The types of mortgages that are available are all pretty similar in terms of the way they work, but there are many different places you can go to arrange a mortgage – which we’ll discuss below. Each has its own respective advantages and disadvantages, and each operates in a different way.
Loans from mortgage brokers
Mortgage brokers act in a similar way to insurance brokers (or any other kind of broker, for that matter). The role of the broker is to meet with you (the potential borrower), identify your needs and source the most appropriate financial product from one of various different financial institutions. Brokers act as an advocate for the borrower in negotiations with lenders.
With many different lenders and mortgage products on offer, a broker is able to source and compare all kinds of different loans before determining and recommending the most suitable loan package for your circumstances. The brokering service is often offered without a fee, as brokers are generally compensated by the lender they recommend in the form of either a fee or commission payment.
It’s no surprise that when most people think of mortgages they think of banks – they’re easily the most common source of mortgage funding. Banks are the oldest form of lending institutions, and source their funds through their customers’ savings deposits. Australian banks are regulated by the Australian Prudential Regulation Authority and have stringent lending policies and varying approval criteria for loans.
Banks pay varying interest to clients on their deposits, and in turn make available the funds to lend to potential borrowers. In turn, these borrowers pay interest to the bank on the outstanding loan value until it’s fully repaid. The margin between the interest paid on deposits and the interest received from loans provides banks with a major source of revenue.
If you’re looking to a bank for a mortgage it’s well worth shopping around and comparing the different rates on offer.
Credit unions offer similar services to banks, but they’re cooperatively owned and controlled by the people who use them. All members are both customers and shareholders of a credit union.
As is the case with banks, deposits and savings that belong to credit union members are used to fund loans. Given that credit unions are typically non-profit organisations with no external shareholders, fees are generally kept to a minimum and they’re normally able to offer competitive lending rates and conditions.
Like banks, credit unions offer the full suite of banking facilities including loans, deposits and financial planning - often with a greater emphasis on customer service.
Building societies operate in a similar manner to banks, and obtain their funding primarily through customer deposits. Some building societies borrow extensively on a secured basis from banks or other third parties. This practice greatly reduces the security of depositors, as in the event of trouble all losses would fall on them rather than on those higher up the security queue.
As with credit unions, customers are members and they indirectly own the society. Building societies are often referred to as ‘mutual societies’.
Lending specialists who arrange finance for home and investment loans are referred to as ‘mortgage managers’. Mortgage managers don’t have a client base with deposits to fund their lending book. Their funds are sourced via a process known as securitisation - which means assets with an income stream are pooled and converted into saleable securities.
The original provider of the funds is the ultimate owner; these providers include superannuation funds, unit trusts and individuals who have invested in mortgage-backed securities.
A mortgage manager establishes the loan and liaises with all parties involved, including the originators, trustees, credit assessors and borrowers. They provide the customer service role and manage the loan throughout its term.
Which option is right for me?
The only right answer to this question is to encourage you to learn as much as you can about what separates different financial products and to make sure you’re getting the one that best fits your needs and circumstances. The difference between a good fit for your needs and one that’s poorly suited can cost you thousands (even tens of thousands) in the long run – or cause you a number of other problems.
Your best bet is to shop around as much as you can. Don’t be afraid to push for better rates either. While there’s not always a great deal of flexibility where lenders are concerned, there are circumstances where it’ll definitely pay to negotiate.