Not everyone has used the services of a mortgage broker. Phil discusses what you need to know if you choose to use a mortgage broker to apply for a loan. It is improtant to always check professional accreditation and membership of professional associations.
| Dealing with a Mortgage Broker
Phil Naylor former CEO MFAA
Phil Naylor was the CEO at Mortgage and Finance Association of Australia ( MFAA ) which is the peak industry body providing service and representation to approximately 11,000 Professional Credit Advisers (mortgage and finance brokers, mortgage managers and aggregators). Phil was with the MFAA from 2002 until 2014 and was actively involved in promoting professional standards to brokers and ensuring that the consumer understands the value of having an MFAA Approved Broker working for them. He championed uniform broker legislation.
From 1 July 2020 new legislation will come into effect - the obligations will require mortgage brokers to act in the best interests of consumers and to prioritise consumers' interests when providing credit assistance.
C: Phil, there are many people who’ve used a Mortgage Broker, but for the benefit of those who haven’t, could you tell us what the functions of a Mortgage Broker are?
Yes, Carolyn. The functions of a Mortgage Broker are essentially to provide advice on the many options available to consumers as to mortgages. This could be advice as to a number of lenders that are out there in the marketplace. There are hundreds of different products that those lenders apply.
The second part of the process that the Mortgage Broker does is, once they’ve been given the advice, they then assist the client to find the appropriate finance to suit their particular circumstances.
C: Why wouldn’t somebody just go to a bank to do all of this?
The simple difference between a bank and a Mortgage Broker is that a bank only sells its own product, whereas a Mortgage Broker has access to a range of different lenders. Most Mortgage Brokers would have 10, 12 or more maybe over 20 or so different lenders on their panel.
So if you go to a Mortgage Broker as a client, you’re not only hearing about the products of one particular bank or one particular lender, you’re hearing about the products across a whole range of different lenders.
C: Would they get a better deal if they went to a Mortgage Broker than with a bank? I’ve always had the impression that Mortgage Brokers somehow can find better deals.
Well, if the Mortgage Broker’s on the ball and certainly they are, they are aware of special deals that are available from day to day, which the average person in the street wouldn’t be aware of.
So yes… Once they understand what your circumstances and needs are, they’ll find the most appropriate deal for you. It’s difficult to say, but the best deal is always the best deal because the best deal today might be not the best deal tomorrow, but given the circumstances that the client has, the Mortgage Broker will go out and find the most appropriate deal for those particular circumstances.
C: How does one become a Mortgage Broker? What sort of training do they have to undergo?
The Mortgage Broking profession has only been in existence for 20-25 years, and it’s grown a lot more particularly in the last 10 years. A lot of the existing Mortgage Brokers are people who have come out of banks and other lending institutions over the years. They’ve got a strong knowledge of lending and the processes involved, but there’s a new generation of Mortgage Brokers who are coming and looking at Mortgage Broking as a career.
In order to become a Broker, certainly to become a MFAA approved broker, which is one of our members, they have to have achieved a Diploma in Financial Services, specializing in Finance and Mortgage Broking Management. They have to have two years’ experience before they can operate on their own. If they come into the industry with less than two years’ experience, they have to have a mentor that supervises their work until they have those two years’ experience.
C: Where do they do the Diplomas? Is it a TAFE one, or is it a private College or a University? How long is it?
The Diploma is provided by some TAFE Colleges, and also by a number of private registered training organizations. We have a list of nine preferred vendors that we offer to our members. The course depends on how you wish to do it. It can be done by correspondence or by attending classes or a mixture of both. The time that it takes depends on how much time you’ve got available to devote to it.
C: While they’re doing their two years’ experience that means that they’re working in the industry with a mentor?
That’s correct, they’d be working in the industry with a mentor. Initially, they wouldn’t be writing loans, but after a period of introduction and satisfying the mentor that they’re working appropriately, they would be writing loans. Those loans would be under supervision of a mentor.
C: Once they’re done their two years’ experience, could they effectively go out and start up shop on their own?
Yes, they could, and a lot do. Most brokers these days belong to aggregational franchise groups, I won’t mention any names, but there are a well known mortgage groups out there. They get a lot of support and assistance from these groups that they belong to. Even though they’re independent operators, because they belong to a wider group, they get that extra support.
C: What makes a good Mortgage Broker? Or but what makes a bad Mortgage Broker compared to a good Mortgage Broker?
I think I prefer to tell you what a good Mortgage Broker is.
There’s four Es - experience, education, ethics, and empathy.
Empathy with a client is important because if the Broker can’t build that empathy with the client and a trust relationship with the client, it’s not going to work. The Broker’s got to satisfy the client that the client can trust the Broker, and trust what he or she is going to do for the client.
But in return, the Broker also has to have empathy with the client to be able to get a feel if they ( the broker ) are being told everything by the client, that they need to know and that nothings being withheld by the client.
If the Broker doesn’t know exactly what the client’s circumstances are and what their needs are, they won’t be able to do the best job for the client.
C: What sort of questions should one ask a Mortgage Broker when you’re going to see them? Is there a standard set of questions, or are there any important question that one should ask in determining if that Mortgage Broker is the right person for you?
I think the first thing is to make sure that they are a MFAA approved Broker, and they would be able to demonstrate that by their membership certificate or a logo or whatever. You can also check these on our website - mfaa.com.au. You can find MFAA Brokers listed there.
The areas to ask about should be:
- Understanding the range of lenders they have on their panel.
Some clients may be happy with a Broker, who’s only got a handful of lenders on their panel, but other clients may want to see a far wider range, and that’s a personal thing.
- They should identify that and work out exactly which products and which lenders the Broker is going to compare when looking at the options for you.
- They must now, according to the law, disclose their commissions so you know how they’re getting paid.
- You then should, of course, ask them if you want to be satisfied for any references they might be able to give them from previous clients they’ve dealt with.
- Finally, you should really make sure that they understand exactly what you want.
Don’t sign up with a Broker if you’ve got some doubts that they really understand what you’re interests are.
C: I’m interested when you mentioned about the range of products and the lenders that a Broker is associated with. Could you just elaborate on that a little bit?
The products, at the end of the day, come from one of the lenders.
What the Broker does is give you advice as to your best options.
Then, the next stage of the process is then to lodge the loan application for you once you’ve agreed on which lender you want to apply to.
The Broker then takes you through the whole process of recommending the product, sourcing it, and doing their best to make sure that you get approved based on your circumstances.
There’s the obvious big four lenders that everyone’s aware of, but there are lots of smaller lenders, smaller banks, credit unions, building societies, and non-bank lenders. There’s a whole range of lenders out there in the marketplace who are all competing. They’ve got differing products.
The products look very similar to the uninitiated, but when the Broker starts talking with you and finding out about your particular circumstances, he or she might be able to identify if there’s a product, that’s offered by a lender that’s not offered by other lenders that would better suit your particular circumstances. That’s the value that the Broker provides.
C: I often see on various websites, Broker of the Year. What does that mean, and how does one become a Broker of the Year, presuming they’re all doing their best?
There are a number of awards that are given out in the industry. The only one that I can speak for is the awards that we provide. Every year we have a MFAA Excellence Award where we acknowledge and recognize standards in excellent conduct provided by our members.
One of those awards is the Mortgage Broker of the Year.
The person who’s selected in that role is someone who’s entered in to the competition, and someone who has had his whole business judged fairly rigorously by a panel of judges external from the MFAA.
The one who is decided that is the best that year, gets that accolade. It is something to promote the industry, and it promotes that particular Broker.
It doesn’t mean that there aren’t lots of other good Brokers in the industry.
It just means in that particular year, that Broker because of his or her entry which they made to the competition and the judging which followed, that they’ve been judged the best in the year.
It’s similar to what our professions do.
C: You just mentioned that their business is fairly rigorously judged. Does that mean they would look at all the ins and outs of the business e.g. their finances , to make sure that everything’s correct? Does it go into that depth?
Part of MFAA membership is the background and the ongoing conduct of the Broker and is continuously monitored so that someone who was in the Broker of the Year competition certainly wouldn’t be someone who’d been in strife with ASIC ( Australian Securities & Investments Commission ) or who had been in strife under our own disciplinary processes.
To that extent, yes, those issues are delved into.
C: If one wanted to use the services of a Mortgage Broker, would you get a couple of quotes? Would you go and visit a couple of them?
If you wanted to. The Brokers are providing a service like any other profession out there, and if you feel that you want to shop around, the Broker would hope that you would stay with them. Nevertheless, they respect that if you want to, as they say, get a second opinion, you may shop around. I suppose at the end of the day, most Brokers would hope that they’ve done enough to impress you that you would want to deal with them. By all means, if you want to hear another story or get another look at the issue, there should be nothing inhibiting you from doing that.
C: You mentioned earlier when you were talking about what makes a good Broker that they should disclose their commissions, they’re required to by law. How do they get paid?
Brokers primarily get paid when they settle a loan with the lender. The lender pays them commission based on the size of the loan. In average terms, it’s usually about 0.5% on the value of the loan, which is an upfront commission.
Then they get a trial commission, which is paid in subsequent years based on the reducing balance on the loan, which is usually around 0.15%. That’s paid by the lender, that’s not paid by the borrower.
C:So clients don’t need to worry that, if they went to a bank, they wouldn’t have to pay these fees? That it’s not costing them more to see a mortgage broker?
It’s a question to ask, but the loan that you get from the Broker, in the vast majority of cases, would be the same loan that you would have got if you went to the bank.
C: So the commission isn’t an expense which is paid for by the client?
Not at all … No.. It’s an operating expense of the lender.
C: Phil, is there anything else that somebody who hasn’t used a Mortgage Broker before should be aware of that we haven’t touched on already?
I think we’ve covered a wide field. I think the only thing that I’d reiterate is the key thing about a Mortgage Broker and their client is the relationship they develop.
The best result you’ll get from a Mortgage Broker will be achieved if you are able to trust them and feel that they can trust you such that they can operate in your best interest. What the Broker is there to do is, although they’re eventually selling a product on behalf of a particular lender when the loans are ultimately settled, their real purpose is to act in the borrower’s interest.
C: If somebody took out a loan through a Mortgage Broker and then had problems, what would the procedure be? Would they go back to the Mortgage Broker, or would they go directly to your organization if that Broker was a member of it?
It would depend on what the problem was. If it was just an administrative issue, I’d say go straight back to the Mortgage Broker and get it sorted out.
If it was something that you felt that the Mortgage Broker had operated or acted improperly, and they’re our members, we have a disciplinary process where complains are investigated.
All our Brokers are required to belong to an Ombudsman scheme, so if the action that was taken causes some damage which warrants compensation, you’d take it to the Ombudsman. The Ombudsman is called the Credit Ombudsman, which is the abbreviation is COSL. They can handle complaints where compensation is warranted.
C: That’s fairly reassuring for someone who hasn’t used a Mortgage Broker or is unclear about the process.
Absolutely. I didn’t mention, but the underlying thing is that, although MFAA has standards which are above the legal requirements, the baseline is that you cannot operate as a Broker in Australia unless you’ve either got an Australian Credit License and you operate under the National Consumer Credit Protection Act, or if you don’t have a license, that you are a representative of someone who is a licensor. Consumers are totally protected in terms of the legal situation, but also from professional standards if they’re an MFAA approved Broker.
C: Phil, thank you very much for your time today. That’s made it a lot clearer for me, I hope it has for a lot of other people as well.
It’s a pleasure.
C: Thank you.