Refinancing Mistakes and Official Sources
Mortgage broker or go direct to a lender? Duties, commissions and how to check
How Australian mortgage brokers are paid and regulated, what the best interests duty requires, when going direct to a bank makes sense, and the questions to ask before you choose.
A mortgage broker compares loans from a panel of lenders and manages the application, and is usually paid by the lender you choose rather than by you. Since 1 January 2021, brokers have had a legal best interests duty: they must act in your best interests and put your interests first when there is a conflict. Going direct to a lender can be just as good when you already know which lender suits you, your situation is simple and you are confident negotiating. A broker tends to add the most value when your circumstances are complex, your borrowing power is tight, or you want help comparing lender policies rather than just advertised rates.
This guide is part of home loan refinancing mistakes.
How brokers are regulated
- Licensing. A broker must hold an Australian Credit Licence or be an authorised credit representative of a licensee. You can check on ASIC's professional registers.
- Best interests duty. Under the National Consumer Credit Protection Act 2009, mortgage brokers must act in the best interests of consumers when providing credit assistance, and give priority to the consumer's interests if there is a conflict.
- Responsible lending. Brokers must also make reasonable inquiries, verify your situation and not suggest an unsuitable loan.
- Remuneration rules. Rules on conflicted remuneration restrict certain commission arrangements, such as payments tied to loan volumes or campaigns. Check ASIC for current detail.
- Complaints. Brokers must belong to AFCA, so you can take an unresolved complaint there for free.
How brokers are paid
| Payment | Paid by | What to know |
|---|---|---|
| Upfront commission | Lender | A percentage of the loan amount drawn, paid at settlement |
| Trail commission | Lender | A smaller ongoing percentage of the balance while the loan stays open |
| Clawback | Lender recovers from broker | If you refinance or repay within an early period, the lender may claw back commission from the broker |
| Broker fee | You | Some brokers charge fees, for example for complex loans; they must be disclosed |
Your broker must give you a credit guide and disclose commissions. Ask for the dollar amount of upfront and trail commission on your loan, and how commissions compare between the lenders recommended.
Broker vs direct: side by side
| Mortgage broker | Direct to lender | |
|---|---|---|
| Choice | Panel of lenders, often dozens, but not every lender | That lender's products only |
| Legal duty | Best interests duty | Responsible lending; no best interests duty to you |
| Cost to you | Usually nothing; sometimes a fee | Nothing |
| Policy knowledge | Knows which lenders accept which income types and situations | Knows its own policy in depth |
| Negotiation | Can request pricing exceptions from lenders | You negotiate with the lender yourself |
| Ongoing service | Some review your rate yearly | Varies; you need to ask |
| Best for | Complex income, tight serviceability, first home buyers, refinancers wanting a broad comparison | Simple loans, existing customers with strong relationships, confident negotiators |
What a better rate is worth
On an illustrative $600,000 loan over 30 years, finding 5.85% instead of 6.00% lowers the repayment from $3,597.30 to about $3,539.65, a saving of about $57.66 a month or $692 a year. Over five years before you might refinance again, that is about $3,460. Whether you find that rate yourself or a broker finds it, the value is the same; the question is effort and expertise.
Questions to ask a broker
- How many lenders are on your panel, and which ones did you compare for me?
- Why is the recommended loan in my best interests, and can I have that in writing?
- What upfront and trail commission will you receive, in dollars, from each lender you compared?
- Do you charge any fee, including if I refinance within a set period?
- Will you review my rate each year?
- What is your credit licence or credit representative number?
Doing it yourself well
If you go direct:
- Check new-customer rates at your bank, two other major lenders and one or two smaller lenders or customer-owned banks.
- Use the comparison rate as a first filter, then work out dollar costs on your balance; see comparison rate explained.
- Use written offers to negotiate; see asking your lender for a lower rate.
- Follow a checklist; see the home loan comparison checklist.
Warning signs
- A broker who will not tell you the commission or the lenders compared
- Pressure to borrow more than you planned
- Suggestions to adjust income or expense figures to "get it through", which can amount to misrepresentation and leave you with an unaffordable loan
- Unlicensed advisers, or someone who cannot give a licence or credit representative number
If you see these, choose someone else, and you can report concerns to ASIC.
Frequently asked questions
Do brokers get paid more by some lenders?
Commission rates can differ between lenders. The best interests duty requires the broker to put your interests ahead of their own, and they must disclose commissions.
Can a broker get a better rate than I can?
Sometimes, because brokers can request pricing from multiple lenders at once. Many borrowers get similar rates by negotiating directly.
Do bank staff have a best interests duty?
The broker best interests duty applies to mortgage brokers. Lenders' own staff must comply with responsible lending and other obligations, but they act for the lender.
What if my broker gave me poor advice?
Complain to the broker first. If unresolved, take it to AFCA. See mortgage hardship and AFCA complaints.
Sources
- ASIC — best interests duty, credit licensing and professional registers
- ASIC Moneysmart — choosing a mortgage broker
- Australian Financial Complaints Authority — complaints about brokers
