Mortgage Broking

A managed mortgage fund (or scheme) is an investment vehicle where many investors pool capital, which is then lent out as mortgages secured by property (residential, commercial, or mixed) rather than ordinary bank deposits or shares. The loans might be “first mortgages” (senior, registered mortgages) or subordinate (second mortgages, mezzanine, etc.), depending on the fund. Investors receive income (interest) from those loans, less fees, and sometimes get paid regularly (monthly or quarterly) from those returns.

These funds are often seen as income-generating options, especially when bank deposit (term deposit or savings) interest rates are low. Because mortgage rates (especially from non-bank lenders) tend to be higher to reflect credit risk and property security, mortgage funds often offer higher yields than low-risk fixed income alternatives.

Before diving into strategies, it’s essential to understand what you’re paying for and what levers you can touch to reduce mortgage repayments.

What you pay: principal, interest, fees

• Principal: the original amount borrowed (or the outstanding balance). Every repayment contributes to reducing this to some extent.
• Interest: the cost of borrowing – usually expressed annually (e.g. 5% p.a.). The interest you pay depends on the interest rate, the amount of principal outstanding, and the duration.
• Fees (and other costs): include application fees, ongoing fees (e.g. mortgage-package fees, offset account fees), early repayment penalties (for breaking fixed-rate terms), redraw/offset fees, and possibly the lender’s mortgage insurance if the loan-to-value ratio (LVR) is high. These add to the cost and may limit flexibility.

1. The role of a mortgage broker in Australia

What a mortgage broker does

A mortgage broker acts as an intermediary between borrowers (you) and lenders (banks, credit unions, non-bank lenders). Rather than you going to each lender to compare, a broker:

• Has access to a panel of multiple lenders and home-loan products.
• Compares rates, features, fees, and lending criteria across that panel.
• Helps you with your application (gathering documents, negotiating with lenders, structuring the loan).
• Often handles the submission and settlement process.
• After settlement, may assist with future refinancing or re-negotiation.

Brokers are regulated in Australia (must hold a credit licence or act under one) and are subject to disclosure and conduct requirements.

Because brokers can shop through multiple lenders, they may find a better fit or cheaper product than you might find on your own.

However, brokers are (in part) remunerated via commission from lenders (both up-front and trailing commission). Always ask what fees or commissions the broker receives, whether there is any conflict of interest or panel restrictions, and whether the broker offers “fee for service” or commission-based models.

The use of brokers has grown significantly in Australia, with brokers now originating a large share of home loans. (Wikipedia)

A recent study also examined how brokers mitigate borrower confusion regarding loan features. (ScienceDirect)