How much can you trust your broker? - short answer 'only as much as a salesman!'

We recently had the following statement on our website.

Because no broker is really ‘independent’ of the products they sell, you should definitely make sure they compete against each other (competition is a wonderful thing).

A large mortgage broker threatened legal action, claiming our statement was "erroneous and misleading". We beg to differ. Let me explain what brokers do and help you get the best out of broking.

Mortgage brokers generally have a ‘panel’ of lenders to whom they refer business. Often the panel is a wide cross section of the industry, and that means brokers can expose their clients to much or most of the market with a single call or visit. But the lenders pay hefty commissions for the brokers to introduce clients to their products. For instance on a loan of $250,000, lenders typically pay $1,500 up-front, plus a ‘trailing commission’ of $600 odd per year, declining with the balance of the loan. This is why most brokers don’t charge, but it also means that brokers are working for those who pay them – the lenders.

Mortgage brokers perform a valuable service because they have better knowledge of the available options in the market than most consumers. However, I object to the habit of so many mortgage brokers of inviting their customers to ‘leave it all to them’, describing themselves as ‘independent’ and couching their salesmanship as ‘advice’.

Mortgage broking is a bit like selling fridges in a large department store. You’d hardly be surprised if you were told by a salesperson that in their range they had the perfect fridge for you at the best possible value. We have all learned to take this type of ‘advice’ with a grain of salt!

However, imagine if you visited a firm calling itself ‘the fridge adviser’. You are in the same shop, same range of products but this time the salesperson invites you to think of them as an ‘adviser on all your fridge needs’. Even if you were told that the ‘fridge adviser’ was paid the same for whatever fridge they sold, you’d still figure they were a salesperson – which they are.

Mortgage broking is a bit like selling fridges. You wouldn’t expect a fridge salesman to tell you about a fridge they didn’t sell, so don’t expect most mortgage brokers to tell you about products they don’t have access to. There are some good products around which brokers can sign you up to. There are also some good products to which they can’t.

None of this is sinister.

Of course a broker, like a salesperson, still has an incentive to get you the best loan. They want to secure your business now and for the future.

So, as I see it, the most critical thing for a borrower dealing with a broker to do is make sure that your broker competes for your business. If that comes with some useful background advice reflecting their experience and superior knowledge of the market, well and good – but take the advice with the same amount of salt you’d take advice from a salesperson.

In fact under the new Financial Services Reform Act, from March 11 if mortgage brokers were financial advisers they would be breaking the law if they took commissions and still described themselves as ‘independent’.

Here are some other tips to keep you in charge when dealing with a broker.

• Look for bargains that brokers don’t cover;
  

• If you use a broker, make sure they know they are competing with other brokers. (But don’t flippantly invite several to your house for nothing – they have to earn a living too!);
  

• Ring a few brokers, tell them your circumstances and needs and see what they suggest. Don’t invite a home visit until the broker can tell you of a loan that sounds at least as good as any loan you can find for yourself;
  

• Most broking operations train their brokers in sales techniques to ‘clinch’ the deal at the home meeting. The broker will help you fill out the application forms for your chosen loan. Keep the forms for a day or so as a cooling off period. If your broker seems uncomfortable with this, you know they’re acting more like a salesperson than an ‘adviser';
  

• Consider an internet and phone based broker. A home visit has advantages, but if you know what you want, you can ‘cut to the chase’ over the phone, and have application forms e-mailed to you with minimum fuss.
  

• Realise that lenders’ commissions are generous. Accordingly some brokers are now rebating commission back to borrowers. So you can now pick up most products with excellent service as well as a cash payment above what you would have got if you had approached the lender direct. On that loan of $250,000 mentioned above, you can pocket the first $1,000 commission with the identical loan and bank branch relationship you’d have if you approached the lender direct.

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