Introduction

Working out how does a mortgage broker get paid.

Mortgage brokers can be invaluable allies when you are starting your journey of home ownership. A mortgage broker can guide you through the complex process of securing a mortgage, often making it easier and more efficient. However, understanding how a mortgage broker gets paid is an important question to ask. This post delves into the fees, costs, and commissions associated with mortgage brokers, ensuring that you have a comprehensive understanding before making any decisions on whether you should engage us or not

Key Takeaways about Mortgage Broker Fees & Commissions

• Mortgage brokers are paid commissions by lenders whenever they arrange a loan.
• There are two main types of commission — upfront and trail commissions.
• A mortgage broker may charge a fee for their service if your borrower situation is complex or you have a home loan below $450,000.

How Does a Mortgage Broker Get Paid?

Mortgage brokers are typically compensated by the lenders, earning commissions for each loan they successfully settle. This section explores the primary types of commissions mortgage brokers receive and how these payments are structured.

Upfront Commission

Upfront commission is a one-time payment that lenders give to mortgage brokers for bringing in new business. This commission is calculated based on the loan amount and typically ranges from 0.60% to 0.70% of the loan amount plus GST. The payment is usually made about 6-8 weeks after the home loan is settled. It’s important to note that if the borrower does not stay with the lender for at least 1.5 to 2 years, the mortgage broker may have to return this commission under a clawback provision set by the lender in question.

Trail Commission

Trail commission is an ongoing payment that mortgage brokers receive for retaining the client with the lender. This commission is paid annually and typically ranges from 0.10% to 0.20% of the loan balance. If the borrower decides to refinance or move their loan to another lender or broker, the trail commission payments cease.

Additional Compensation

Mortgage Brokers who are part of a brokerage firm often receive a base salary in addition to their commissions. This setup provides a steady income stream while still incentivising brokers to close more loans.

Is Your Broker Biased Towards Loans That Pay Higher Commissions?

A common concern among borrowers is whether mortgage brokers might recommend loans that pay them higher commissions. The Australian Securities and Investments Commission’s (ASIC) Best Interests Duty provision mandates that mortgage brokers must prioritise their clients’ best interests over any potential higher commission. This means brokers are legally required to recommend loan products that suit their clients’ needs and financial situations, not the ones that pay the highest commission.

Mortgage brokers must disclose their commission rates and any potential conflicts of interest to their clients. This transparency ensures that clients are aware of how their broker is compensated and can make informed decisions. When in doubt, borrowers should ask their mortgage broker about their commission structure and any incentives they might receive for recommending specific lenders. With that being said, the broker commissions are very similar these days post the 2017 royal commission.

Do Mortgage Brokers Charge a Fee?

While most mortgage brokers do not charge borrowers a fee for their services, there are certain scenarios where fees might apply. These situations include:

• Complex borrower scenarios: If you are self-employed or applying for a bad credit home loan, the complexity of your situation might warrant a fee.
• Small home loans under $450,000: Brokers may charge a fee to cover the difference between what a lender would pay for the business and the minimum loan size the broker typically handles.
• Early repayment or refinancing: If you plan to repay the loan within 1-2 years, some brokers might charge a fee.
• Commercial or business loans: These types of loans often come with additional complexities, leading to potential fees.

How Much Does It Cost to Use a Mortgage Broker?

In most cases, using a mortgage broker won’t cost you anything directly. According to ASIC’s review of mortgage broker remuneration, 85% of brokerage firms do not allow their brokers to charge upfront fees to customers. For those that do, the fee amount is determined by the broker and must be clearly outlined in a Credit Quote document before any services are provided. This document must be signed by the client, ensuring all costs are transparent and agreed upon.

Can You Negotiate a Broker’s Fees or Commission?

While commission rates set by lenders are generally non-negotiable, borrowers can negotiate any fees that a broker might charge directly. It is also possible to request that any fees be paid after the loan is arranged, providing flexibility in how and when payments are made.

Conclusion

Understanding mortgage broker fees, costs, and commissions is essential for any borrower. By being aware of how brokers are compensated, you can ensure that you are receiving unbiased advice and that any potential conflicts of interest are disclosed. Ask your broker about their commission structure and any fees that may apply to your specific situation. This knowledge will empower you to make informed decisions and secure the best possible mortgage for your needs. To take the next step contact us at startnow@sorenfinancial.com

FAQs

1. Do all mortgage brokers charge a fee for their services?

No, most mortgage brokers do not charge a fee for their services. They typically earn commissions from the lenders. However, in certain complex scenarios or for small loan amounts, they may charge a fee.

2. What is a clawback provision in mortgage broker commissions?

A clawback provision requires a mortgage broker to repay the upfront commission if the borrower leaves the lender within a specified period, usually 1-2 years.

3. How can I ensure my mortgage broker is acting in my best interest?

Under ASIC’s Best Interests Duty, mortgage brokers must prioritize your needs over potential higher commissions. You can ask your broker about their commission structure and any potential conflicts of interest to ensure transparency.

4. Can I negotiate the fees a mortgage broker charges?

Yes, while lender-set commission rates are non-negotiable, you can negotiate any fees that a broker might charge directly. You can also request that fees be paid after the loan is arranged.

5. Do mortgage brokers earn more by recommending certain lenders?

Mortgage brokers generally receive a standard commission, but some loans may offer higher commissions. However, brokers are required by law to recommend loans that are in the best interest of their clients, not based on the commission.

6. Why might a mortgage broker charge a fee for a small loan?

For small loans under $450,000, the commission a lender pays might not cover the broker’s minimum business requirements. In such cases, the broker may charge a fee to make up the difference.

7. Are there any additional costs I should be aware of when using a mortgage broker?

While most broker services are free, you should be aware of potential fees in complex borrowing scenarios, small loans, early repayments, or commercial loans. Always ask for a Credit Quote to understand all potential costs upfront.

8. What is a trail commission?

Trail commission is an ongoing payment that brokers receive annually from the lender as long as the borrower remains with that lender. It typically ranges from 0.10% to 0.20% of the loan balance.

9. How do I know if a broker is biased towards certain lenders?

Mortgage brokers must disclose their commission rates and any potential conflicts of interest. Ask your broker directly about their commission structure and if they receive any incentives for recommending specific lenders.

10. Can a broker’s commission affect my loan terms?

A broker’s commission should not directly affect your loan terms. Brokers are required to find the best loan products that suit your needs, irrespective of the commission they earn.

11. What should I look for in a good mortgage broker?

Look for a mortgage broker who is transparent about their fees and commissions, has a good reputation, and prioritizes your best interests. Personal recommendations and online reviews can also be helpful.

12. Is it better to go directly to a lender or use a mortgage broker?

Using a mortgage broker can provide access to a wider range of loan products and expert advice, potentially saving you time and money. However, some borrowers prefer to deal directly with lenders to avoid broker fees or commissions.

13. How can I compare mortgage broker fees and services?

Request a Credit Quote from each broker to compare their fees and services. Look for transparency, clarity, and any additional services they may offer, such as ongoing support or refinancing advice.

14. Are mortgage broker commissions regulated?

Yes, mortgage broker commissions are regulated, and brokers must comply with ASIC’s Best Interests Duty and other legal requirements to ensure they act in their clients’ best interests.

15. Can I use multiple mortgage brokers?

While you can consult multiple brokers for advice, working with more than one broker simultaneously might complicate the process. Choose one broker you trust to handle your mortgage application to avoid confusion.