Finance Australia: What Is a Mortgage Broker?

There are many home buyers in Australia who are looking to get into home ownership for the first time. These home buyers may not be familiar with certain terminology or they may not be aware of the options they have in purchasing a home. The most pertinent barrier to home ownership is funding, how will these home buyers get the funding they need to make the purchase? Sure, there are the usual suspects to investigate such as banks, credit unions, and other financial institutions. But, what about other options that may not be readily available to the public? This is where a mortgage broker comes into play.

Mortgages – A Bustling Business

Mortgage Brokerages are firms that employ a team of mortgage brokers who specialize in getting mortgages for their clients. Visualize a stock broker from movies like “Boiler Room”, constantly making calls and trying to get the best stocks for their clients. A mortgage broker operates much the same way without the extreme intensity and pressure of stocks and bonds. The mortgage broker serves a high demand of matching clients with lending institutions to get the best deal for both parties.

Middleman

The broker is a mortgage expert with relationships cultivated over many years within the finance industry. These relationships stretch from Sydney to Perth throughout a network of banks and lenders that deal with a wide range of credit scores and clients. The broker can find lenders that are not accessible through the normal channels that the public has access to. These special lenders deal with other lending institutions or through mortgage brokerages exclusively.

2008 – Crisis of Confidence in the USA

2008 brought upon the housing market crisis in the United States with many mortgage brokerages facing scrutiny over their lending practices. So-called NINJA loans were utilized in these mortgages which ultimately caused a rise in defaults. The acronym NINJA stood for No Income and No Job in relation to loan qualifications. These types of practices brought a black eye upon the trade as scrutiny spread to other locations around the world. Because of this crisis, the brokerage houses re-doubled their efforts to establish a standard of ethical lending practices to avoid the same calamity happening in the future.

Typical Process of a Mortgage Broker

A client is looking to purchase a home in Sydney and is having problems garnering financing with their bank. The client does his due diligence and goes to a reputable mortgage broker in Sydney. The broker has the client fill out the proper paperwork with their financial information such as income, how long they’ve been at their job, bank statements, collateral, etc. If the client is looking for a mortgage with a co-signer, the co-signer’s requisite information is also gathered at the initial consultation. The real estate in question is also discussed and paperwork on the property gathered from either the client or the home seller which entails deeds, property tax information, and possibly home inspection paperwork done by an appraiser.

The Sydney mortgage broker then contacts a list of different lending institutions to get the best rate for the client based upon how much the mortgage will be worth and the client’s credit worthiness. Once a suitable match has been made, the broker will get the offer sheet from the lender and provide that to the client. The client can then either accept the terms or reject the terms and ask for a different lender. The broker can make their cut on the deal through a variety of ways. The broker can collect the brokerage fee (essentially, a finder’s fee) from the client once the client accepts the terms.

Another option is that the broker collects the fee from the lending institution upon final approval by the client. This last option may result in a tiny bump-up of the APR in the terms to the client to make up the difference to the lender. Yet another option to the broker is that the lending institution pays the broker a commission at final approval. This commission may be an addition to the brokerage fee that the broker collects from the client. This last scenario is most likely to happen with brokerage firms who send a large group of clients to a specific lender, establishing a solid relationship in the process.

Anatomy Of a Mortgage

There are certain signposts in the road of Life that most of us see as we continue down the path. These signposts fall under the usual suspects such as falling in love, getting married, having children and starting a family, etc. The signpost that most of us see whether we start a family or not is owning our own home. Some of us are lucky enough to have the capital available to purchase a home outright while a vast majority of us end up taking out a loan for the home. This loan for the home is called a mortgage and there are many kinds of loans that fall under this umbrella called a mortgage.

The word “mortgage”

Why the word “mortgage” and not the words “home loan”? Who’s Mort and why does he have a gauge? These are somewhat valid questions to ask and the reason for this particular word is steeped in history. The very word “mortgage” is taken from a term from Law French language in the Middle Ages in Britain. This term meant “death pledge” and is in reference to a death of a pledge (pledge conclusion) with two outcomes. The two outcomes to a death pledge were fulfillment of the original obligation or foreclosure of the property that was used as collateral.

Basic process of a mortgage

The process of obtaining a mortgage is the same no matter which kind of mortgage is being sought. The borrower seeks out a lender or a bank to obtain the funds needed for the purchase of the home. Dependent on which lending institution is used and the borrower’s financial situation, a down payment and/or a co-signer is required to obtain the mortgage. Most down payments on a house fall below the 20% equity of the home and this brings up PVI (Private Mortgage Insurance) which we’ll cover below. The terms of the mortgage are then agreed upon, these terms cover the length of the mortgage and the interest rate and monthly payments required during the term of the mortgage. Once the terms are agreed upon and the lender supplies the money to the Realtor or home owner for the home, the buyer “closes” on the home and they become the new owners of the home.

Mortgage terms and living with the home “on loan”

Your name may be on the house’s deed as the homeowner, but you don’t technically “own” the home as long as you have a mortgage on it. This is why your home is technically “on loan” as long as you’re making a mortgage payment. There is a signature from the lender at the bottom of the deed as a lien holder on the property. What this means is that the lender has a lien on your property and they can exercise this lien if certain terms of your mortgage are not met. These certain terms are in relation to keeping up with your monthly payments on the mortgage. If you fall behind in your payments, your mortgage will end up in arrears and this basically means that you’re in “catch-up” mode on your mortgage payment schedule. If you don’t bring the mortgage out of arrears and fall behind even more, the lender can foreclose on your property. That’s where the lien comes into play as it’s a legal document giving the lender legal rights to take your property due to non-payment.

Private Mortgage Insurance

As mentioned previously, PVI comes into play in most conventional mortgages when your equity (money paid towards the principal of the mortgage) is below 20% of the home’s value. In most cases, this insurance is an additional premium placed on your regular monthly insurance payment to your lender. This insurance is in place to protect the lender from high risk borrowers and the higher chance of having the loan defaulted. Once the equity in the mortgage reaches 20%, the PVI premiums are lifted from your monthly payments.

Conclusion

There are different types of mortgages available to fit to almost any budget or family situation. Having a sizable amount of money saved up for a down payment is the best course of action when you’re looking for a new mortgage on a property. Having this down payment puts you in good position to not have to pay PVI premiums and having a good size of equity built up from the start. This equity can provide emergency money down the road should you need it in the form of a home equity loan.