Should you use a mortgage broker to refinance a home loan?

If you’re considering refinancing your home loan, you may be wondering whether to hire a mortgage broker to get an agreement on a new rate. Here are some things to consider before making your decision.

There are a number of reasons why you might want to refinance your home loan. For example, you may be coming to the end of one fixed rate period and want to move to another, or you may simply be dissatisfied with your current rate or your lender.

Whatever the reason, you can find a new bank or lender yourself, or you can enlist the help of a mortgage broker, who may be able to find you a competitive offer. Is it worth using a mortgage broker to refinance your mortgage? Here are some questions to consider.

Mortgage brokers generally do not charge fees to borrowers and are not necessarily paid by their employers. Instead, they make most or all of their money by taking commissions from banks and other lenders, and this is also the case when you use a broker to help you refinance your home loan.

Mortgage brokers receive commissions in several ways. They can be upfront, which means the bank or lender pays when you take out a home loan, or they can be so-called “trailer fees”, which continue every year for the life of the loan.

In either case, mortgage broker commissions are usually calculated as a percentage of the total loan amount. For example, a hypothetical mortgage broker might receive an initial commission of 0.5% of the total loan amount of your refinanced home loan, plus a trailing commission of 0.2% of the loan amount per year.

Mortgage brokers may also receive “soft dollar” benefits from banks and lenders – these are non-monetary benefits, such as travel and exclusive access. When you refinance with a broker, they will likely be compensated in one or more of these ways.

Since 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 refinance. If you are considering refinancing but are concerned that a broker will recommend loan products based on the commission they will receive rather than what is best for you, it should be noted that brokers are required by law to act in your best interest.

The so-called Best Interest Obligation, which came into effect in 2021, requires brokers to consider your best interests when recommending home loan product(s), bearing in mind things like cost of the recommended product and whether it has a realistic possibility of giving you the best possible benefit compared to other products on the market. This legal requirement was introduced in response to the Royal Commission on Banking, in part to try to mitigate any conflicts of interest that might arise between borrowers, brokers and lenders.

Using a mortgage broker can be a convenient option if you want to refinance, simply because brokers tend to be familiar with the mortgage market and can access a variety of mortgages, some of which may be suitable. to your needs and situation. . Mortgage brokers tend to work with a panel of lenders, each of which can offer a variety of different home loan options. It may be that a lender on your mortgage broker’s panel is offering 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 can be convenient.

It is important to remember, however, that no mortgage broker will work with every lender in the market, which means there may be lenders who can offer you better deals than what your broker has access to. . Even if you use a broker, it can pay off to do your own research. Likewise, even though your broker is bound to act in your best interest, it can still pay off to ask them about the home loan options they recommend and ask them why they think the products they he chose are the best. interests.

If you are refinancing with a mortgage broker, there are a number of key things you should consider asking, in particular:

1. Are they licensed? Moneysmart advises you to check whether a broker is authorized to give credit advice. You can ask your broker directly or check with an organization such as the Finance Brokers Association of Australia Limited (FBAA) or the Mortgage & Finance Association of Australia (MFAA).
2. How many lenders do they deal with? While there is no hard and fast rule on panel size, a broker who works with several dozen lenders will naturally have more options to choose from than a broker who only works with a handful.
3. What are their fees and commissions? Although mortgage brokers are under a legal obligation to act in your best interest, you may still want to understand how much your broker can earn in commissions and whether this will be paid up front or annually over the life of the loan.
4. What will the borrowing costs be? Although you may not have to pay any fees to your broker, there are still costs that can come with refinancing. For example, if you change lenders before the end of your fixed home loan term, you may have to pay a termination fee to terminate your current loan. You can inquire with your current broker or lender about this and other charges that may arise.
5. What types of interest rates are best for you? If you’re refinancing your home loan, you probably already know whether you want to switch to a fixed or variable interest rate, or a split rate loan that combines the two. Nevertheless, a mortgage broker may be able to give you some insight into the arrangement that might be right for you.
6. What is the comparison rate for the new home loan? While a home loan’s interest rate can give you an idea of ​​what your repayments will look like, the loan’s comparison rate is a more accurate measure of its cost because it includes the impact of most fees and charges. It is important to take this into account before refinancing a new mortgage.
7. Is the loan the best they can recommend? Moneysmart advises that when a mortgage broker recommends a home loan or loans to you, it’s worth asking if they are recommending the best loan(s) for you, and if they can potentially show you some loan options. extras, including one with the lowest cost, so you can compare.
8. What features are available? You may be refinancing to take advantage of a home loan that has features like clearing accounts and withdrawal facilities. If so, it’s important that your broker understands exactly the types of features you want in a home loan.
9. What information will the lender need? When applying to refinance your home loan, your new lender will want to get an idea of ​​your financial situation. If you want to learn more, Canstar has a guide to the types of documents banks and lenders typically want to see with a home loan application.
10. What happens after applying for a refinance? It’s 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 you submit your refinance request.

If you’re considering refinancing, you don’t need to hire a mortgage broker. While a mortgage broker can help you find a loan that suits your needs and budget, you can research the market and compare home loans yourself to find one that meets your needs. Once you have found a home loan that suits your needs, you can then go directly to the lender of your choice.

This is the case even if you obtained your current loan through a mortgage broker. You can choose to continue your relationship with the broker or, having already applied for the home loan, you can have the confidence to apply directly to a lender this time around.

There is no definitive answer as to whether it is better to go through a broker or deal directly with a bank when refinancing. Ultimately, this will come down to personal preference and potentially the range of loans a broker can offer you, versus what you can find by comparing options on your own. If you’re thinking about refinancing, you might even consider contacting your current lender directly to ask if they can offer you a better rate than what you currently have. Your current lender may want to keep you as a client, so if you let them know you’re considering refinancing, they may give you a better deal.

In order to get the deal that’s right for you when refinancing your home loan, it may be advisable to consider the various options – dealing with a mortgage broker, contacting your existing lender and researching and comparing home loans by yourself. Considering all the options can improve your chances of finding the home loan that will save you the most money.

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