Brokers. Who are they, what do they do, and should you use one?
All questions that nobody ever answers. Like seriously, how do grown ups know this shit? (Yes I still refer to people as grown ups even though I’m 27 lol).
Well worry no more. With The Broke Generation, you’re enrolled in the fast track course to adulthood, starting with a breakdown of why brokers are a millennial’s saviour when applying for a mortgage (in my opinion!).
Let’s do this.
What is a broker?
A broker is someone with long-term relationships with financial institutions, who can basically get them to give you a loan. They’re pretty tight with the lending folk – if this were Tinder, they’d have swiped right to each other long ago and made it past that awkward stage of ignoring one another post-first-date.
Why use a broker?
When you’re applying for a home loan, a broker can speak directly with the lender and explain your financial situation. For example, if you’ve been hanging out in Bali for the last 6 months and spamming Instagram with your #islandlife snaps, you might not have much to show for your spending habits. But if you’re actually a really savvy saver and have 50k tucked away, a broker will be able to help you explain yourself to the bank, and find ways to prove to them that you’re worthy of a home loan.
How much do brokers cost?
Alright get ready to be #shook. Broker’s are free to use as a consumer. I know, what the hell? Nothing is free when it comes to mortgages! Now when I say free, I mean there is no upfront cost to you as the consumer. Ignore those annoying TV ads with middle class white people tapping their iPad Pro on the sofa at night applying for home loans online. A broker is a real human who can help you.
How do brokers make money then?
This might not seem important – after all, you’re not their Mum. What does it matter to you how they make money?
It does matter, because they’re paid on commissions, which sometimes relate to the loan you take out.
Brokers get a kick back from the lender you eventually sign with. They usually get an upfront payment when you take out the loan, and then an ongoing payment after that. It’s called a trail commission. In Australia, brokers’ trail commission is currently under threat from the government, but that’s a story for another day.
So when you sign the loan documents on your 30 year mortgage, the broker that helped you get there gets a monthly commission proportionate to the value of your loan. That is, for every year that you hold that loan.
Understanding how brokers make money may help you unpack what recommendations to take and what to to ignore. Yes, brokers are there to help you, but they also make a living from commission. If you’re ever unsure on something your broker has suggested, obtaining qualified, impartial financial advice may be the way to go.
Should you use a broker when buying a home?
In my opinion – YES. I grew quite attached to our broker and enjoyed his emails popping up in my inbox with another update. I also loved that I could ask him a ton of questions. When we first sat down with him, he said to me “there are no stupid questions”. And that, in one sentence, is why I would always use a broker.
You can get clear answers on anything you don’t understand, ask for more details on interest rates or fixed terms, and get their thoughts on how the loans will suit your lifestyle. Our broker was infinitely valuable in helping us navigate my residency status. Because I wasn’t permanent resident of Australia when we bought our property, our borrowing power wasn’t the best. Thanks to our broker, went through certain processes to ensure I was exempt from paying foreign investment tax, and scored a mortgage together with a reputable lender.
Yes, they’re paid a commission, but a good broker will write a loan that’s in your best interest before their own. That’s because if you stay on the loan they wrote you, their trail commission continues. The value our broker provided was incredible. We wouldn’t have secured a loan without him, so the commission doesn’t bother me whatsoever.
Disclaimer: as always, information contained in this article is reflective of my personal opinion and experience only. Always seek qualified financial advice for information tailored to your situation.
PIN THIS FOR LATER
Emma this is NOT CORRECT!! Brokers are NOT FREE!! The trailing commission you are referring to is BUILT INTO the interest rate THAT THE BORROWER PAYS FOR THE LIFE OF THE LOAN that’s WHY the government want to BAN TRAILING COMMISSIONS! There are usually also UPFRONT fees that are based on the size of the loan which incentivse Brokers to lend more to people than they can afford to repay. Please do not confuse consumers more spreading financial misinformation. I’m 100% for improving financial literacy but please ensure what you say is accurate or it will lead people into scams!
Hi Jay. Thanks for your comment. I explain trailing and upfront commissions in full in the paragraph below that one. I understand how mortgage brokers work. A good broker won’t write you a loan you can’t afford. My experience was in fact quite the contrary. As a temporary resident at the time of buying (along with the many hurdles first home buyers face nowadays), we would not have bought if it were not for our broker. When it comes to dodgy brokers, I of course see the issue with trail commissions. But looking at the bigger picture, I want to keep brokers around, particularly to maintain competition in the lending market and allow first home buyers to access support without an upfront fee. If one really disagrees with broker commission, they can get a loan through a broker and refinance it themselves to cut the broker’s commission.