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A house will often be one of our the biggest purchases of our lives, and a mortgage (also called a home loan) is typically going to be your biggest financial commitment. Choosing the right home loan and repaying it quickly can save thousands of dollars – and free you up to achieve other goals faster!
You can use a mortgage broker or go to a bank to get a mortgage to purchase an investment house. So what’s the difference and which one is better for you?
Here are some list of pros and cons in using a using a mortgage broker or alternatively going directly to a bank.
What is a mortgage broker?
A mortgage broker is the middleman between the borrower and the bank or mortgage provider. In New Zealand all mortgage brokers are regulated by Financial Markets Authority.
A mortgage broker will usually offer their services free of charge to the borrower because they get paid their commission from the banks margin. The important thing to understand here is that you will not get a less favourable interest rate by going through a broker. In fact, it’s possible a broker may be able to get the best rate for you by negotiating with a number of loan providers.
Where a broker operates under this commission model they only get paid when you take out a loan through them. There’s nothing wrong with this model but you do need to understand that they have a vested interest in you taking out a loan.
- Mortgage brokers know the interest rates and application criteria for different lenders, and can negotiate on your behalf.
- Brokers can help you put a loan application together.
- All mortgage brokers are now required to be Registered Financial Advisers. Which means they must have a complaints process with a dispute resolution scheme in place.
- Brokers don't cover all lenders. Some banks don't deal with mortgage brokers.
- Different lenders pay different commission rates to mortgage brokers.
How does the bank operate differently to a mortgage broker?
The role that is done by a mortgage broker is very similar to the role a mortgage salesman does at a bank. The main difference is that in a bank they can only sell the products from one provider (their own bank).
To put this into perspective, going to the bank is like going to a BMW dealership for a new car. You will only get a BMW. Going to the broker is like going to a general dealership who will sell you a new Toyota, Ford, Chevy, Nissan, or whatever other brand they are licensed to sell. The broker has many options to pick from to get you exactly what you need. The bank does not.
In New Zealand not all banks are prepared to put property investors through brokers. The reason they do this is they see value looking after customers total banking needs and want to keep a direct relationship with their customers. Banks are after all of your banking business and believe there is value in creating a relationship with you to look after your mortgage, credit cards, daily account management like chequebooks, online banking etc. This is especially important if you want services that banks provide, not covered by a broker.
- Competition between banks can sometimes lead to great deals, such as a bank contributing to legal bills, discounting insurance or lending at a low fixed interest rate.
- Their loan application fees are usually negotiable.
- Banks tend to be more cautious and are more likely to turn you down if you have a bad credit history.
How do I pick which one to use?
Whether you use a broker or go direct can only be decided by you based on your knowledge of the mortgage industry and your financial requirements. However, it is free to use the services of both a bank mortgage salesperson and a mortgage broker so you have nothing to lose by trying each one and seeing which is the right fit for you.
In both instances you will receive professional advice that will help you decide which mortgage product is right for you. There are many different mortgage products i.e. floating, fixed, offset and revolving credit just to name a few options and picking the right one is key to the best use of your funds.
Awareness of the market place is key. Here's a simple checklist you should be going through when you go out looking for home loan.
Broker vs Bank – Checklist
1. Look Around
Both brokers and banks offer free advice so the fit will come down to personality and ability.
2. Be Upfront
Explain and tell them that you are seeking quotes from different sources to find the best deal for you.
3. Clarify Fees
Loan Fees – there may be an administration fee which should be clearly explained to you from the outset.
Advice Fees – brokers usually operate from a commission arrangement but it does not hurt to clarify all potential charges at the beginning.
4. Build Trust
If you don’t feel the person is looking after your needs then try someone else until you find the fit that is right for you.