If you’re considering refinancing your home loan, you may be wondering whether to use a mortgage broker to get a deal on a new rate. Here are some things to consider before making your decision.
There are any number of reasons you might wish to refinance your home loan. For example, you may be coming to the end of a fixed rate period and wish to move onto another one, or you may simply be unsatisfied with your current rate or lender.
Whatever the reason may be, you can find a new bank or lender on your own, or you can enlist the help of a mortgage broker, who may be able to find you a competitive deal. Is it worth using a mortgage broker to refinance your home loan? Here are some questions to consider.
How do mortgage brokers make money on refinances?
Mortgage brokers typically do not charge fees to borrowers, nor are they necessarily paid by their employers. Instead, they make most or all of their money by receiving commissions from banks and other lenders, and this is also the case when you use a broker to help refinance your home loan.
There are a number of ways mortgage brokers receive commissions. They can be upfront, meaning the bank or lender pays when you sign up for a home loan, or they can be so-called ‘trail’ commissions, which continue annually for the life of the loan.
Either way, mortgage broker commissions are typically calculated as a percentage of the full loan amount. For example, a hypothetical mortgage broker might receive an upfront commission of 0.5% of the total loan amount of your refinanced home loan, plus a trail commission of 0.2% of the loan amount per year.
Mortgage brokers can also receive ‘soft dollar’ benefits from banks and lenders – these are non-monetary perks, such as trips and exclusive access. When you refinance with a broker, they will likely be remunerated in one or more of these ways.
Why do mortgage brokers want you to refinance?
Because mortgage brokers make money primarily in the form of commissions from banks and other lenders, it is therefore natural to assume that they would want your business if you are refinancing. If you are contemplating refinancing but are concerned that a broker might recommend loan products based on the commission they’ll receive rather than what’s best for you, it’s worth noting that brokers are bound by law to act in your best interests.
The so-called best interests duty, which came into effect in 2021, requires brokers to consider your best interests when recommending a home loan product or products, keeping in mind things such as the cost of the product being recommended, and whether it has a realistic possibility of offering you the best possible benefit relative to other products on the market. This statutory duty was introduced in response to the Banking Royal Commission, partly as an attempt to mitigate conflicts of interest that could arise between borrowers, brokers and lenders.
Is it worth going through a mortgage broker?
Using a mortgage broker can be a convenient option if you wish to refinance, simply because brokers tend to be knowledgeable about the home loan market, and can have access to a variety of home loans, some of which may be suitable for your needs and situation. Mortgage brokers tend to work with a panel of lenders, each of whom may offer a variety of different home loan options. It may be the case that a lender on your mortgage broker’s panel might offer the broker access to lower rates or better deals than might be available to the general public, which is another reason why using a broker might be convenient.
It is important to remember, however, that no one mortgage broker will work with every lender in the marketplace, meaning there may be lenders out there who can offer you more favourable deals than those your broker has access to. Even if you are using a broker, then, it can pay to do your own research. Likewise, even though your broker is duty-bound to act in your best interests, it can still pay to ask them questions about the home loan options they recommend to you, and ask why they believe the products they’ve chosen are in your best interests.
What should you ask a mortgage broker when refinancing?
If you are refinancing with a mortgage broker, there are number of key things you should consider asking, in particular:
- Are they licensed? Moneysmart advises you to check if a broker is licensed to give credit advice. You can ask your broker directly or check with a body such as the Finance Brokers Association of Australia Limited (FBAA) or the Mortgage & Finance Association of Australia (MFAA).
- How many lenders do they deal with? While there is no hard-and-fast rule about how large a panel should be, a broker who works with several dozen lenders will naturally have more options to choose from than one who only works with a handful.
- What are their fees and commissions? While mortgage brokers are bound by statutory duty to act in your best interests, you may still wish to understand how much your broker stands to earn in commissions, and whether this will be paid upfront or annually over the lifetime of the loan.
- What will the borrowing costs be? While you may not have to pay your broker a fee, there are still costs that can come with refinancing. For example, if you are changing lenders before your fixed home loan term is up, you may be required to pay a break fee to exit your current loan. You can ask your broker or your existing lender about this and other costs that may arise.
- What types of interest rate is best for you? If you are refinancing your home loan, you likely already have some idea about whether you wish to move to a fixed or variable interest rate, or a split rate loan that combines the two. Nonetheless, a mortgage broker may be able to offer insight on what arrangement may be suitable for you.
- What is the comparison rate of the new home loan? While the interest rate of a home loan can give you a picture of what your repayments will be like, the comparison rate of the loan is a truer measure of how much it will cost, as it includes the impact of most fees and charges. It is important to consider this before refinancing to a new home loan.
- Is the loan the best one they can recommend? Moneysmart advises that when a mortgage broker recommends a home loan or home loans to you, it is worthwhile to ask if they are recommending the best loan or loans for you, and if they can potentially show you a few more loan options, including one with the lowest cost, so you can compare.
- What features are available? It may be the case that you are refinancing to take advantage of a home loan that has available features such as offset accounts and redraw facilities. If so, it is important for your broker to understand exactly the kinds of features you want in a home loan.
- What information will the lender need? When applying to refinance your home loan, your new lender will want to get a picture of your financial situation. If you wish to know more, Canstar has a guide to the kinds of documentation that banks and lenders generally want to see with a home loan application.
- What happens after you apply to refinance? It is important to keep in mind that applying for a home loan does not guarantee that you will be approved, even if your broker has recommended a particular lender to you. Your broker will be able to advise you on what happens after your refinance application is submitted.
Is it better to deal with a mortgage broker or bank?
If you are considering refinancing, you by no means have to use a mortgage broker. You can compare home loans yourself to find one that suits your needs, and apply directly to the lender of your choice. You could even consider contacting your current lender directly to ask if they can offer you a more favourable rate than the one you are currently on. It may well be the case that your current lender wishes to keep you as a customer, so if you let them know you’re planning on refinancing, they may offer you a better deal.
In order to get the deal that suits you the best when refinancing your home loan, it may be advisable to consider all three options – dealing with a mortgage broker, contacting your existing lender and researching and comparing home loans for yourself. Considering all options may improve your chances of finding a home loan deal that will save you the most money.
Cover image source: GaudiLab/Shutterstock.com
Thanks for visiting Canstar, Australia’s biggest financial comparison site*