What will a mortgage broker cost you?

Yahoo 7, 21 August 2007

Lisa Wolff

The internet has opened up a world of possibilities when it comes to shopping around. Need a new credit card? Hop onto the web and within seconds, you have a range of the best rates at your fingertips. Plus you can apply online instantly. The same goes for necessities like car insurance.

The middleman has essentially been dumped. No longer does the 'net savy consumer feel the need to pay expensive consulting fees to a broker when they can do their own research just as easily (and far cheaper). Of course, it's never a bad thing to consult with an expert but this does usually come with a hefty price tag attached.

This has been confirmed by research conducted by Infochoice, an independent information provider for financial and investment products and services. According to Infochoice estimates, broker commissions cost Australian home buyers a massive $1.8 billion a year.*

Discussing the broker commissions, InfoChoice general manager Denis Orrock said, "On a $250,000 loan we estimate brokers are paid $1,3881 a year. With nearly 40 percent of existing mortgages sourced through brokers, this represents a total cost of $1.8 billion** nationally. This cost is set to rise with almost 50 percent of new mortgages expected to be sourced through brokers by year's end. While a mortgage broker may offer some benefits, consumers need to realise these do not come free and nor are they cheap. With housing affordability at an all time low, this is a cost most Australians can ill afford!

"Brokers get around the issue of commissions by telling customers that these expenses are covered by the bank or loan provider. While 'technically' true, in reality these costs are factored into loan pricing and ultimately the customer pays through higher interest rates and fees."

People getting a home loan through a bank aren't better off either; Orrock added. Banks still need to factor in broker commissions when setting their prices, which means their customers end up paying the cost.

"What's remarkable is that some lenders are now talking about increasing interest rates to cover the cost of more challenging capital market conditions," he said. "It appears the consumer will be left to foot this bill while lender and broker margins remain intact."

So what options do we have? There are a handful of new-age mortgage providers that operate exclusively online rather than via physical branches. Some also tout that they do not pay broker commissions which means lower costs and greater savings for borrowers.

Hamish Carlisle, The MD of one such company, QuickDirect, said, "Throughout my career, I have been continually amazed by the level of confusion caused by banks and brokers within the Australian mortgage industry. Much of this confusion serves to justify the high rates and fees charged."

He continued, "Much of the appeal around brokers is that they appear to take the hard work and confusion out of selecting between the hundreds of mortgage products in the market. But getting a home loan shouldn't be difficult".

"Rather than trust a bank's interest rate at face value, consumers should investigate the comparison rate which banks are obliged to disclose. This is a true reflection of what they're getting charged when you take into account things such as application, maintenance and settlement fees. Getting a low interest rate can save tens of thousands of dollars over the life of a home loan, so it's one of the most important factors to consider."

Need help calculating your borrowing powers or stamp duty? Check out the essential Yahoo!7 homeloan calculators.

* Based on up-front commissions of 0.67%, trailing commissions of 0.27% and a loan life of 28 months.

** Based on outstanding housing credit of $860 billion of which 38% assumed to be broker originated with an average annual cost of 0.56% being 0.67% up-front amortised over 28 months and 0.27% trail.