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 panel 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 compensated 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 from lenders. This compensation will vary depending on the lender as well as the size of the transaction.
Upfront commission is the commission a broker receives for introducing the home loan customer to the lender. It 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.
Trail commission is a recurring commission that is calculated based on the remaining loan amount each year, which is paid to them on a monthly basis. Some lenders offer an ongoing commission of 0.1-0.2% based on the remaining value of the home loan. This commission is paid for the broker providing ongoing service to the client.
Clawback of commissions
If a customer refinances the home loan suggested by their broker to another lender within a certain timeframe, 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.
A few 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.
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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, regardless of whether or not it’s the best product for your needs. This is why it's important to talk to your broker about their commission structure.
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.