How to get the right home loan
By Sarah Mills, ninemsn money
When you take out a loan, you are basically buying money. Money is a very simple commodity, which means you should be able to compare the price of loans (money) at a glance, in the same way you might compare a litre of fuel. In reality, this rarely happens.
Lenders understand that it is not in their interest (excuse the pun) to embark on a rate war with each other for market share and have instead opted to attach any number of bells and whistles to loans that ultimately obscure the true cost to the borrower.
Some of these bells and whistles, such as redraw facilities, can be very convenient, even desirable. What the borrower needs to know, however, is how much they are paying for that convenience.
The financial industry has largely resisted efforts to publish the "real" interest rate on a loan and the average borrower today is pretty much confounded by the thousands of home loans on the market offered by hundreds of lenders. Not even a rocket scientist could easily calculate the best home loan in the market today without a fairly sophisticated software package or strong industry knowledge.
This obfuscation, along with reduction in branch networks and strong competition for home loans, has in part been responsible for the mushrooming of the mortgage broker industry. Virtually non-existent 15 years ago, mortgage brokers now write at least 30 percent of all loans in Australia.
In theory, the mortgage broker's job is to be familiar with all the loans on the market so that when you enlist their services, they can find a loan that matches your circumstances and offer the best deal for you. They can save you time and money, help explain loan documents, costs and disbursements and even negotiate with the lender on your behalf.
Not all mortgage brokers, however, are working for you. Mortgage brokers make their money by receiving commissions from the lenders, which can affect their impartiality. Some have relationships with only a few lenders, which means you don't have access to all loans on the market. Others may only offer the products of one bank. Others may simply suggest to you the loan that pays them the highest commission, not the one that gives you the best deal.
Alas, the borrower is now like the old woman who swallowed the fly and then has to swallow a spider to catch the fly: it may have been difficult calculating the cheapest interest rate, but it can be even more difficult calculating the independence or honesty of a broker.
Tips for getting the best deal from mortgage brokers
- Sign a contract up front with the mortgage broker that fully outlines both parties' expectations and obligations.
- If you have a verbal agreement with a broker, get it in writing.
- Ask the mortgage broker how much the service will cost you and when you have to pay.
- Make sure your contract stipulates that the broker only gets paid if they get a loan that suits all your requirements.
- Don't pay an upfront free. Do not pay any fee until the lender has approved the loan.
- Ask if the broker belongs to an industry association and if that association has a dispute resolution policy.
- Discuss their methodology upfront. How do they identify the best solution? Is it commission-based?
- How many loans do they evaluate through that package and how many lenders do they represent?
- Call a range of finance brokers and ask about their charges and their offerings. Ask friends for recommendations.
- Do not sign anything without reading it carefully. Do not be pressured into signing.
- If you do not understand something in the contract, get independent advice.
- Ensure your broker is not just a lender in disguise, offering only one company's loans.
- Ask how the broker gets paid. Ask them to disclose all commissions, payments and kickbacks they receive.
- Ask them to provide a formal comparison of any loans recommended, including upfront and ongoing fees.
- Ask them to clarify the actual cost of the loan, including and excluding interest, fees and ongoing costs.
- Double check. You can cross check your broker's final recommendation by accessing the online calculators.
- Ask if they comply with the Privacy Act. You want to protect your financial and personal details.
- Ask if they have professional indemnity insurance.
A written agreement with a mortgage broker should cover the following:
- Any fee to be paid and the payment date (which should be after the loan confirmation).
- The type of loan.
- The amount of the loan.
- The term of the loan.
- The interest rate, whether it is fixed or variable and the term of any rate offer.
- The loan's features such as draw-down facilities.
- All lender's fees such as application fees, establishment fees, solicitor costs, etc.