There has been articles in the press lately about the possibility of mortgage brokers going out of their way to push clients into taking out bigger loans so that they get paid bigger commissions from lenders. I wanted to comment on this since, while is sounds like a good story, the practicalities of it are quite a bit more challenging and unlikely to occur.
Let me say up front - yes, mortgage brokers are paid by the lenders based on a % of the loan amount. This comes in the form of an upfront payment of around 0.6% and a trailing payment of around 0.15% per annum of the balance of the borrowings. This is a payment in return for the broker services which includes searching for the loan, talking to lenders, doing the loan application, talking to the assessors and working with conveyancers and sometimes accountants.
Now back to the theory that mortgage brokers go out of their way to jack up loan amounts.
Firstly - it is hard to do. Customers know what they want to buy, they know the buying costs, they know how much deposit they have saved. The math is pretty simple to work out how much they need to borrow. For a mortgage broker to say "Oh let's increase the borrowing amount by an extra $50,000" then they will get the customer response of "Why? I don't need any more". I don't know about you but I just can't see how you would be convinced to borrow more than you need.
Secondly - let's say the morgage broker was able to convince a client to get into debt by an extra $50,000 for no great reason, what would the broker stand to gain? They would get an extra 0.6% upfront, which in this case would be $300 and an extra $75/year in trailing commission.
Would any broker risk their credit representative status for the sake of an extra $375? I seriously doubt it and any that do don't deserve to be operating. Their licensee will be checking their loans regularly and a pattern will emerge fairly obviously if they consistently write loans where clients are borrowing more than they need.
A tip for dealing with a mortgage broker is to be on the lookout for any suggestion that you should be borrowing more than you really need. If you feel that they are overly pushy then it will pay to shop around for a new mortgage broker.
Getting the lowest rate home loan is something we all strive for when taking out a new loan. However, there are attributes of your loan requirements that determine what rates are available to you. Some things you can control and others you can't. At the end of the day, lenders will offer lower rates for lower risk loans. Let's explore some of the more common factors.
One of the biggest influences on what rate you can get is the loan-to-value ratio (LVR). Put simply, this is how much you are borrowing versus the value of the property that you are purchasing. LVRs of 60% can drive much better rates than LVR's of 95%. In essence, having more deposit (resulting in a lower LVR) means you usually get lower rates.
The purpose of the loan makes a big difference. Owner-occupier lending, where you intend to live in the property, will get much better rates than when you are borrowing as an investor.
Many lenders offer better rates for larger loan amounts. Typically loans over $750,000 will often open up improved rates. While lower loan amounts still command good rates, your ability to negotiate a lower rate improves with loan size.
Most lenders now charge more for interest-only loans so that they can limit the amount of investment lending as per APRA's requirements. Consequently, interest-only rates are typically 0.4% - 0.5% higher than principal+interest rates. Going with principal+interest will improve the rates on offer.
No-frills loans, those without features such as offset accounts, will often provide lower rates. Loans with monthly fees or larger application will also give you lower interest rares. Be careful here since the fees can add up quickly and make what looks like a great rate loan turn in to quite an expensive one.
Tier of Lender
The tier of lender can often impact rates. It is no secret that the big four tend to charge more, on average, for home loan rates since they have a lot more invested in bricks and mortar branches. Tier 2 lenders will usually offer lower rates. Being flexible on lenders can usually open up more attractive rate options.
Other factors that can improve the rates on offer include having the property located in a metropolitan area, being employed in a full time job with the same employer for more than 6 months and having genuine savings.
As you can see, it is quite complex and sometimes very confusing. A mortgage broker can help since they will compare the rates and fees of loans and will be able to assist you with finding the best product in the market based on your lending needs.