Matt & John's story Matt and John had been living together for 2 years. Both had jobs paying around $30,000 pa. They decided to buy a house. Roger called called them about a "special mortgage deal". As they were shopping for a loan anyway, they made an appointment with Roger at 6pm the next Friday. Roger told them about the "special mortgage deal". He showed them graphs of how much they would save if they put all their salary into the loan and only withdrew their living expenses. Roger said that only he could arrange this deal. After Roger spent several hours with them they agreed to sign some forms to apply for the loan. Roger left at midnight. Matt and John found a house to buy. Roger arranged for Matt and John to sign the loan documents. Soon the purchase of their home settled. A few days later Matt and John received a letter and were horrified to find that Roger had added a "commission" of $3500 to the settlement. Worse, the special deal Roger had arranged was actually a "line of credit loan" with a higher interest rate than an ordinary home loan. A year later Matt realised that they were not careful enough with withdrawing their expenses and, as a result, the loan balance had reduced very little. |
What is a finance broker? A finance broker is a "go-between" who usually arranges loans for a fee (paid by you or the lender or both). A finance broker deals with the lenders for you and arranges a loan for you. Some finance brokers are called mortgage brokers. Mortgage brokers are finance brokers who specialise in arranging home loans. How much does a finance broker cost? It will depend on which finance broker you use. There are 3 types: - Finance brokers who do not charge you a fee. The lender pays this type of finance broker. The lender will usually pay the broker a fee for introducing you to them and an ongoing fee for the length of your loan (called a "trailing commission"). Mortgage brokers often operate this way.
- Finance brokers who charge you a fee (or commission) and receive a one-off commission and a trailing commission from the lender.
- Finance brokers who only charge you a fee and do not receive any payment from the lender for introducing the loan. This type of finance broker is not as common as the other two types.
If you decide to use a finance broker that is charging you a fee, as a guide the fee should not be any larger than 1.5-2% of the amount of the loan being arranged. As this amounts to $3,000 - $4,000 on a $200,000 loan for example, you should also be sure you feel you are getting value for money from the service and you have checked what other services are available. Who is the finance broker acting for? This is a complicated question. In a narrow sense the finance broker is providing a service to the potential borrower. The service being provided by the finance broker is arranging a loan. Yet the finance broker is usually being paid by the lender to introduce the loan so in another sense the finance broker is acting as the agent of the lender. Best advice: Do not assume that a finance broker is acting in your best interest and will get you the "best deal". In some cases they may be motivated by the commission paid by the lender rather than your best interests. Shop around and make sure you ask about commissions and other kickbacks. If you enter a broking agreement in NSW, then information about fees, commissions and other relevant information will be included in it so read it before you sign. Should I use a finance broker? This is up to you. You do not have to use a finance broker. You always have the option of dealing with most lenders directly. Finance brokers can be good value and find you a loan that suits your needs with a competitive interest rate. For busy people this can save a lot of time and effort in shopping around for a loan. Finance brokers can also be poor value and put you in a loan that is completely unsuitable for you. Furthermore, often you could have approached the lender directly and got the same loan (without having to pay any fee!) Can a finance broker arrange a loan when I would not be able to get a loan elsewhere?
The answer should be no. If you are having trouble getting a loan you should get advice. There is a range of reasons why you may not be able to get a loan: for example, a past bankruptcy; you do not earn enough; or, a poor credit record. Loans from alternative lenders that target borrowers with a poor credit history are usually more expensive, so make sure you really have no other alternative. Keep in mind that whatever your problem is, it will not be improved by getting a loan that does not suit your needs. If you are seeking another loan because you are having difficulties paying the loans you already have, you should try to come to an arrangement with your existing lenders. Debt consolidation can assist in some cases, but beware finance brokers who charge a substantial fee or commission and direct you to expensive alternative lenders. You may find yourself in a worse position than the one you were trying to fix. See also Can't Pay Your Loan?. Hints for getting the most out of a finance broker - If you are not sure whether you are dealing with a finance broker, ASK! Some people think they are dealing with the lender when in fact they are speaking to a broker. If you are unsure ask.
- Shop around. Ring other finance brokers and check what they charge and what they are offering to do.
- Ask how much the service will cost you.
- Do not pay an up front fee. In NSW, finance brokers arranging loans for personal purposes cannot charge you a fee until the loan is secured. This means you shouldn't pay the broker until the lender has approved the your loan
- Make sure you have a written agreement that covers the following:
a. Any fee to be paid
b. The type of loan being arranged for you
c. The amount of the loan
d. The term of the loan
e. The current interest rate
f. Fees to be paid to the lender or the lender's solicitors to arrange the loan. For example, the lender's application fee, establishment fee, the lender's solicitor's costs to prepare, register and stamp the mortgage (if applicable). In NSW, finance brokers arranging loans for personal purposes cannot charge you a fee unless you have signed a written agreement covering the amount of the loan, and the term of the loan. - Do not sign anything without reading it carefully first. If you don't understand anything, get independent advice. (See Getting Help) Many potential borrowers have signed a document presented by a broker (sometimes thinking it is a loan application), only to discover later that they have signed a binding contract including a substantial fee that is payable whether they accept the loan arranged by the broker or not.
What if I have problems with my Finance Broker? Get legal advice (See Getting Help). You can also lodge a complaint with:
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