Mortgage Broker vs the Bank - what's the difference?
When you think of borrowing money your initial reaction is likely to be to picture a bank. Not only are they a great place to store your hard-earned cash but they also have funds that they can lend, perfect if you want to buy a house!
If you've used the same bank for most of your life then it may seem natural to make your bank your first stop in your journey to home ownership. After all, they should know your finances better than anyone. It's also a common belief that there's little difference between mortgages, so with all banks seeming to offer the same product options what's the point in shopping around?
It may surprise you then that if you need a home loan to purchase your first home then there are actually several ways you can get the funds needed to make your dream home your own ... and many of them don't involve a bank at all !
DOES SHOPPING AROUND MAKE A DIFFERENCE?
Yes! Let's say you're looking to borrow $500,000 then something as small as a half a percent in annual interest will make a massive difference to the amount you'll pay back to the lender.
$500,000 over 30 years at 5.0% | total repayable = $965,813
$500,000 over 30 years at 4.5% | total repayable = $911,599
$500,000 over 3o years at 4.0% | total repayable = $858,949
The numbers quickly stack up and could mean you're paying back almost double what you borrowed over the lifetime of the loan. Going to your bank and selecting their mortgage option may be quick and easy, but it may not be the most cost effective route.
WHAT ARE MY OPTIONS?
First you could apply with your bank directly; second you could apply to a variety of other lenders for a sharper deal yourself; or your third option is to get a mortgage broker to do it all for you.
The great news is that all three options are free! Well, they don't cost any money anyway. Doing it yourself can cost you a lot of time and effort, but if you save tens of thousands of dollars at the same time then maybe that's time well spent. You may also find a high level of complexity in researching your available options, especially if you're a first home buyer and unsure what all the jargon and terminology means.
A prudent way to look at it starts by asking yourself the following question:
"Would my bank necessarily tell me if I could get a better deal with another lender down the road?"
Not sure about you but we're pretty confident that most people would probably answer with the following ... NO!
SO WHY SHOULD I USE A MORTGAGE BROKER?
Mortgage brokers are home lending experts working independently of the banks and have negotiating power that can often get you lower interest rates than what your bank is advertising. Why do brokers have negotiating power you ask? Well firstly, it’s fair to say that banks will try to give you a good interest rate, however it’s not necessarily the best deal you might qualify for without shopping around with other lenders. As with any other retail purchase, a lender will often sharpen the pencil if they know you've done your homework !
Brokers can sometimes access better deals because they are constantly working with the banks to understand who is offering the best rates for certain types of clients. A broker can then direct more borrowers to the best deals, creating a win-win for everyone!
It's a bit like a tradie getting trade pricing at Bunnings or Mitre 10 while the rest of us have to pay retail. Some of our clients have said that using a mortgage broker is like hitting up your tradie mate to buy the materials for your deck on your behalf. A broker will sometimes be able to get you access to better offers than advertised.
BUT I STILL BORROW FROM A BANK?
Your broker would likely have gone to several banks, and non-bank lenders, to find the best mortgage deal for your particular needs. So you may end up having a mortgage with your existing bank, but only if they're providing the best deal for you. And because a mortgage broker is free you haven't lost anything by getting them to check your options.
WHAT'S THE DIFFERENCE BETWEEN GOING DIRECTLY TO A BANK AND A MORTGAGE BROKER AGAIN?
- A bank has one set of products to sell and can therefore only promote their own products
- Banks won't openly recommend you go to a rival if another offer is better
- Your loan application might be declined if you don't meet their particular Lending Policy
- You may spend tens of thousands more if you go with an uncompetitive deal
- Has access to many loan options, from many different providers
- Will find the option that best suits your particular needs
- Will keep looking if you're rejected by one lender until they find a solution
- Receives compensation from the lender you choose, and only after your mortgage is drawn