Banker or Broker: who’s the best to get my loan from?

That’s a great question, and one that our readers have actually requested we cover off, so thank you for that. This article will cover three different aspects of banker versus broker: product, service and pricing. We’re also assuming a good and honest banker, as well as a good, accredited broker. Let’s play with the type of scenario where either one was so good, that your trustworthy friend referred you to them. This analysis will aim to be as fair as possible, without any biases. Realistically, we know that there are cowboys in any industry, so let’s just evaluate the services for what they are.

What is a banker?

For the context of this article, a banker is the loan officer in a specific bank who helps customers with loan applications. This person could also deal with transactional products and refer you to Wealth & Insurance advisors, but their primary focus is typically dealing with consumer (or business) products. Bankers typically have high sales targets to meet, though they can only deal with the bank that they work for. Many loan officers climb their way through the banking ranks and start out from teller or call centre positions, so they can be especially knowledgeable. However, people from all sorts of industries start working in finance and banking.

What is a broker?

A broker is a third party who doesn’t work for a bank, but acts as an intermediary between customers and the banks. It is the aim of a broker to try and get the best deal for their customer at any lender. Brokers must be accredited by either the MFAA or the FBAA. FBAA brokers must only have their Certificate 4 in Finance Broking, but MFAA brokers must have a Diploma, which covers complex lending. Many brokers used to work at banks, and many come from entirely different industries. Good brokers will often chase the bank so that their customers don’t have to, put their customer’s applications together in a beautiful way and get a loan approved in a smoother way than if a customer went into the bank.

Product

Banker: Bankers can only sell you the products of the bank for which they work. This means that if there’s a better product on the market, the banker will not be able to recommend it to you.

Broker: Brokers typically have a ‘panel’ of lenders, often more than twenty, that they can get your loan approved through. This of course depends on your circumstances. When you go to a broker, they will input your information into their software and it will give them a few options to present to you.

Verdict: Brokers definitely win this category because you’ll have a much greater market exposure than with a broker, rather than a banker. Bankers are highly limited by their product offering.

Service

Banker: Remember, this article assumes a great banker who does everything they can. However, even a great banker could have hundreds of customer enquiries to deal with. If your loan is ‘too small’ or the bank you got a loan with doesn’t have a relationship management framework beyond a call centre, you could be stuck with unresolved issues and lots of frustration. This is especially true for when your loan has already been set up and you just need maintenance.

Broker: Again, we assume a great broker in this instance. If you have an issue with your bank, the broker will likely have contacts to help sort the issue out. The downside is that you may not have such a good relationship with your bank, but it’s always good to have an extra person on your side. Brokers can make a lot of noise because they can affect the volume of deals that a particular banker is getting. However, there are many things (for example, transactional enquiries) that a Broker won’t be able to assist you with.

Verdict: It’s always better to have one more contact. However, you may still need to deal with the contact centres or branches even if you have a broker. So this one is a little more neutral, but leaning towards a broker.

Price

Banker: A banker will typically charge you an application fee, which can be in the several hundreds of dollars. However, some banks have been waiving this. Beyond this, there’s also a risk that the interest rate you’ll be paying is higher because unless you do independent research and show much better offers from similar-level banks, there’s little a customer can realistically do to move the bank on rates or pricing. The banker’s job is to try and sell you the value and benefits of going with the bank.

Broker: Many brokers don’t charge fees, and you can typically find out upfront if they do. Sometimes, if your case is very complex, they charge fees or a small commitment fee to ensure you don’t run away to another broker. However, the actual loan’s pricing is where a broker truly competes. Brokers get the most up to date rates from all of their lending panel, many on a weekly or bi-weekly basis. Some diligent brokers will also forge strong relationships with important bank stakeholders, including ones who have influence over the pricing areas of various banks. Although brokers get paid commissions from the banks, the rates they can get are still typically better than what’d actually have been offered to the customer if they walked into the bank from the street.

Verdict: Brokers win on price, as they can shop around for you and get you a better deal on your lending and the bank can only go back to their own pricing area.

Overall Verdict

In many cases, going to a broker costs nothing and you can get a second opinion and some extra options. Given the above, I think brokers are the way of the future because they can help you. It’s just important to ensure they’re listed with the relevant industry bodies and have up-to-date accreditation. The best place to get a referral to a broker is from a friend who’s had a good experience.

3 easy ways to easily save money everyday

These might seem like obvious things, but they all have one thing in common: discipline and planning. I’ve saved hundreds of dollars each week in recent times by following three simple rules.

  1. Review your coffee consumption and change it.
    For some people it’s tea and for others it’s Cola. For me, it’s coffee. I can drink three or more cups per day. This really adds up if you keep buying it from a coffee shop. So what I’ve implemented is a rule where I can have one coffee in the morning from a coffee shop, and if I ‘need’ another coffee-bought coffee, it can only be purchased during happy hour. It sounds like common sense, but it’s not so common. I’ve been guilty of it too. Another tactic I’ve recently used is purchasing coffee sachets and drinking those at work. Most of the time it means that my coffees cost $3 to $5 a day at most, as opposed to $15-25.
  2. Plan your meals, at least loosely.
    This doesn’t just help your pocket, it could even help your waistline if you’re careful about this. If you plan most of your meals, you’ll be less likely to use meal delivery services. I know they’re easy and addictive, but if you budget for your food and go to the supermarket (or whichever other market or local shop you like), you will most likely save a lot. Especially if you look out for specials. I fed two people dinner for under $4 for the whole meal tonight because of fantastic specials. Going out to eat has become special again, and cooking is bonding time. You can also save more money because you’ll likely have left-overs which you can take with you to work, as I’ve been doing.
  3. Sweep your money away into a different bank’s savings account as soon as possible.
    I’ve done this for as long as I can remember but have had periods where I’ve slipped up, which gets quite scary. I’ve found that by planning for all mandatory expenses (rent, food, bills) and then sweeping the rest of the money into savings, it really stops me from spending anything I am not meant to spend it on. Further, these savings are in a different bank to where I am paid. The transfer delay helps to fight temptation. The best thing about this technique is that there is no limit on the amount of free accounts with banks that you can have. This means that if you open an account that penalises you for withdrawing funds but gives you a higher interest rate, that can be your “don’t touch” account. You can have a small “fun fund” if you need so that you are not penalised.

If you’re a frugal person who already knows how to save, these tips will most likely already be something that you’re doing. I hope you use your frugality to plan for your future.

I’m scared there’s a housing bubble. How’s Australia different to the USA?

Apart from our geographic location, there are many actual differences between our Australian banking system and that of the USA banking system, especially pre-GFC. For those who don’t know what the GFC is, it was the Global Financial Crisis. Naturally, this topic is far more complicated than what this short post will contain; however, I’ve also linked a good one of the many explanatory peer-reviewed articles about what happened in America in case you’re unsure of the background.

So what are the three main things that mean we’re safer than America was?

  1. Our lending market is not deregulated. In fact, it’s so heavily regulated, that there’s less and less wiggle room for lenders to approve new loans every year. The regulation is getting fiercer.
    It’s also getting much worse. Why do I say that? Well, let’s just put it this way. Seasoned property investors might remember that last year, the banks started raising interest rates on investment loans. Now I’m not sure if you guys are aware, but the banks now have a yearly cap on how many investment loans they can write each year. Only 10% of the bank’s front-book (i.e. new loans) can comprise of investment loans. So it’s much harder to obtain investment loans and they cost more. It’s annoying as a property investor, but it’s one of the ways that APRA is ensuring control of the market.
  2. Lenders can’t write sub-prime mortgages in Australia. In case you’re wondering what a sub-prime mortgage is, it’s where banks lend money to people who can’t repay it. Lenders here can’t do that because of that pesky, annoying and rude r-word – ‘regulation’. What it means in a practical sense is that APRA has drilled down on the banks regarding many things. APRA has pushed the banks into a corner; down to the point of telling them how they can measure peoples’ income, expenses and which affordability rates to apply when assessing loan applications. Effectively, this means that it’s harder for banks to approve any loans, and there are even stricter measures in place to prevent sub-prime mortgages from being sold (not that this was happening in the same way in Australia like it was in America’s long-time heavily deregulated market).
  3. Our population is actually growing, so we do actually need more housing. It’s not exactly a ‘bubble’ if the housing is actually in demand, as it is demand that drives rent prices up. In fact, we should have more investment houses on the market if we want to drive the rent prices down. Australia’s population hit 24 million last year. We are growing and our housing situation is far closer to that in London, rather that of the USA. Many people tend to be concerned about the areas with the most capital growth, and areas such as Sydney which aren’t as affordable as they used to be. Of course places like mining towns are considered to be a terrible investment, because the cash flow typically dries up as soon as the mines do. However, places like Sydney just keep growing and growing due to the sheer perception of opportunity associated with large capital cities.

These are just three of the basic factors which explain why we are different to the USA, but even they are enough to simply explain why we’re not in the same boat. Thank goodness that we’re in Australia; where our banks might be a little evil, but at least there’s APRA’s dominating choke-hold on them.

3 cheap and easy ways to lower your tax bill

Note: this article excludes property, because most people would not consider it to be cheap or easy.

1. run a business

I don’t mean that you necessarily need to quit your job or go out and buy an expensive business. It can be something small and part time, like driving Uber (no offence to any full time Uberists) or something like a Network Marketing business with an low entry cost. You don’t need to make millions, but here’s a link to the Business Expenses section on the ATO website. You’ll likely need to create an ABN and do the whole sole trader thing, but you should check that out with your accountant to make sure that this advice is a good fit for your circumstances.

2. salary sacrifice into your superannuation

You will need to speak to your superannuation fund about this, as different funds have different methods of contributing. If your employer knows more about your super than you do, get as many details from them as you can. Salary sacrifice arrangements mean that you reduce your pre-tax income and then are able to stick you into a lower tax bracket. Please be sure to do the tax calculations using the ATO tax calculators first, because you don’t want to disadvantage yourself.

3. salary packaging 

Many employers allow you to package your salary, which is similar to salary sacrificing except you can get different things from it, not just superannuation contributions. Depending on your employer and the salary packaging provider, you might be able to ‘package’ cars, computers, holiday accommodation and many other things. It works by ‘packaging’ some of your pre-tax income away, so you get taxed on less dollars.

So there you have it folks, always be sure to speak to your accountant about these strategies first to make sure you are getting the right advice for your circumstances.

How can I best prepare myself for my first property purchase?

The best thing that we can do to prepare ourselves for a property purchase is to try and align ourselves with the banks’ lending criteria. The very first step should almost always be to save, consistently. However, here is a guide of a few steps to take:

1. Pay off any existing unsecured debts 
 Any ongoing credit cards, personal loans and/or payday loans should be gone. The less unsecured lending you have, the less will be used in servicing calculations (i.e. the bank will assess you to have more income available to pay their loan back)

2. Always pay your expenses on time
Anything like rent, bills and everything else like that – you should try to ensure that you always pay this consistently and on time. Banks might ask you for some bank statements to track your expenses, so it is important to be able to show this. One of the core lending principles is also ‘character’ – which means that the banks will try to judge your character by how true you are to your commitment of paying things on time (given that you’re trying to go for a loan).

3. Save genuinely, and be disciplined about it. You should also try to save up to 20% of your property value if you can.
If it means that you need to create rolling term deposits for every $5,000.00 that you save, you should do that. This is because the banks like to see genuine savings. Some brokers will tell you that banks don’t need to see this, but that’s typically only really true if you’re willing to put your parents on the hook (i.e. make them go guarantor, which I will talk about later). Regarding the 20% deposit value, this is just so that you can look like a save bet to the banks. The banks will typically be more lenient if you have more of a deposit. 

4. Try to stay employed by the same employer for 6 months or more.
This can be casual employment with some lenders, but it’s highly important to be employed for a continuous period of time, for as long as possible. Also, if you’re in an industry that has some sort of special working hours or conditions, you might be able to work with lending specialists (for example, you should go to the health division of your bank if you’re a doctor – this is because ordinary lending officers might not understand about the way your pay is structured).

5. Check what type of property you’re aiming for, but be careful.
Banks typically don’t allow properties with an area that’s less than 50 metres square to be used as security for their loans. This is in reference to internal areas, so balconies aren’t even counted in that most of the time. You also can’t really get away with it because the banks will value the property as part of the lending process.

That’s all for now folks, prepare these things and then I would say you should speak to a good, reputable mortgage broker.