How do mortgage brokers get 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.
Being paid a commission doesn't always mean, however, that the interest rates offered by brokers are higher than those offered directly by lenders. Banks generally see the value in paying commission to brokers because they introduce more customers than a bank's own branch network, and they handle the ongoing customer service after the loan is settled.
Some brokers do charge a fee for their services, but these brokers generally offer services above and beyond sourcing home loans. A mortgage broker who charges a fee might also put together a budget for you, help you identify areas in which to buy and might also be a licensed financial planner who can offer investment advice and build an ongoing strategy for your finances.
A mortgage broker can offer a range of home buying and home loan services which can help make the transition from renting to buying, or the transition between properties smoother and easier on your time. However mortgage brokers services are not for everyone and if you prefer to be in control of your choices and have access to the full range of Australian home loans on offer, you may prefer to go direct. You can benefit by making your own comparisons because:
Who are some of the major home loan brokers in Australia?
How do I compare to find the best mortgage brokers?
Ask for recommendations
Friends, family and colleagues can be great sources of recommendations. Many of the best brokers source the majority of their business from referrals. Ask around and see if anyone you know has had some experience with a good mortgage broker.
Do your research
Mortgage brokers may have access to hundreds of different loan products, but it doesn't hurt to spend a little time researching your options on your own as well. Remember, this is your mortgage and it will be with you for a couple of decades to come. Arming yourself with information will help both you and your broker.
Special deals might mean special conditions
If a mortgage broker recommends a special deal, always ask if there are any special conditions attached. For example, a super-cheap interest rate with one particular lender might be unbeatable in terms of rate, but the conditions could include penalty fees for extra repayments. Other special deals may include introductory offers that sound incredible, but which revert to a much higher interest rate once the introductory period is over. Always check if there are conditions attached to any special deals you're offered.
Start a folder and keep written notes of any contact you receive. Include details such as time, date, names and any offers you receive in writing from brokers. This can be invaluable later in case of a dispute.
Approach more than one broker
Always keep in mind that different mortgage brokers will often have different lenders on their list to recommend to you. This is because each broker must gain accreditations with each individual lender in order to offer you that bank's products. For this reason, not all brokers will have access to absolutely every lender available in the entire country. They may choose a selection of preferred lenders and banks that represent a broad cross-section of clients well and stick with those.
If you consider that not every broker may end up with access to every lender available, it could be a wise decision to make an appointment to talk with two or three different brokers. This may give you access to a wider selection of banks and lenders than you might otherwise have had.
Questions to ask your mortgage broker
1. 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. You'll also want to ensure your broker is registered with the Australian Securities and Investment Commission (ASIC) either as a license holder or a credit representative. You can check ASIC's register here.
2. Are you a member of an industry association?
Mortgage brokers are required to be a member of an industry association, either the Mortgage and Finance Association of Australia (MFAA) or the Finance Brokers Association of Australia (FBAA). The MFAA and FBAA set standards of practice and discipline for their members.
3. Are you a member of an external dispute resolution (EDR) scheme?
By law, mortgage brokers are required to belong to an EDR scheme, either the Credit and Investments Ombudsman (CIO) or the Financial Ombudsman Service (FOS). An EDR scheme provides consumers an avenue to resolve complaints should problems arise with a broker’s service.
4. How long have you been in the industry?
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.
5. 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.
6. How many lenders do you have in your network?
As a rule of thumb, most brokers have access to 20-30 lenders. You want to ensure that the broker has a diverse range of lenders in their panel, including banks and non-bank institutions.
7. 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.
8. 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.
Questions to ask about the loan
1. What is the interest rate?
The answer to this question determines how much you'll repay on top of what you borrow. Interest accrues over the life of the loan, and with the average mortgage lasting 15 years you want to make sure your rate is affordable.
2. Is the rate permanent or just a promotion?
Lenders often give new borrowers an attractive low rate to win their business. This low rate is normally temporary, and sees you revert to the lenders standard rate when the promotional period is over. Find out whether the advertised interest rate is permanent, and if it isn't what's the lenders standard variable rate. There's no point getting a great rate for a year if you're going to pay over the odds for the remaining term.
3. Why have you selected this loan for me over other loans?
By law, mortgage brokers must choose a home loan for you that is "not unsuitable". This means the features, rates and fees should be a good match for your personal circumstances. Make sure you find out how your broker arrived at the decision to suggest a particular home loan for you, including which of your personal circumstances were taken into account.
4. How much of a deposit do I need?
Ask how much of a deposit the lender wants, and find out whether the size of the deposit affects the interest rate of the loan. Sometimes a lender will give you a better rate of interest if you put down a larger deposit. A smaller deposit may also mean that you have to pay a lenders mortgage insurance (LMI) premium.
5. Can I make extra repayments and/or repay my loan early?
The quickest way to repay your mortgage and save money in interest is to make overpayments whenever possible. Double check your lender is happy for you to do this without penalty. Some lenders charge an admin fee to process the additional payment. Whilst you're on the subject of overpayments you should also find out whether your monthly payments adjust in line with any additional payments you make.
6. What are the additional charges?
The most common charges you'll run into when getting a home loan are valuation fees, application fees, and legal fees. It's not unusual for lenders to run special promotions where you get free valuation or help with fees. Ask if there are any additional charges, and find out whether they can be paid upfront or have to be added to your loan.
7. What documents will I need to provide?
Normally lenders need to see three to four months' worth of bank statements, along with a couple of forms of I.D, and proof of your assets and liabilities. Ask whether your lender has any other requirements as this will speed up your application process. Read our home loan checklist for more information
8. How long does it take to process the loan?
In the property market a few days can make a big difference. Try to get an estimate of how long the application process will take, and don't try to settle on a property too early into the process. It's a good idea to get a pre-approval before you go hunting for the home of your dreams.
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How does a mortgage broker become accredited?
Mortgage brokers receive licensing by the Australian Securities and Investment Commission (ASIC). They can either hold an Australian Credit License (ACL) or be a Credit Representative under an individual or company's ACL. Credit Representatives have more restrictions in the services they are allowed to provide.
A broker must complete a minimum of a Certificate IV in Finance and Mortgage Broking. They also have to belong to a professional organisation, either the Mortgage and Finance Association of Australia (MFAA) or the Finance Brokers Association of Australia (FBAA). Brokers also must hold professional indemnity insurance, and belong to an external dispute resolution (EDR) scheme.
How does a mortgage broker establish a lending panel?
While some brokers maintain direct accreditations with lenders, lenders often have volume and compliance standards that may be difficult for a broker to achieve on their own. As a result, many brokers use an aggregator or a “dealer wholesaler” to access major lenders and maintain their accreditation.
Who are aggregators?
Aggregators can be wholesale businesses or fully franchised brands such as Mortgage Choice or Aussie Home Loans. They provide brokers with access to a panel of lenders. Coupled with their lending panel, aggregators often provide brokers with additional services such as mortgage comparison and customer relationship management (CRM) software, mentoring, ongoing education and compliance support.
Does the aggregator charge a fee?
The aggregator will charge a fee for offering the broker access to their lender panel and additional services. This fee is normally a percentage of the upfront or trailing commission, or it could be a flat monthly or annual fee.
Some aggregators may also charge a joining administration fee.