Know what your mortgage broker will earn from your home loan so you receive the right product recommendations.
Sourcing a local mortgage broker allows you to leverage their industry experience and knowledge, and it can also help you find the right home loan by giving you access to their portfolio of lenders. A mortgage broker can negotiate for a competitive product on your behalf, help you sift through a range of home loan products and help you understand the process involved.
Mortgage brokers generally provide their services free of charge to interested borrowers and are instead reimbursed by lenders. We delve into some of the different commission structures that mortgage brokers receive to help you ensure that you’re receiving value for money and not engaging with a broker who may have a conflict of interest.
What is a mortgage broker?
A mortgage broker acts as an intermediary between borrowers and lenders. They help clients find a loan that suits their situation by researching, comparing and negotiating for deals on behalf of the client.
What activities does a mortgage broker do?
- Assess your borrowing requirements. Brokers should also evaluate your serviceability potential across different scenarios.
- Identify home loan products that satisfy your requirements
- Negotiate on your behalf to find the best deal
- Provide support for any questions that you have may throughout the process
- Organise the paperwork to secure the home loan
How are mortgage brokers paid?
Mortgage brokers receive a commission or fee from lenders. This compensation will vary depending on the lender as well as the volume of the transaction.
The largest proportion of a broker’s payment is in the form of an upfront commission, which is normally around 0.3-0.5% of the loan value. For example, for a $850,000 mortgage, a 0.3% commission would amount to approximately $2,550 in the broker’s pocket.
Also known as a “trailing commission”, the second portion of their payment is through a recurring commission that is calculated based on the remaining loan amount each year, which is paid to them on a monthly basis. While some lenders offer no ongoing commission, others offer an ongoing commission of 0.1-0.2% based on the remaining value of the property.
If a customer refinances the home loan suggested by their broker to another lender, then the initial lender can take a clawback commission fee from the broker. This is because it can be costly for a lender to set up a new loan for the customer, and the lender loses out if the customer then decides to discharge the loan.
Many brokers argue that this is unethical because self-employed brokers do not have an industry body to protect them from this occurring.
Some brokers in these situations have opted to pass on the fee to their clients. This is not illegal in Australia as long as they follow the correct guidelines.
It’s estimated that only 1-2% of total loans are subject to clawback each year and therefore it doesn’t represent a major issue for the broking industry, but it’s still important for brokers to educate their customers about how clawback provisions work.
There has been criticism and debate in recent years around whether or not clawback fees are in breach of Australian Consumer Law, but it appears that clawback commissions will not be removed from the mortgage broking industry.
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Conflict of interest
Because most brokers receive commissions, a conflict of interest can occur in some cases. For instance, a broker might promote a certain home loan with a lender that offers a handsome commission over one that offers a lower commission, irrespective of whether or not it’s the best product for your needs.
Fee-based brokers charge you an upfront fee instead of a earning commission from your lender, so they will theoretically only recommend suitable products to you based on your borrowing needs.
What are my rights as a client of a mortgage broker?
The National Consumer Credit Protection Act (NCCP) aims to protect you as a client of a mortgage broker by ensuring that the broker does not recommend an ‘unsuitable’ loan to you. This means the broker must carefully consider your needs and requirements, including your financial situation, to ensure that you will be able to service the loan without enduring financial hardship.
How can I ensure that I’m not getting a biased product suggestion?
To ensure that you’re not getting a biased product suggestion and that your broker is recommending the right home loans to you, you should consider asking the following questions:
- Do you have MFAA membership? Mortgage brokers should be member of the Mortgage & Finance Association of Australia (MFAA). If they’re not, then you should look for a broker elsewhere. The MFAA is the industry regulating body for mortgage brokers and brokers who are members of the Association have education requirements they must fulfil and other regulations to abide by.
- What credentials do you have? You will want your mortgage broker to have the relevant mandatory courses completed as well as other additional education to better guide their choices.
- How long have you been in the game? The length of time that the broker has been in the industry will reflect their experience, so you may want to opt for a broker with more years in the business.
- Do you charge a fee? While most mortgage brokers don’t charge their clients, some do, so you should pose the question to the broker at the start so you’re clear about all the costs involved.
- How do you identify the right mortgage product? Make sure that the broker has your best interests at heart and that they will find a loan to complement your financial and personal situation when recommending suitable loans to you.
- How many lenders do you have in your network? As a rule of thumb, most brokers have 20-30 lenders on file. You want to ensure that the broker has a diverse range of lenders in their panel, including banks and non-bank institutions such as building societies.
- How much commission do you make? To understand the broker’s motivation, you should ask how their commission structure works. This may help you determine whether or not there is a conflict of interest at play.
- What’s the actual cost of the loan? Estimate the actual cost of the loan including the application fees as well as ongoing charges to ensure that you understand the total cost involved.
- Do you have any testimonials? A successful mortgage broker who has developed positive broker client relationships will be happy to provide you with testimonials from past clients to vouch for their quality of service.
Although mortgage brokers can help you discover a home loan product that matches your borrowing needs, it’s important to know how they function and how their commission structure works. Keep this in mind when approaching a broker to ensure that you find one that will find the most suitable loan for you.