What does a mortgage broker do, and when should you use one?

The short answer

A mortgage broker assesses your position, works out which lenders would accept it, recommends one, and then runs the application through to settlement. The lender still makes the credit decision. The broker decides which lender is asked.

Use a broker when your situation needs a lender chosen carefully. Self-employment, variable income, an unusual property, a past credit issue, a tight servicing position, or simply not knowing where to start are all cases where lender selection is most of the outcome.

Going direct can make sense when your file is simple, you have a long relationship with your bank, and you are confident that what it is offering is competitive. Even then, it is worth knowing what else was available before you sign.

What a mortgage broker actually does, start to finish

Most of the job is invisible, because most of it happens before an application exists. By the time a lender sees your file, the decisions that determine the answer have already been made.

1. 1

   Works out your position

   Income, commitments, deposit, credit history and what you are trying to buy. Nothing is submitted anywhere at this stage, so no credit enquiry is recorded against you.

2. 2

   Shortlists the lenders that fit it

   Credit policy differs by lender on income type, property type, deposit source and employment history. The shortlist is the lenders whose rules your circumstances actually meet.

3. 3

   Explains the trade-offs and recommends one

   Rate, fees, structure and policy fit, set out so you can see why one lender is being put in front of you rather than another.

4. 4

   Builds and submits the application

   The file is assembled for that lender's credit assessor, with the supporting documents and the explanations they will ask for already in it.

5. 5

   Manages the lender, the valuer and the settlement agent

   Chasing the valuation, answering the assessor's questions and keeping the settlement date honest is work somebody has to do. Without a broker, that somebody is you.

6. 6

   Stays with the loan after settlement

   Rates move, fixed terms expire and circumstances change. A loan nobody reviews is a loan slowly drifting away from the market.

The formal name for the work is credit assistance, and it is regulated. A broker has to hold or operate under an Australian credit licence, which is why a licence number appears at the foot of this page.

What a bank can and cannot do for you

A bank lender knows one credit policy extremely well: its own. If your circumstances fit that policy, the process can be quick and straightforward.

What a bank cannot do is tell you that another lender would lend you more, price you better, or take a view on your income that it will not. It is not being dishonest by staying quiet about that. It simply is not its job.

The limitation shows up hardest when the answer is no. A decline from your own bank tells you nothing about what forty other lenders would have said, and by that point you have a credit enquiry on your file.

What a broker does that a bank cannot

A broker's job is lender selection first and paperwork second. That means matching your circumstances to the credit policies most likely to accept them, before anything is submitted anywhere.

• Compares many lenders, bank and non-bank, against your actual position
• Knows which policies treat overtime, bonus, commission or self-employed income generously
• Knows which lenders are comfortable with the property type you are buying
• Builds the file so the credit assessor has fewer reasons to come back with questions
• Handles the follow-up with the lender, the valuer and the settlement agent
• Stays involved after settlement, when rates and circumstances move

None of that guarantees an approval or a particular rate. Lending is subject to the lender's assessment and to your circumstances, and any broker who tells you otherwise is not being straight with you.

Who pays the broker

For most residential home loans there is no fee to you. The lender pays the broker a commission when the loan settles, and the rate you are offered is not increased to fund it.

There are exceptions. Some commercial, development and specialist files carry a fee, and where one applies you are told the amount in writing before any work starts.

How the commission is structured, when it is disclosed to you, and why it does not decide the recommendation are covered properly in our guide on how mortgage brokers get paid.

The best interests duty

Mortgage brokers in Australia operate under a legal best interests duty. It requires the broker to act in the interests of the client when providing credit assistance, and it is enforceable.

Staff selling their own employer's loans are not subject to that duty. They are governed by responsible lending obligations and by their employer's own standards, which is a different thing.

It is worth knowing the distinction exists, because it changes what each party is obliged to weigh up on your behalf.

Where the bank is the better answer

A broker who claims the bank is never the right answer is selling, not advising. There are real cases where going direct works better.

• You have a long relationship with your bank and it has offered pricing that stands up to comparison
• Your file is simple and your income is salaried and stable
• You want a product or feature only that lender offers, and you have checked that it is worth the trade-off
• You are doing a straightforward rate review on an existing loan with the same lender

Even in those cases, one comparison conversation costs you nothing and no credit enquiry. If the bank's offer is genuinely good, you will find that out and proceed with more confidence.

What actually happens in each case

The theory matters less than the sequence. Here is what the two routes look like from where you are sitting.

Going direct to a bank

1. 1

   You approach one lender

   Usually your own, and usually because you already bank there rather than because you compared anything.

2. 2

   It assesses you against its own policy

   One credit policy, one view of your income, one set of property rules. The answer is yes, no, or a smaller number than you hoped.

3. 3

   You take the offer or start again

   If the answer does not suit, you approach another lender from scratch, with a credit enquiry already recorded.

Going through a broker

1. 1

   Your position is worked out first

   Income, commitments, deposit and the property type are assessed before anything is submitted anywhere, and no credit enquiry is recorded.

2. 2

   Lenders are shortlisted against your circumstances

   The ones whose policy fits your income type, your deposit position and the property are put in front of you, with the trade-offs explained.

3. 3

   One application goes to one lender

   The file is built for that lender's assessor, and the follow-up with the lender, the valuer and the settlement agent is handled for you.

The difference is where the comparison happens. In one case it happens after a decline, and in the other it happens before an application.

Questions worth asking either one

Whichever route you take, the same handful of questions will tell you quickly whether you are in good hands.

The questions themselves, and what a good answer to each one sounds like, are set out in our guide on what to ask a mortgage broker. Take them to a bank lender too — most of them work either way.

How to compare the two properly

Comparing on the advertised rate alone is how people end up in the wrong loan. The rate is one line in a structure that will be in place for decades.

Whatever you decide, get the comparison done before you lodge anything. Every application you make is recorded, and the order in which you approach lenders is worth thinking about.

Where to go next on this site

A broker is not only a home loan person. The same job — work out who would say yes, then go and ask them — is what happens on a commercial file, a development site or a build.

If you want the finance questions answered rather than the broker question, the guides below are the ones to read next. The borrowing power guide is where most people start.