talk to a number of mortgage brokers and talk to the banks directly and to credit unions and play them off against one another. It’s not unknown for someone to go into a bank and say, ‘Look, I’ve got a better deal’.”
Professor Zumbo believes there is a looming prospect of reduced competition in the loan market. By cutting commissions, the banks have used their market power to “screw down” brokers and some have gone out of business.
Mr Naylor confirms this trend, saying membership of the MFAA has dropped from 13,800 members before the GFC to fewer than 12,000.
He says the banks have increased their share of the home-loan market from 75 per cent to 90 per cent since the crisis hit, largely at the expense of non-bank lenders.