How Do Mortgages Work?

By: | 10 Apr, 2024
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A Quick & Simple Guide 

This does not constitute financial advice. 

Key Topics 

  • What is a mortgage broker? 
  • How does a mortgage broker get paid? 
  • Licensing - Required documentation 
  • Calculating how much you can borrow 
  • Steps when applying for a loan 
  • Approval types


What is a Mortgage Broker? 

A person or company who deals with multiple banks on your behalf.

Why not just go to a bank? 

You can, but they only represent their products that may not best fit your needs and will not tell you about better deals with other banks. A broker will generally have access to hundreds of products from over 20 lenders. This gives you more options and potentially saves thousands of dollars. 

Key Advantages of a broker: 
  • Existing relationships with banks 
  • Knowledge of various products to assist in finding the best loan for you. 
  • A single point of contact who represents you and deals with the banks on your behalf. 
  • They only get paid if your loan is successful, incentivising them to perform and make you happy. 
  • Heavily regulated to ensure your best interests come first. 
  • Bankers generally move on to other banks or with promotions, whereas brokers tend to maintain longer-term roles focused on building relationships. 
Do I need to pay a broker? 

Typically, no.

How do they get paid? 

The banks pay them with one upfront commission and a smaller trail commission over the life of the loan. This is paid as an incentive because they brought business to the bank. 

The trail commission is paid for retaining your loan, so the broker is incentivised to provide continued good service. 

Does their payment impact my price? 

No, brokers have access to the same base rates and in fact have access to pricing reviews for discounts with most lenders, brokers also have a legislative duty BID “Best interest duty” which requires a broker to always act in the best interest of a client. 

Are they licensed?

Yes, they usually operate as a credit representative under an aggregator who holds the credit license or may hold their own credit licence. 

Does this help protect me? 

Yes, you cannot be an authorised credit representative if you have been convicted of a crime or serious fraud within the last 10 years. They must also be qualified by doing the following: 

  • Have at least a Certificate IV in Financial Services (Finance/Mortgage Broking) 
  • Undertake 20 hours of continuing professional development each year. 
When should I hire a mortgage broker? 

As soon as you’re ready to look at property. The broker will be able to determine how much you can borrow without submitting a loan to the banks, allowing you to understand your budget and what you can spend. They can also provide initial advice if you’re not ready yet. 

If you believe you’re ready, a broker can lodge a pre-approval so you can enter the market with confidence, this is generally valid for up to 90 days. 

It’s very important that you understand your financial position before making any type of offer on a property. 

What documentation do I need to apply for a loan? 
  • Proof of identity (Combination of Passport/driver’s license/birth certificate/Medicare) 
  • Proof of income – Share details of your employer, two recent consecutive payslips, and details of your previous employer if you’ve been in your current job for less than one year. 
  • Proof of expenses – Lenders will typically use your bank statement to determine how much money you must put towards your loan repayment each month. 
  • Asset List - It allows lenders to see your wealth and may assist in obtaining a mortgage as you can potentially use these assets if required. 
  • Liability List – It’s very important that you’re honest with this, make sure you truly declare any outstanding debts to ensure you can afford your repayments. This includes things like car loans and Afterpay. 
Can I find out what I can borrow without it appearing on my credit history? 

Yes, a broker will typically conduct a serviceability check to determine roughly what you would be eligible for. This follows all the criteria that the banks use, without the banks being informed. 

You would typically use this method for an untitled lot that is over 3 months away from settling. It will give you the confidence to place an offer without formally approaching a bank and having your conditional approval expire.

 NOTE: You can also use an online loan calculator, one is available at the bottom of this article. 



How do they calculate how much I can borrow? 

They use a Serviceability Calculator. 

What is a ‘Serviceability Calculator’?

It is a tool used by the banks to make sure you can afford to repay the loan each month. 

How does it work? 

They take your monthly income and subtract your monthly expenses. Every bank is different, however most will build in a buffer, example: 

The current interest rate is 6%, they will calculate it at 9% to be safe (they added a 3% buffer). They will then add your expenses and subtract your income, if you have enough money to cover your repayments and expenses, you qualify. 

Why add a buffer? 

To be safe and cover any future interest rate rises or any unforeseen changes in your expenses/earning capacity. 

Do all banks need to include this? 

Yes, a minimum of 3% must be added. This is set by a government authority called ‘APRA’ (Australian Prudential Regulation Authority). 


What is conditional approval (pre-approval)? 

You are approved for the agreed borrowing amount, but not guaranteed to obtain the loan. This gives you the confidence to place an offer on a titled lot or one that will settle within three months. 

How long does it last? 

Generally, up to 90 days (3 months) 

Why isn’t it guaranteed? 

The bank will still need to see the property contract and may still need to verify your financial position or perform other necessary checks such as a valuation on the property. 

How long does it take to receive conditional approval? 

The length of time it takes to get conditional approval depends on your individual circumstances. In some cases, it takes a few hours. In other cases, it may take a few weeks. 


What are the steps when applying for a loan? 

  1. Engage a mortgage broker or bank. 
  2. Discuss your goals and objectives (what you’d like to buy and/or borrow) 
  3. You confirm which finance product is right for you to the mortgage broker or lending specialist at the bank. 
  4. Provide the required documentation (as noted earlier). 
  5. Submit your loan application to the broker or bank (they will walk you through this) 
  6. Your broker or bank lending specialist submits the loan application along with your supporting documents to the bank. 
  7. Conditional approval is received. 
  8. Place offer on desired property. 
  9. All parties sign property contract. 
  10. Submit contract to lender. 
  11. Lender conducts valuation on property. 
  12. Valuation amount is satisfactory (what you paid and what the bank values the property at are the same or similar). 
  13. Receive unconditional approval. 
What does ‘Unconditional Approval’ mean? 

The bank finds you eligible for a loan and have no further conditions to satisfy. 

  • The bank will then send a contract for you to sign agreeing to the loan. Your broker will present this to you. 

    Find Out How much You Can Borrow


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Definitions & Terminology 

Mortgage Broker - A person or company who deals with multiple banks on your behalf. 

Serviceability Calculator - It is a tool used by the banks to make sure you can afford to repay the loan each month. 

Conditional approval (pre-approval) - You are approved for the agreed borrowing amount, but not guaranteed to obtain the loan. This gives you the confidence to place an offer on a titled lot or one that will settle within three months. 

Unconditional Approval - The bank finds you eligible for a loan and have no further conditions to satisfy.