Mortgage broker vs bank

Whether you’re applying for a home loan for the first time or refinancing an existing one, the mortgage broker vs bank conundrum is just one of several key decisions you’ll be faced with. 

In Australia about 70% of new residential home loans are facilitated by a broker. Clearly plenty of people see a benefit in taking the broker route.

But while there are some advantages to using a broker (particularly if you’re time-poor), there are some trade-offs.

Having completed the home loan application process both with and without the help of a broker in the past few years, I’ve seen first-hand the good and bad of both options. Read on for a full broker vs bank breakdown.

Understanding the roles: Mortgage brokers vs. banks

When deciding between a broker and going directly to a bank for your home loan, understanding what each actually does is a good starting point.

What does a mortgage broker do?

A mortgage broker is a financial professional who helps home loan borrowers find a suitable loan from a range of lenders. 

• They usually start by getting to know the borrower’s goals and financial situation .
• They can help borrowers understand how much they may be able to borrow based on their home loan deposit and other factors.
• They explain the different kinds of home loans, features, costs, and loan terms and conditions (like whether you’ll need to pay for lenders mortgage insurance).
• Based on the client’s needs, they present various home loan options from a pool of lenders.
• Brokers offer guidance on lenders’ credit policies and which ones may offer the best chances of approval.
• They usually also submit the home loan application to the lender on your behalf.

What does a lender do?

Lenders are financial institutions that issue home loans and other credit products directly to borrowers.

• They offer a range of home loan products targeted at different kinds of borrowers (e.g first home buyers, property investors).
• They set the interest rates and fees on their own products.
• They accept home loan applications directly from borrowers and through mortgage brokers.
• They assess the applicant’s financial situation and either approve or decline the application.
• Once a home loan is approved they provide the funds for a borrower to purchase a property.
• They then manage the home loan and the borrower’s repayments, and offer related services to the borrower (e.g. a mobile app, offset account etc.).

Is a mortgage broker an agent of the bank?

No, brokers don’t work for banks. Instead, they are separate businesses that have a relationship with multiple banks and other lenders. Brokers work on behalf of their clients (borrowers) and refer them to lenders in return for a commission, usually paid by the lender.

While most brokers receive payments from lenders for sending borrowers their way, they are legally obliged to act in your best interests. They are also required to prioritise customers’ interests when providing credit assistance.

The lending process with brokers vs banks

The process is usually fairly similar whether you apply for a home loan directly with a lender, or through a mortgage broker.

The main difference is that a broker will complete some of the steps in the process for you.

How do home loans work through a mortgage broker?

Here are the main steps involved if you apply for a home loan through a broker:

1. You meet with your broker so they can ask questions to get an understanding your situation and goals.
2. They may ask for documents to verify your financial situation.
3. They provide you with various home loan options from the lenders they work with.
4. They help submit your application.
5. They will keep you informed about the progress of your application until it’s approved and your home loan is settled.

How long does a mortgage application take through a broker?

This depends on how complicated your application is and which lender you ultimately apply with. The process from start to finish typically takes several weeks.

A home loan application won’t necessarily be any quicker with a mortgage broker. It may even add time to the process. But importantly, it may involve less of your time as the broker is doing some of the work involved for you.

How do home loans work if you go straight to the lender?

By contrast if you apply for a home direct with a lender, the process usually works like this:

1. You research home loan options and compare loans and different lenders.
2. You make a home loan application with your chosen lender (usually online but it can be done in person, at a branch or over the phone).
3. The lender will request documents to verify your income and expenses.
4. The lender will assess your application and inform you if it’s approved.

How long does a mortgage application take through a bank?

Again this will depend on the complexity of your application and how fast that particular lender is at assessing applications. Some online lenders can process home loan applications within a few days. But some banks will take weeks if they have a backlog of applications.

Unfortunately, it’s often the case that the lenders with the best home loan deals will also be the ones with the most applications from other borrowers sitting in the queue.

Is it easier to get a mortgage through a broker?

A mortgage broker will do a lot of the home loan research for you and will deal with the lender on your behalf. In that sense it generally is easier to get a mortgage through a broker.

If your situation is complex (e.g. you’re self-employed or you have bad credit), a mortgage broker can be particularly valuable in navigating lenders’ credit criteria and policies. Many first home buyers unfamiliar with the process also find it easier to apply with the help of a broker.

But if your situation is straightforward, applying for a home loan directly with a lender is generally no more difficult than doing it through a broker. This can be particularly true if you are refinancing your existing home loan and have a good amount of equity built up in your property.

Is it better to go to a bank or a mortgage broker?

Let’s look at some of the pros and cons of each to help you understand which options may be most suitable for you.

Pros of using a mortgage broker

• They will do a lot of the home loan research for you.
• They know the lenders’ policies, processes and lending criteria to help you get your loan approved.
• They may be able to negotiate the home loan interest rate on your behalf.

Cons of using a mortgage broker

• They usually only work with a select number of lenders, meaning your range of choices could be more limited.
• It’s not always obvious how some brokers are paid by lenders (some lenders offer incentives to brokers who sell their loans to clients).
• Doing research to find a good mortgage broker can be just as much work as researching home loans by yourself.

Pros of going direct to a lender

• By researching home loans for yourself you will have access to a wider range of options than a broker typically offers.
• Assuming the lender offers good customer service, you may be able to get answers to your questions faster than doing so via a broker.
• It saves lenders money if you apply directlt (no broker commission for them to pay) – you may be able to use this fact to your advantage when negotiating your interest rate with the lender.

Cons of going direct to a lender

• Comparing home loans by yourself can be daunting, particularly for first home buyers.
• With some lenders, the application process can be complicated and time-consuming.
• It can be challenging at times to get information about your application directly from a bank (be prepared to spend some time listening to hold music).

Are brokers safer than banks?

Both banks and mortgage brokers are heavily regulated in Australia (e.g. required to have an Australian credit licence. You’re generally well protected with either option. However, some borrowers find it reassuring to have an industry expert like a broker helping them. It’s not strictly necessary, though.

Comparing mortgages and interest rates

On the face of it, it should be possible to compare loans from more providers and find cheaper rates by going it alone. This is because mortgage brokers don’t work with all lenders in the market.

But that requires effort and if you are short on time to do the digging yourself, most brokers can find competitive interest rates among their pool of lenders.

You can always give yourself the best of both worlds and get options from a broker while keeping an eye on rates yourself. Your broker may not be too happy if you ultimately choose a lender they don’t work with, but finding a cheaper rate could save you thousands of dollars.

Can a mortgage broker get a lower rate?

In some instances, brokers may be able to negotiate a lower interest rate for you compared to the lender’s standard rates. Brokers have relationships with a wide range of lenders and can sometimes use those connections to your advantage. Just remember, there may still be cheaper rates out there among lenders the broker does not work with.

Broker fees vs bank fees

Fees are another consideration when weighing up a broker versus applying for your home loan with a bank. The good news is it generally won’t be any more expensive to use a broker compared to a bank.

Do brokers charge fees?

Borrowers generally don’t pay a fee to use the services of a mortgage broker. Instead, brokers earn their money by receiving a commission from lenders when they refer a client to them.

Just remember you’ll pay the standard home loan fees (application fees, ongoing fees etc.) whether you apply directly with a lender or through a broker.

How do brokers get paid by banks?

Brokers earn money from banks in a two main types of commission:

• Up-front commission: This is an initial payment from a lender to a broker for referring a borrower to them. It’s often a percentage of the loan value and can vary depending on the type of loan (e.g. owner occupier vs investment home loan)
• Trail commission: Brokers may also receive an ongoing commission from the lender for as long as their client remains with the lender and keeps up their repayments on the loan.

One important factor to note is that some banks will pay brokers higher rates of commission than others. It’s worth asking a broker up front about this so you know what financial incentives may be at play.

How to choose a mortgage broker?

If you’re considering going down the broker route, here are some factors to weigh up when it comes time to find a mortgage broker:

• What are their qualifications?
• How experienced are they helping other borrowers like you?
• How many lenders do they work with?
• Do they have special deals with particular lenders (e.g. higher commission rates)
• Have they been recommended to you by someone whose judgement you trust?
• Do they have good reviews from existing customers?

If you haven’t worked with a broker before, you could always arrange to meet a few different ones to get a sense of which one will be the best fit for you.

How to compare home loans?

If you decide to compare home loans by yourself, here are some of the key factors to look at:

• The type of loan (e.g. interest only vs principal and interest, and fixed vs variable interest rate are key factors)
• The interest rate
• Fees charged by the lender
• Loan features (like an offset account that could help you save on interest)
• How flexible is the loan for making extra repayment without a fee applying?
• How simple will the application process be?
• Does the lender have a good reputation (based on reviews) for customer service?

Impact on credit score in dealing with brokers and banks

The impact on your credit score likely won’t be any different if you use a broker or a bank for your home loan application.

The lender you apply with will do a credit check as part of the assessment process, whether you make the application direct or a broker submits it on your behalf. This is what’s sometimes called a ‘hard credit check’ that lenders usually complete when a borrower applies for credit.

If you use a broker, they may do what’s known as a ‘soft credit check’ to help get an understanding of your financial situation. This kind of check typically doesn’t affect your credit score.

If you are applying for a loan directly with a lender you can do a free credit score check yourself, so you know where you stand before applying.

If you’re applying directly, avoid making applications with multiple lenders, as this can damage your credit score. Instead, compare your options and only submit an application when you’re confident you have found the best home loan for your needs.

Sean Callery is the Editor of Money.com.au. He’s a finance writer and editor with more than 15 years of international experience across Australia, the UK and Ireland. His experience spans banking, lending, investing and insurance, as well as legal and consumer affairs.