Insider truths behind home loan comparison sites

These days, home loan comparison sites are everywhere. You can’t view a property article without 10 banner ads popping up to tell you they have the cheapest loans. While these sites are convenient, here are some additional things you should know about them:

A note on mortgage brokers versus mortgage bankers

Sometimes, this article will refer to mortgage brokers. These are the individuals who find mortgages for borrowers, and are the operating arm of home loan comparison sites. They do not work for any specific bank.

Mortgage bankers, on the other hand, are the bankers who deal with the sale of home loans. They work for their specific bank, and they earn their commissions by selling you mortgages from said bank.

1. Sometimes, the cheapest home loan on the site may not be the cheapest loan in the market

The cheapest loan on the site is usually the cheapest loan on the market. But you may occasionally see two sites that give different rates for the same bank, in which one is a bit lower than the other. Sometimes, a bank which appears on one website doesn’t appear on another at all.

Why the discrepancy?

It’s because the sites don’t compare between every bank; they compare between the banks that work with them. Most loan comparison sites generate revenue based on referral fees, which are paid by the bank when they help bring in customers (that’s why they are free to you).

But if a bank refuses to pay referral fees, or there is a problem in the working relationship (such as if the site has been repeatedly paid late by the bank, and they don’t want to work with it anymore), the bank may be dropped from the site’s comparison lists.

Larger and more established sites will work with a wider range of banks, but small sites may only work with five or six banks. Beware: the lowest rate among these small sites may not be the lowest rate in the entire home loans market.

As for the rates being different, the mortgage broker working for the site may have a special relationship with the bank. It’s not unheard of for bankers to give lower rates to select brokers, with whom they have a long working relationship. So even if two sites agree on the cheapest bank for your home loan, one may still have a rate that is better than the other.

In short, use two or three home loan sites to compare, to be sure you get the better rates.

2. Some sites are inclined to promote some loan packages over others

It used to be that the referral fees from the banks were quite uniform. These days however, with the property market in a long slump, mortgage departments are more desperate for business. Some are willing to pay significantly higher referral fees than others, if for no other reason than the mortgage bankers being desperate to meet quotas.

This can lead to some websites putting in a stronger sales pitch, for a loan that isn’t actually the cheapest. For example, you may be warned off the cheapest loan with the argument that the “thereafter” rate is higher on some loan packages, or that features like an interest rate cap are useful given the probability of future rate hikes.

Now we’re not saying all of these are lies – the mortgage banker may well be telling you the truth. Sometimes, the cheapest loan package is a bad deal in the long run. But it’s always best to get a second or third opinion, given that some brokers are inclined to promote loans with bigger referral fees.

3. It’s more for getting the paperwork done rather than for comparison

You might be wondering: why can’t you look up which bank is the cheapest via the comparison site, and then go to the bank yourself?

The answer is you can. But there are some things you need to know about that.

First, as we mentioned above, the bankers may have a working relationship with the broker. Sometimes, you’ll find that the rate is different for you.

Second, the real service of loan comparison sites isn’t the comparison part (ironic, we know). It’s that they do the paperwork for you, so there’s less work on the part of the banker (who just needs to rubber stamp your application), and you (who won’t have to fill in the forms and such). That’s really how they earn those referral fees.

That said, it’s not unheard of for a borrower to check for the cheapest loan, and then approach the bank directly. The more brazen or experienced borrowers will try to negotiate to get the referral fee, which the bank would otherwise have paid to their broker.

Try it if you want, but (1) there’s no guarantee you’ll get it, and (2) you had better be ready to handle all the paperwork yourself.

4. Sometimes, the loan package is modified when you get it from a comparison site

This isn’t common, but it does happen. You may find that certain features of the loan package, such as a free repricing option, are removed or changed when you get it via the comparison site. These tweaks are sometimes made to make home loans cheaper.

You may find, for example, that your cheap home loan comes with a five year lock-in (you cannot refinance for five years), when this is not a part of the standard package. But your mortgage broker may have done this for you to lower to the rates.

(If you tell your broker you have no intention to refinance, it makes sense to get you a lock-in if doing so would result in a lower interest rate).

But do be careful to check, and clarify all differences.