Picture yourself in a shoe store looking for a new pair of black shoes for work. Would you want to be shown one style of black shoe, at one price? Or would you prefer to be offered multiple styles at varying prices, so that you could choose the style and price that really felt ‘right’ for you and your budget? As a former banker, broking seemed to be a way to offer more solutions to more problems, to more people (and at a market-leading price). Like most brokers emerging from banking, I’ve never looked back.
Why Bankers Hate Brokers
Like a lot of finance brokers in the world today, I’ve seen the finance world from both sides of the fence, having worked as a business banker for over 9 years, before becoming a broker.
When I started out as a graduate, and through most of my early banking career, I had no idea what a broker was. My brain was wired to sell a single set of products, whilst adhering to the one set of bank policies, and it felt as if this was how lending was done. I’d meet with my clients, resolve their pain points, and prescribe the product that fulfilled their needs. But looking back now, my view of the finance world was oh so narrow.
Much like Morpheus introduces Neo to The Matrix, I was introduced to the idea of broking by a close friend of mine. It was one of those ‘take the blue pill, or take the red pill’ moments. It seemed like such a huge risk to take that plunge and go out on your own.
As a banker, I hated brokers. They seemed to always be lurking in the shadows and I could never be sure if they were chasing my clients or not. As a banker, brokers make you nervous.
Brokers seemed to effortlessly offer more money and at a price that often seemed insane to me in my banker world. I was forever on my toes protecting my clients to prevent an attack.
It wasn’t a complete war however, as I did have a few relationships with brokers who fed me transactions from time-to-time, saving me from investing my time on sales activities. This was helpful as a banker, as getting new business is difficult when you’re bogged down with seemingly endless reporting, compliance and administrative tasks.
Having been a broker-hating-banker for so long, why would I want to become one?
It required a real change of mindset. The more I thought about what they did, the more I realised that brokers weren’t evil at all. They were simply able to access the whole finance market, and offer the most competitive pricing to keep the clients happy, and the big banks honest.
I’m not suggesting that there is no value in seeing a banker, especially a business banker. The main advantage with a banker is that you may be interacting with the exact person who can press the ‘approve’ button, and there is real value in that, however nowadays most credit decisions on loans are made centrally, and the final decision to lend may be out of the banker’s control.
The moment I knew I made the right decision to take the red pill and become a broker, was when I was in the back of a taxi after a work function, with an old bank colleague of mine sitting in the front passenger seat. Like a lot of taxi drivers, this driver was exuberant about his business pursuits outside of his taxi. He had a number of business ideas, and didn’t know where to start. He stated explicitly that he needed finance, for both a new larger home (as he’d just become a Dad), and separately, a new piece of equipment for the café he ran. My old banking colleague began to spruik to the driver about his home and business loan products, stating that he could assist with both, offering his business card to the eager driver.
After this exchange, I interjected and asked the driver if he really wanted to see just one loan at one price, or if he wanted to be connected with the entire market, and over 40 home and business loan providers, to obtain the most competitive price and products. I explained that I could summarise for him the ‘best of the best’ in the finance world, and that I could locate the lenders who had the most appetite. The process would essentially cost next to nothing, as long as he used me to facilitate the lending and ensure it got approved. The driver’s eyes lit up and he leaned towards me in the back, asking for my business card and stating he’d give me a call on Monday.
At that point in time it was clear to me that brokers will usually win when it comes to finance, and it is the reason the number of brokers in Australia is growing like wildfire. Statistics suggest that over 60% of all home loans settled in Australia are broker-written, and that percentage is growing annually, so more and more people are turning to brokers over bankers.
A lot of people see brokers as the ‘middle-person’ who sits between the bank and the consumer, fighting to ensure the consumer gets the right price and approval. They then get paid from the bank for the referral. This is essentially correct, but there are several things that the average consumer may not know about finance broking.
9 Reasons Why a Finance Broker is Better Than a Bank
1. CHOICE
A broker will be able to offer you practically the entire finance market. If you want a home loan, a quality broker can identify the most appropriate loan for you, normally from over 30 lenders. A banker can offer one set of products from their own bank, nothing else.
2. PRICE
Having access to the full market means a broker can weed out the expensive lenders and offer you the lowest prices. With home lending, though a bank will pay the broker a commission for the loan referral, there is absolutely no inflated rate to you as a consumer as a result of this payment.
A thing called ‘channel conflict’ prevents banks from offering a better price than a broker can, if they are referring to the same bank. So you can rest knowing that if you walked into a branch for a loan and you managed to get their best price, your broker will be able to get that same best price, or better.
3. TIME
Searching the internet for the best home loan can be incredibly time-consuming and complex. Nowadays it’s hard to figure out what the absolute best price you can get is from a certain bank, and it’s normally not the one offered on their website. Some of the new comparison sites can present options, but are often convoluted, and it’s hard to know if you even qualify for the offer with all the fine print involved.
An experienced broker will cut through the complexity and be able to summarise the best options that suit your needs by doing the legwork for you. A good broker will also explain to you the benefits of a certain structure over another (whether the loan is best as interest-only or principal and interest, fixed or variable, or a combination of all of these).
Not only will you save time in searching for the best options, you’ll also save time in the application process. Most brokers will be able to complete most of the core application in 5 minutes over the phone with you (rather than have you fill out a 23-page long form) and all you have to do is provide the verifying information.
A good broker will also know exactly what you need to provide to the banks to get a good outcome, and will help to ensure approval even if there are issues with the provision of certain information.
4. CHANCE OF APPROVAL
Brokers have access to all of the banks’ lending processes and policies at their fingertips, and every bank is different when it comes to their risk appetites towards certain customers. For example, lenders will offer wildly different options for contract workers, permanent residents, or those on maternity leave.
By enlisting the help of a broker, you will know which banks can do certain things, and which can’t, to prevent you wasting time barking up the wrong trees.
5. AGILITY
When using one bank, as a consumer you’re exposed to a high level of risk if something doesn’t quite go to plan, and you may be left completely stranded.
For example, I recently secured a pre-approval for a client of mine’s new home purchase and everything was good to go. After purchasing their new home, the bank involved went and valued their property for an amount significantly below the contract of sale price. Whilst challenging this unfortunate valuation, I was able to swiftly order two new valuations at two other competing lenders, and to the client’s relief, both of these lenders valued the property at the contract price. As their broker, I was able to reassemble their application with the new lender to enable a fast re-approval, with a price very similar to the original lender.
A situation like the above is why it is vital that you have access to a quick-thinking and innovative broker.
6. ONGOING SUPPORT
Because brokers receive an ‘ongoing trail income’ from the banks, of around 0.15% of the loan amount per annum for home loans (not passed on to the client), they have a vested interest in ensuring that client continues to be happy with their loans. If a client refinances, the broker will lose this trail income.
A good broker will regularly touch base with their existing clients to ensure they’re still on a competitive rate and have the product that most suits their needs. A broker can organise revaluations on your property and reassess your loans in the context of the market at any point in time. At a bank, you’re less likely to be contacted about your existing home loan after drawdown, and you’re almost certainly not going to be called by them offering you a better rate!
7. CONVENIENCE
Once you do one loan with a broker, they’ll have your information available to them for any future transactions you are looking to do (saved in a secure and private location). This means that when it comes time to change your loan, refinance, or access more funding, they’ll be able to just ask for a few items, but the core information won’t have to be resent by you, saving you both time and the frustration of having to repeat yourself again and again.
8. POTENTIAL FOR MORE FUNDING & NO LMI
Different Banks have different rules when it comes to lending on certain property types or to certain individuals. A broker will be able to get you the best result if you’re looking to put in as little cashflow as possible if you wish to use your cash for other things.
In addition, certain professionals (such as solicitors and accountants) are able to access Professional Packages at some banks, who will lend as much as 90% of the property value, with no Lender’s Mortgage Insurance (LMI) being charged, which is a one-off insurance policy covering the banks that can often cost upwards of $20,000 for a typical property purchase, if you borrow above 80% of the property value.
9. STAFF TURNOVER / BROKER FOR LIFE
Bankers are notorious for moving roles and banks as they pursue their next promotion. As a consumer, this is not a great outcome, as you’re often left explaining your situation again and again to new staff who seem to only be around for a fleeting moment in time. Add to this the stress of one staff member offering you an approval, then leaving, and not giving you much confidence that the loan will get done by the incoming employee.
Brokers tend to be for life. They are building their book of clients and aiming to maximise their trail book, and are often extremely careful about their personal brand so they get repeat business and referrals. You will likely not have to explain your situation again with your broker, and they are likely to have much more time than a banker to entertain a meeting with you, or to take you out to say thank you for your business.
In the end, a broker is effectively working for you and your family, and a banker tends to be working for the bank and its shareholders.
For the above reasons and more, when you’re next in need of finance, it’s best to think twice about running straight to the bank, and ‘open your mind’ to the prospect of starting a relationship with an experienced finance broker.
Steven Whiteside is an ex-business banker and MFAA-accredited Finance Broker at BlueRock Finance , an experienced home and business finance broking firm based in Melbourne.
