Mortgage Broker vs Banks: Which Is Best for Your Home Loan?

Introduction

Your mortgage could be the biggest financial commitment you ever make. With loan terms lasting up to 25 or 30 years, finding the right mortgage will greatly impact your financial situation. So, where do you start? Should you stick with your trusted bank and let them guide you, or turn to a mortgage broker who can compare loans across multiple lenders?

More and more Australians are leaning towards mortgage brokers. In fact, in the September quarter of 2024, a record high of 74.6% of all new home loans were broker-facilitated. In this article, we’ll uncover the key differences between banks and mortgage brokers, the pros and cons of each, and help you decide which option is best for you.

If you want to find a great broker in your area, check out our top 10 lists:

• Best Mortgage Broker Sydney
• Best Mortgage Broker Melbourne
• Best Mortgage Broker Brisbane

Understanding the Roles

What Does a Mortgage Broker Do?

A mortgage broker is like a matchmaker for home loans. They work with a panel of lenders, such as banks, credit unions, and specialty finance companies, to compare loans and find the right choice for you.

How Mortgage Brokers Work

• Get to Know You: Your broker will start by getting to know you and your financial situation. That includes what kind of home you want to buy, whether you’ve saved a deposit, your income and expenses, and other essential details. Then, they’ll evaluate your borrowing power and look for suitable home loans.
• Go Through Your Options: Your broker will compare various options from multiple lenders. They’ll check the rates, features, and terms to find the best fit.
• Negotiate on Your Behalf: Your broker will do the heavy lifting when negotiating. They’ll work to get you the best interest rates, terms, and fees so you get a loan that works for you.
• Guide You Through the Application Process: Your broker will walk you through the paperwork to ensure your application complies with the lender’s criteria and avoids hiccups.

How Much Do Mortgage Brokers Cost?

For most borrowers, mortgage brokers are free. This is because they receive commissions from lenders, so you don’t have to worry about out-of-pocket fees. There are two ways mortgage brokers get paid through commissions:

1. Upfront Commission: The lender pays them when the loan is settled (usually 0.5%-0.7% of the loan amount).
2. Trail Commission: The lender pays them a smaller ongoing payment while the loan remains active (typically 0.1% – 0.2% of the remaining loan balance annually).

Mortgage brokers are independent of any single lender, while not all brokers are regulated in Australia by the Best Interests Duty. They must legally act in your best interest and recommend a home loan that aligns with your circumstances and goals rather than chasing a higher payout.

What Does a Bank Offer?

While mortgage brokers work with a panel of lenders, banks only offer their products. You’ll deal directly with one of the bank’s employees who will go through their product range and suggest one for you.

How Banks Work

• Big Focus on Their Products: Banks only offer home loans within their portfolio. They won’t call the bank down the road to check if there’s a better option with a competitor.
• Emphasis on Existing Relationships: If you’ve been with your bank for many years, they might reward you with perks like bundled discounts or reduced fees.
• Less Flexibility: Banks may have stricter lending policies, making it harder to qualify for a loan, especially if you have complex financial circumstances.

Dealing directly with a bank might seem straightforward, but you don’t get the power of comparing options from multiple lenders as you do with a broker.

The Difference At A Glance: Mortgage Broker Vs Going Directly to a Bank

This table shows a side-by-side comparison to highlight the key differences:

	Mortgage Broker	Bank
Loan Options	Brokers offer a broad range of loan products from multiple lenders, including banks, credit unions, and specialty lenders.	Banks only provide loans from their own product range, limiting your options.
Interest Rates	Brokers may negotiate with lenders to secure lower interest rates.	Rates depend on the bank’s standard offerings, which may or may not be the most competitive.
Guidance	Brokers provide tailored advice, comparing loans to find the best match for your needs.	Bank representatives focus on selling their own products, offering less comparative advice.
Complex Situations	Brokers are skilled at finding loans for self-employed borrowers, those with bad credit, or unique financial circumstances.	Banks may have stricter lending policies, making it harder for some borrowers to qualify.
Convenience	Brokers handle the paperwork, negotiation, and whole process, saving you the hassle.	You do the application yourself, as well as doing your own research and comparisons.
Cost	Brokers are typically paid by the lender, so their services are usually free for you.	Banks don’t charge extra for working directly, but they offer no external comparison options.
Time	Brokers save hours of research because they do it for you. Also, they can streamline the application process to potentially speed up approvals.	Banks may have a slower, stricter approval process. You’ll also spend time comparing loans across banks on your own.

Pros and Cons of Using a Mortgage Broker

Pros of Using a Mortgage Broker

Using a mortgage broker comes with a host of key benefits that can make your home loan journey smoother and more convenient:

1. Access to a Broad Range of Lenders

Think of a mortgage broker as your shopper. By partnering with multiple lenders, brokers search a wide range of loan products to have clients find the best fit. With more options, you’re more likely to get a tailored loan.

“Working with a mortgage broker offers a clear advantage over going directly to a bank or lender. Unlike banks, we aren’t tied to any specific institution. Instead, we focus on understanding our client’s needs and matching them with the right lender.” – Mansour Soltani, Soren Financial

2. Expert Guidance and Support

Understanding home loans often feels like learning a new language, especially if you’re buying your first home. Brokers take the stress off your shoulders by helping you navigate the mortgage application and approval process. They’re up-to-date on market trends and lender policies, and they explain complex loan terms and features in a way that’s easy to understand.

3. Better Rates and Discounts

Brokers with high volumes of loans have extra negotiating power with lenders. This means they can often negotiate better interest rates and fees on your behalf.

“Using a mortgage broker who writes decent volume is also advantageous because volume means better discounts on rates as well as fee waivers.” – James Haywood, Approved Finance

4. Tailored Lending Solutions

A home loan is not just about finding the right interest rates, terms, or fees. If you have unique financial circumstances – such as irregular income, low deposits, a poor credit rating, or you’re self-employed – a broker can connect you with more flexible lenders.

5. Save Time

Don’t have spare time to research and compare all your options? Your mortgage broker can be a lifesaver if you work a busy job or balance a family. They do all the research for you and narrow down the best options.

Cons of Using a Mortgage Broker

While mortgage brokers have many advantages, it’s important to be aware of potential drawbacks when choosing between a broker and a bank.

1. Variable Expertise and Quality

Like in any industry, some brokers have more skills or experience than others. An inexperienced broker might give you poor advice or overlook a good opportunity to save you potentially. Do your homework before you choose a broker. Check their qualifications, read reviews, and look for a proven track record.

2. Potential for Bias

In Australia, brokers are legally required to act in your best interest. However, there is a risk that commission structures could influence their recommendations. Most brokers genuinely want to find you the best deal, but it won’t hurt to ask questions. Quickly checking their lender panel and approach will give you peace of mind.

3. Ongoing Fees and Conditions

Yes, brokers can provide access to many loan options and find you an outstanding loan, but some products may have higher ongoing fees. Always check the comparison rate to understand the actual cost of a loan and ask questions if it doesn’t add up.

Pros and Cons of Going Directly to a Bank

Pros of Going Directly to a Bank

Going through your bank can offer a few advantages and benefits, especially if you’ve been a loyal customer for years.

1. Familiarity and Simplicity

Some borrowers prefer going directly to their bank because it feels familiar and straightforward. If you have a strong relationship with your bank, you can pick up the phone and go with who you know. Keeping all your accounts, credit cards, and home loans in one place simplifies managing your finances.

2. Loyalty Perks for Existing Customers

Banks often reward loyal customers with perks, such as lower fees or interest rates for bundled products. If you’re a long-term customer, it makes financial sense to leverage your loyalty and see what kind of deal you can get.

Cons of Going Directly to a Bank

Going directly to a bank may seem straightforward, but some limitations could impact your mortgage.

1. Limited Loan Options

The most significant disadvantage of going to a bank is that they only offer loan products. It limits your choices regarding interest rates, fees, loan terms and structure. Some call this the “loyalty tax” because being loyal to your bank could mean you miss a better deal with another lender.

2. Lack of Comparative Advice

Bank representatives work for the bank, not for you. Their goal is to promote the bank’s products. Without looking at the bigger picture, you could end up with a loan less suited to your financial goals.

3. Challenges for Unique Borrowers

If you’re self-employed, have a low credit score, or have irregular income, you might find it harder to get loan approval through the bank. Banks often have stricter lending policies, which can make the home loan process more challenging if you have special circumstances.

Key Factors to Consider

While nearly three-quarters of Australians choose mortgage brokers, it’s not a one-size-fits-all approach. It depends on your situation, preferences, and how much time and effort you can put into the process. Here are a few factors to consider when making your decision:

Your Financial Literacy

How confident are you when it comes to comparing home loans? If you don’t mind crunching numbers on interest rates and fees, you might prefer to handle the process yourself. But if terms like “bridging loan” or “LVR” make your head spin, a mortgage broker can simplify things and guide you through your options.

Time Availability

Do you have time to research and compare home loans independently? Between researching lenders, calculating costs, and understanding the fine print, comparing the home loan market and loans takes time and effort. A broker will free up your time so you can spend it on work, friends, or family.

Complexity of Your Financial Situation

Are you self-employed, or do you have a low credit score? Navigating home loans can be tricky enough already, but things get harder if you have complex financial circumstances. A mortgage broker can find more flexible and willing lenders to work with you.

Your Relationship with Your Bank

If you’ve been with the same bank for years and have built trust, it might be worth calling them first. Remember that while your bank may reward loyal customers with discounted deals, a good broker might find you something even better.

How to Make the Right Choice

The decision between a mortgage broker and a bank ultimately depends on your circumstances and financial goals. Here are a few general rules of thumb for informed decision-making:

Use a Mortgage Broker If:

• You want to compare a diverse range of loan products and give yourself the best chance of finding the right home loan.
• You prefer to get expert help rather than doing all the research yourself.
• Your financial situation is complex (e.g., self-employed, low deposit, or credit issues).
• You’re confused about the process or what specific terms mean and how they impact you.
• You value the convenience of having a broker guide you through the application process.

Call Your Bank First If:

• You have a strong relationship with your bank and trust their products.
• You prefer a straightforward process and don’t want help comparing mortgages from other lenders.
• You’re confident in your ability to do the research and handle the application process independently.

Conclusion

You may be tempted to go straight to your bank when applying for a home loan. While they offer familiarity and loyalty perks, remember they’re limited to their products. This means you could be missing a better deal somewhere else.

Mortgage brokers give you direct access to a range of lenders. With a legal obligation to act in your best interests, they can help you obtain a suitable mortgage with less stress and more confidence. You’ll save time, receive expert guidance, and get a lot of the research and paperwork done for you – leaving you free to focus on choosing the right home loan.

How do I find the best mortgage broker? Check out the top 10 list of local mortgage brokers for your area:

• Best Mortgage Broker Sydney
• Best Mortgage Broker Melbourne
• Best Mortgage Broker Brisbane

Mortgage Broker Vs Banks FAQs

1. Should I use a mortgage broker or go to my bank?

• Choose a mortgage broker if you want access to a wide range of options and expert guidance or have a complex financial situation.
• Try your bank first if you already have a strong relationship and prefer to keep all your financial products in one place.

2. Do mortgage brokers offer better interest rates than banks?

Mortgage brokers often secure better interest rates than banks because they can access multiple lenders, so there’s more choice. Brokers can also use high loan volumes to negotiate lower rates on your behalf.

However, banks might offer special rates to loyal customers or for bundled products. That’s why you should compare offers from both brokers and banks before deciding.

3. Are there any hidden fees or costs when working with a mortgage broker?

In Australia, borrowers rarely pay fees to mortgage brokers because brokers earn commissions from lenders. The lender pays these commissions directly, either upfront when the loan is settled or as a small ongoing payment over the life of the loan.

4. Are mortgage brokers biased?

Mortgage brokers are legally required to act in your best interest. They must also disclose how they’re paid and potential conflicts of interest (e.g., preferential relationships with certain lenders or investment property).

5. How do mortgage brokers choose the lenders they recommend?

Mortgage brokers recommend lenders based on your financial profile and goals. They consider factors like:

• Your loan purpose (investment property, refinancing for renovations, or a first home)
• Your financial situation (credit history, income type, and debt-to-income ratio)
• The lender’s loan options (including policies, rates, and fees)

Brokers only recommend loans from lenders they’re partnered with. While this often includes major banks and specialty lenders, it’s not an exhaustive list. It’s a good idea to ask your broker why they recommend a specific loan.

6. Is one option faster or easier for getting a home loan?

Using a mortgage broker is often faster and easier because they handle most of your work. However, going directly to a bank might feel simpler if you already have a strong relationship with them. Still, you’ll need to do your comparisons and manage the application process yourself. If speed and convenience matter, a broker typically offers a smoother experience.

7. Can mortgage brokers help with loan pre-approval?

Yes, mortgage brokers can guide you through the pre-approval process, helping you understand how much you can borrow and ensuring your application meets lender requirements. For more information on mortgage pre-approval, read our article, Mortgage Pre-Approval: Everything You Need To Know.

8. Are mortgage brokers good for first-time buyers?

Mortgage brokers are invaluable for first-time home buyers. They simplify the process, explain complex terms, and find loans that suit your situation. This can make the first home-buying journey less overwhelming.