Understanding the Importance of Mortgage Brokers
It is no secret… Yes, the Commission’s investigation regarding the lending industry is done and dusted.
But it is essential for Australians to understand how critical the services of brokers are in the banking and finance industry and industries such as insurance.
Although the investigation was ordered because of misconduct among banks, brokers were also targeted.
However, only 1% of the complaints about the lending industry were about brokers.
Mortgage brokers connect home buyers with personalised loan options and give them advice about upfront, ongoing and ending costs. They help people find affordable loan products. The indirect commission structure is spaced out to make broker services affordable.
It was suggested that homebuyers might have to pay upfront fees for the services of brokers. Since they already have many other expenses surrounding settlement time, this would make it hard for them to afford the valuable services of a broker.
This guide is designed to help you understand the profound benefits and value that brokers provide and why their services are so critical.
It will help you understand their connection to affordable loan products, competition and the health of the economy.
By the end of the guide, you will also have a better understanding of their roles in helping consumers and keeping the lending ecosystem in balance.
What Is the Impact of Mortgage Brokers on the Home Loan Market?
According to the latest report from the Mortgage and Finance Association of Australia, brokers reached their highest home loan market share percentage in history last year.
This growth was especially impressive since the home loan market saw a decrease of $8.46 billion between the same periods in 2017 and 2018.
During the September 2018 quarter, brokers brought in 59.1% of home loans across the country. In 2017, their market share for the same period was 55.7%. That was a slight increase from 53.6% in 2016. Broker volume during the period between 2017 and 2018 fell by about 3%.
However, the market share increase happening despite the decline shows impressive broker outcomes.
MFAA’s CEO said that those numbers showed the confidence and trust that consumers put in brokers. Also, at a time when the future of mortgage brokers looks uncertain, the growth shows the importance of preserving their services.
As the CEO pointed out, brokers provide valuable assistance to help people who need home loans from an ever-tightening lending industry. The MFAA’s data came from Comparator. The entity collects statistics every quarter and calculates loan values from 18 leading aggregators and brokers.
Are Buyers More Satisfied With Brokers?
According to statistics from the MFAA, buyer satisfaction with brokers has stayed above 90% for many years. Recently, it rose above 95%. More than 95% of the interviewed participants also said that they would choose a broker again in the future. In comparison, slightly more than 65% of buyers reported feeling satisfied after dealing with a major lender directly.
Do Brokers Offer More Options?
On average, brokers give home shoppers access to more than 30 lenders. Most brokers know about alternative lenders that big banks will not suggest.
Since lenders themselves are in the business of extending loans, it does not benefit them to recommend competitors. However, brokers are in the business of helping people find the right type of loan. If buyers were to search on their own, they would likely not find as many small lending options.
Do Brokers Offer a Personalised Service?
Good brokers know which lenders can help buyers with special circumstances or limitations. If a buyer does not have money for a deposit on a home or wants to compare refinancing options, a broker can help.
Since brokers know about mainstream and alternative lending options, they know how to connect people with loans that fit one or more complex needs. Also, they help them find loans that they can afford in terms of long-term payments and upfront fees.
Personalised services and more options are especially important to the many home buyers in rural areas of Australia. In many cases, lower-income and special circumstances apply to most rural home buyers.
Do Brokers Put Clients First?
A broker’s job is to advocate for real estate buyers. In a competitive market, this means that clients benefit the most. Brokers work hard to earn good ratings and referrals from their clients. To do this, they know that they must provide valuable advice and services.
According to a 2018 survey from the Finance Brokers Association of Australia, more than 90% of respondents said that they were satisfied with the following broker skills:
- Competency and knowledge of the lending industry.
- Understanding of individual needs, financial situation and circumstances.
- Working toward the client’s best interest.
- Commitment to maintaining a strong broker-client relationship.
Do Brokers Have Adequate Experience?
According to a 2018 report, the average mortgage broker has about 13.8 years of experience. While some brokers have fewer or more years, they make a commitment to continuous learning. There are several groups that offer initial and ongoing education for brokers. More than 60% of brokers have additional professional skills beyond their qualifications for mortgage broking.
If recent recommendations are anything to go off the future of broking may look uncertain. However, the structure of the industry promotes healthy competition. One of the benefits of that is the desire of brokers to be the best. To gain experience, they know that they need education. Brokers who are eager to learn and provide the best services to gain more experience are valuable to any home buyer.
Since most brokers have plenty of valuable experience, they can offer insights and suggestions that home buyers may never hear directly from big banks or other major lenders. Many inexperienced or new brokers work in firms or with experienced brokers, which means that they are supervised.
Do Brokers Keep Mortgages More Affordable?
Since brokers can find better loan rates for many people, they help keep the average interest costs lower. By doing this, they make the overall experience of home financing cheaper. According to a 2018 report from the FBAA, brokers have been an integral part of the net interest fall of the past three decades. During that time, net interest dropped by more than three percentage points in Australia. This was reported by the CEO of the MFAA.
Do Brokers Improve the Economy?
When there are more activity and competition in the lending market, it can improve the economy. Australians who can save money on their mortgage payments have more money to spend elsewhere or on necessities.
A Mortgage Business report from earlier in 2019 highlighted the market share decline of the four major banks in Australia’s home loan industry. One key factor that it emphasised was the shift of consumers toward small and virtual lenders.
Brokers are responsible for connecting home shoppers with most of these lenders, and non-major lenders offer attractive benefits. Some examples include mobile app features and simplified application processes.
Most of the home loans that were submitted through one Australias most popular firms were with non-major lenders. An earlier report from 2017 showed that brokers were responsible for distributing the services of small lenders enough to equal the work of 118 branches.
This highlights the importance of the interdependence between brokers and small lenders. They both keep the market more competitive, which is essential for keeping costs lower.
Another way that brokers contribute to economic health is through job creation. In 2017, the mortgage broking industry accounted for more than 27,100 FTE (full-time equivalent) Read more: http://www.businessdictionary.com/definition/full-time-equivalent-FTE.htmljobs.
This benefits Australians everywhere. If the commission structure for brokers were to change, it could mean the potential loss of up to 27,000 FTE jobs in the future. However, if market growth is allowed to continue with their valuable services, there could be modest job growth among brokers.
Understanding the Role of a Mortgage Broker
After you read the previous sections, you may assume that banks are against brokers as competitors. This is not completely true. While brokers are often the big banks’ competitors in initiating new contracts in the home loan industry, brokers are responsible for bringing all banks more business. Although many of the loans that brokers help borrowers find are through smaller lenders, they also help many people find loans through major banks. Think of the role of a broker as an interconnected triangle between you and the lender.
This is a summary of a broker’s role in the home loan process:
- Your broker establishes your position to support you.
- When your broker helps you find the right loan, the lender offers you the funds and a contract.
- As you make your loan payments, the lender collects interest.
- When the lender receives your payments, the broker is compensated with a trail structure.
Understanding the Mortgage Ecosystem
In 2018, MPA wrote about how big banks were tightening their criteria for borrowers. That made the year a brighter one for non-bank lenders and online lending platforms. With banks about to see a restricted flow of business from tightening lending rules, they cannot afford to lose the extra business that brokers bring them. They know that many consumers recognize brokers as advocates who can give them more personalised services and more in-depth advice.
Banks and big lenders know that they must accept this reality and appreciate the extra business that brokers generate. This is also true for other key players in the mortgage ecosystem. Each party in the ecosystem plays an important role. This summary will help you understand those roles and their connections.
Lenders are the ultimate finance providers.
Categories of lenders in Australia include:
- Several mid-tier banks.
- The country’s four major banks.
- Credit unions and other customer-owned institutions.
- Non-bank lenders and online platforms.
- International banks.
Lenders are often categorised as authorised deposit-taking institutions or non-ADIs. Although ADIs held more than 90% of the home loans in the country in 2017, a 2019 report from the Reserve Bank of Australia reported that non-ADIs were steadily growing in popularity.
Their growth can be attributed to changing bank culture, higher consumer household debt and the slowing housing market. Non-ADIs often use wholesale markets for funding and are privately owned. While non-ADIs use sales teams, mobile marketing and online comparison sites to promote their services, a large percentage of their business comes from broker recommendations.
These professionals connect brokers with lenders. Their connections are usually vast and depend on what they offer. With potential aggregators, these are some important considerations:
- Their chosen panel of lenders and diversified lending products.
- Their development and training program offerings for brokers.
- Their licensing options and credibility in the industry.
- Their business practices, promotional support and CRM software programs for brokers.
- Their regulatory compliance information and loan information.
By now, you know that mortgage brokers provide you with lending options and advice. They can use several business models. Their chosen model usually depends on their contracts or arrangements with other entities. They may be part of a franchise. Some brokers use a fee-for-service model or a commission-based model.
Referrers are companies or individuals with lists of consumer information. They collect voluntary information from consumers who are interested in home loans. That information is used to refer them to brokers. Unlike brokers, referrers cannot offer any financial or credit services.
These sites collect information about brokers or lenders. They often rely on ads or click-through compensation structures. The sites provide consumers with free search services. Comparison sites show consumers various loan products with key information highlighted. For example, a home buyer may see estimated interest rates, loan terms and deposit information to compare among several lenders. Although people must still go to a broker or a lender to start the buying process, these sites are useful to shoppers who want to confirm information from a lender or a broker. Also, these sites are useful to lenders for lead generation.
The final component of the ecosystem is the consumer. As a part of this category, you may have your own reason for using a mortgage broker. For example, you may be an investor who wants to buy a commercial property in another part of the country. A broker who lives in that area and is familiar with state or territory laws is an asset to you.
If you are a first home buyer, you are probably someone who needs an advocate to walk you through the complex process of buying a property. A broker ensures that you and your financial interests are protected. Some consumers are existing mortgage holders who want to refinance.
Since there are many fees associated with switching loans, it helps to have a broker who can recommend the most affordable options or advise if it is better to wait. You may also have special requirements. For example, you may be self-employed or may have a limited credit history.
Why All Australians Should Support Brokers
The success of aggregators, comparison sites and referrers is connected to brokers. Just as bees positively affect everything from crop health to food prices, mortgage brokers positively impact everything from economic health to property finance costs. This applies to both residential and commercial buyers.
Brokers help their clients save time by completing tasks that would take an average person-hours, days or even weeks to complete. They save them money by finding little-known grants, discounts or special loans that fit their unique sets of needs.
The home loan industry has gained many benefits from their services, and many non-broker entities in the industry hope to see better broker protection in the future to preserve these benefits.