With interest rates at record lows, you might be wondering if it’s time to shop around for a better deal on your home loan.
If you ask Patrick Veyret, a banking expert at consumer group Choice, the answer is yes. “Refinancing can seem like a daunting process, but right now consumers have all the power,” he says. “Banks are really scrambling to offer lower interest rates to consumers.” So if you are going to look for a better deal, is it worth using a mortgage broker to save yourself a bunch of legwork? We looked at the pros and cons to help you make an informed decision.
Mortgage brokers are convenient, but they aren’t free
The first thing to be aware of is how brokers are paid. Typically, customers don’t have to pay directly for a broker’s services. Instead, most brokers rely on upfront and trailing commissions paid by lenders. There is an obvious potential conflict of interest here, because the broker’s incentive to maximise their commission may be at odds with your desire to get the best deal possible. So how does this play out? Here’s a simple example. “Every lending officer in a bank, and every mortgage broker, is going to come from an initial starting point of, ‘Of course you should refinance’,” says Craig Morgan, an independent mortgage broker who chooses to refund trailing commissions to his clients in return for an upfront fee. “That’s how they meet their KPIs or in the case or mortgage brokers, how they make their living.” Another issue to be aware of is that some lenders have products they sell directly that don’t provide commissions to brokers. In practice, Mr Morgan says this means these loans won’t be recommended by brokers — even if they are cheaper than the alternatives. Some bank officers are also rewarded for signing up new customers. However, following the banking royal commission, the major banks have committed to banning incentives for retail staff based directly on sales targets.
If you’re using a mortgage broker, ask these questions
There are still good reasons why you might want to use a broker. Good brokers can bring you options you might not have thought about, or that would be otherwise unavailable. Using a broker is also going to be more convenient than having to do the research and deal with the banks yourself. To get the best outcome with a broker, it’s important you come prepared. Independent financial adviser Jacie Taylor suggests coming along with competitive rates from different lenders. On top of that, it helps to ask your broker to explain how they operate and why they are recommending certain products. Here are some good questions for your broker, suggested by ASIC’s MoneySmart. • Do you offer loans from a range of different lenders? • How do you get paid for the advice you’re giving me? Does this differ between lenders? • Why did you recommend this loan to me? • What fees will I have to pay when taking out this loan? • What features (options) come with this loan? Can you show me how they work? • Can you show me a couple more options, including one with the lowest cost? • What is the threshold for lender’s mortgage insurance (LMI) and how can I avoid it? • What information do I need to provide for the loan application? You should also check to see that the broker has a proper credit licence using ASIC Connect’s Professional Register. Your broker should appear in searches under one of the three “credit” categories. If they’re not on the list, they may be operating illegally.
The fees you pay to refinance
Lenders charge a range of fees to people refinancing their mortgage. Common ones are discharge fees (paid when you close a loan), application fees (paid when applying for a new loan) and switching fees (if you are staying with the same lender). If you are on a fixed-rate loan, keep in mind you are also going to be liable for a break fee, which can be significant. Even with these fees, it can still be worthwhile to refinance if that means you’re paying less interest over the course of the loan. But as a general rule, you should aim to make up any fees you pay in saved interest within 18 months. “If you’re not [in front after 18 months], it’s probably a mug’s game to change your loan,” Mr Morgan says.
You can always do it yourself
If you don’t want to use a broker, you can always refinance yourself. And even before you think about going to see a broker, it’s worth giving your current a lender a call to see if you can get a better deal. It doesn’t cost anything, and it can save you money. And if you do choose to use a broker later, it sets a higher target for them to beat. Here are some tips for talking to your lender, from Ms Taylor. 1. Do your research first, so that you know what other rates are available, including knowing what your current lender is offering to new clients. 2. Be courteous and confident when dealing with the staff involved. 3. Ask major banks to beat what other major banks are offering, or if a small lender, ask them to match what’s on offer on the market. Or if appropriate, ask for their rate for new clients. 4. If you are given a no, ask nicely to speak to someone higher up. 5. To make it clear you are serious, request a mortgage discharge form. This can sometimes be the tipping point. 6. For some people who have a lot of equity in their home, it may be worthwhile refinancing for a bigger sum (higher loaned amounts can often secure lower interest rates) and then opting to repay the additional funds after settlement.
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