Tuesday, September 30, 2008

Mortgage Brokers - Friend Or Foe?


By Mortgage Rebate - Australia

Mortgage broker.... two words that create different feelings for different people. There are definitely some bad stories out there, but is it really fair to tar all brokers with the same brush? After all, their are bad people in every industry including the lenders who are increasingly pressuring ordinary staff into sales based performance measures.

There is not doubt that obtaining your home loan through a mortgage broker is more convenient and will save you time. However dealing with a good mortgage broker will also save you ongoing stress and possibly thousands of dollars by helping you find the right loan, the right lender and staying with you in good times and bad.

Let's start with some basics. Although there is some debate as to who a mortgage broker works for and how they operate, it is generally agreed that a mortgage broker is an intermediary between lenders and borrowers. The question of who the broker is working for becomes grey because they are paid by the lender, yet much of the benefit of a good mortgage broker is given to the borrower.

Benefits of a good mortgage broker.
The first benefit is mortgage brokers deal with and understand a number of lenders and hundreds of different loan types. A good broker has the ability to listen to what you need, assess how you use your money and develop a loan structure that has the necessary features to help you manage it and pay it off as quickly as possible. Good brokers then take these features to the market to source out the best value home loan that offers these features.

A good mortgage broker will also understand the differences between the different lenders wordings and will be able to help you steer around marketing traps carefully placed by the lender to win your business. So by talking with a good mortgage broker, you have a single conversation that gets tested across hundreds of home loans.

Another benefit is a good mortgage broker stays with you as your needs change. Lenders simply can't. Home loans take years to completely pay off and during that time, lenders will slip from being competitive to not so competitive, being helpful, to not being so helpful. When it comes time to change, your mortgage broker can change with you, so you're not left to start again every time your loan gets stale.

The problem with mortgage brokers.
There are two problems with mortgage brokers. The first is that many, although not all, work on commission only. This creates a financial pressure for them that may lead them to make improper recommendations due to either greed, desperation or a combination of both. Contrary to popular belief, many lenders also set sales performance targets and incentives for their staff, whether they are tellers or 'home loan specialists'. Worse still, there are now quite a few small business franchise operations amongst the non bank and bank lenders, that appear bigger than they really are, which lulls the unwitting borrower into a false sense of security.

The second significant problem with mortgage brokers can be a lack of experience and capability. Whilst it is true that the longer you do something, the better at it you should be, time is not the only measure and even some brokers who have been in the industry for several years inadvertently make mistakes.

The challenge for borrowers.
The Australian home loan market is bewildering. Common terms like Offset have different meanings depending on which loan and which lender you are dealing with. Even basic terms like Fixed Rate have been hijacked by unscrupulous lenders to have a different meaning. Consequently, borrowers need to place their trust in someone. It is impossible for anyone outside the mortgage industry to accurately compare home loans from more than about two lenders. Borrowers simply don't have the time, the tools or the experience to pit themselves against lenders out to win their business.

Instead of attempting to evaluate home loans, smart borrowers are now developing the knowledge to identify a good mortgage broker as that is a lot easier to do than spotting a good home loan. However if you are thinking of using a mortgage broker to assess or arrange your mortgage, do more than ask a friend for a recommendation.

Spotting a good broker.
Spotting a good mortgage broker isn't that hard. Just asking a short set of questions and paying close attention to the answers is all you need to do. A good mortgage broker:

1.Won't charge you any extra, unless they refund 100% of all commissions they receive.
2.Has a minimum of three years mortgage brokering experience or they are required to test each recommendation with a broker who has three years or more experience before they make any recommendations to you.
3.Will not make recommendations off the top of their head.
4.Does not use a single software package to identify solutions on the spot.
5.Will put their recommendations in writing and explain the reasons for the recommendations to you.
6.Does not rely on commissions to survive.
7.Is paid regardless of whether you take up their services or not.
8.Has the appropriate professional memberships (COSL and either FBAA or MFAA).
9.Is fully insured for Professional Indemnity.
10.Make sure your mortgage broker can tick all of these boxes. If they give you a mortgage rebate, that's a bonus.

©2008 Mortgage Rebate

Sunday, September 28, 2008

Chance to slash mortgage


By Nicole Pedersen-McKinnon
September 7, 2008


Maintain repayments and you're really in the money.

THE Reserve Bank has handed you a huge opportunity. And I mean - at a conservative estimate - tens of thousands of dollars huge.

There were months of media speculation about whether the commercial banks would pass on a Reserve Bank rate cut. When it came, they virtually fell over themselves to do so.

Assuming yours delivered the full 25 basis points, your required repayments will soon drop by about $17 a month for each $100,000 you have borrowed, or $43 for each $250,000.

With cost pressures seeming to grow by the day, that's welcome news. It gets better, though.

The cut takes the Infochoice benchmark variable rate (IBVR) - a weighted average rate that reflects the discounts people commonly receive on the quoted standard variable rate - from 9.3 per cent to 9.05 per cent.

That means you will now pay almost $13,000 less in loan interest over the life of a $250,000 home loan, $25,818 less on a $500,000 loan and $38,726 less on a $750,000 one (25-year term).

But here's where the enormous opportunity lies: if you can manage to leave your repayments at their current level, you will keep from the bank - and for yourself - far more. For example:

* What is now a $43 overpayment on a $250,000 mortgage will save you $17,000 in loan interest.

* What is now an $86 overpayment on a $500,000 mortgage will save you nearly $35,000.

* And what is now a $129 overpayment on a $750,000 mortgage will save you just under $52,000.

In all three cases you will also repay your loan a whole year early.

Bear in mind, too, that this is the effect of maintaining your repayments when there has been just one rate cut. Some economists are predicting more like four in the next year in a bid to stimulate economic growth and buffer Australia from the global credit crisis.

How would a full 1 per cent fall change the figures? If the IBVR moved from 9.3 to 8.3 but you held your repayments steady, you would save $49,408 in interest on a $250,000 loan, $98,305 on a $500,000 loan and $147,773 on a $750,000 loan.

Yes, that much. And remember, it's not cost you one cent beyond what you are used to paying. In all instances you would also be debt-free 31/2 years sooner.

The reason keeping your repayments at the same level when rates fall is so powerful is that, immediately, less goes towards interest and therefore more to paying down your principal. The lower the rate drops, the more dramatic the effect.

So maintaining repayments come what may is one of the smartest ways to beat debt. With your mortgage outlay, if at all possible, the only way should be up.

What do you do to make sure you get the savings on offer? Nothing. Unless you say otherwise, your bank is unlikely to reduce the amount it debits for your monthly repayments. They are typically much quicker to adjust direct debits for rate rises because they are out of pocket if they don't.

Of course, for you to get the full benefit of what will now be extra repayments, your bank will need in future to cut its interest rates at pace with the RBA. And with profits squeezed courtesy of the credit crunch, none will commit to that.

Still, every little bit helps.