1. Encourages you to falsify your financial informationMortgage brokers work on commission so the more loans they get across the line, the bigger their commission is going to be. Some brokers might suggest that you inflate your income to get your loan over the line. Or worse, they might boost your income without telling you! They may also encourage you to manipulate your financial documents to show lower expenses or not declare all your debts so that you look more favourable in the eyes of the lender.
Make sure you check the application form the broker is submitting to the bank and don’t sign a blank document. Don’t be swayed to embellish your income at all costs.
2. Urges you to put up your home as collateral for another purchaseA dodgy broker may encourage you to put up your residential property as collateral when buying another property without explaining the risks of doing so. If you’re low on borrowing capacity and looking to buy another property, they may suggest that you use your existing property as additional collateral in order to get your loan over the line. The biggest risk of using your home as security is that it would tie it up with the new property. If something goes wrong and you have to sell, you’re putting both properties at risk. It would also be very costly to untangle the properties once they’re cross-securitised.
Grill your broker about why you should cross-collateralise your properties. Ask about the risks and impact on your borrowing in the future. As a general rule, it’s the last resort as there are simply too many downsides to doing so; for example, your borrowing capacity will be limited and your lender will have more control of your assets.
3. Encourages you to take high interest non-conforming loansIf you don’t have the required borrowing capacity or have blemishes on your credit record, some brokers might push you into taking non-conforming loans or other higher-interest loans just to get finance. Don’t get talked into taking up these loans. It’s better that you wait a while, build your deposit and strengthen your financial situation before borrowing, rather than taking high interest loans offered by fringe lenders.
Start saving as soon as you can and focus on cleaning up your credit record. Show your lender you’re managing your debts by making repayments regularly.
4. Double dippingSome mortgage brokers will charge you an upfront fee as a way of paying themselves for getting you a home loan. This is an unnecessary expense on your part because they’re already being paid by the lenders. They’re essentially double charging you for the loan: once by you and once by the lender. You may want to consider avoiding mortgage brokers that charge you an upfront fee to get you a loan unless they’re providing massive value such as taking you through a long education process. Even then, considering the fact that they are paid very well by the lender, it seems fishy that they charge you, the borrower, for getting a loan. Good brokers get a lot of referrals and they’re so busy writing loans that they won’t need to double dip.
Ask your broker if they’re charging you a fee and why. If you’re not satisfied with their answer, look around. There are plenty of competent brokers who don’t charge borrowers a fee for their services.
How do mortgage brokers make money?If you’re wondering how brokers get paid, here’s a rough breakdown: When a broker writes a loan, the lender pays an upfront commission – a small percentage around 0.6% of the loan amount. For example, on a $500,000 loan at 0.6% commission, they get $3,000 straight in their pocket. It varies from lender to lender but on average it’s under 1%. On top of this, there’s also a trailing commission which is around 0.15%. This is based on the outstanding balance, not on the loan amount. This means that anything on the redraw or offset reduces that amount and it’s calculated monthly. That’s why brokers are incentivised to get a higher valuation for their clients when refinancing.
What to do next?Over the next weeks, I’ll be releasing comprehensive guides and tutorials on how to navigate the ever-changing mortgage and property market. At a time when there’s so much uncertainty, you need to arm yourself with independent, practical and relevant information to avoid any risk. I invite you to sign up to get access to these exclusive reports.
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