Many mortgage brokers advertise their services as free but being the careful home buyer that you are, you want to make sure that there are no hidden costs that will come up along the way. If their services are really free of charge, then how do mortgage brokers get paid?
Don’t worry. Through this article, we’ll dig into how mortgage brokers derive income from a successful home loan application. This is what happens in the background after loan settlement with the bank or lender.
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What are mortgage broker fees?
The majority of mortgage brokers are small businesses or contractors. If brokers don’t charge their customers, who pay them? Typically, the lenders pay them a commission when the customer opts for their home loan product. The lender calculates the commissions paid based on various factors; different lenders may calculate commissions differently.
Generally speaking, it considers the loan amount, Loan to Value Ratio (LVR), and the overall quality of home loans. So, if the lender pays mortgage brokers, do you ever have to pay for their services? And how much are mortgage broker commissions exactly?
How much is the commission paid to mortgage brokers?
Most mortgage brokers get paid commissions based on the percentage of the home loan value to the bank. Essentially, the more money the bank earns through fees and interest on the home loan, the higher the commission to the mortgage broker. The exact percentage differs – some lenders might pay higher rates than others.
On average, it’s probably around 0.2% – which means the broker receives $800 a year on a $400,000 loan balance. Hang on, a year? Yes, mortgage brokers get paid by what’s known as “trail commission”.
How do mortgage broker commission rates work?
Mortgage brokers get paid two ways:
- Upfront commission
- Trail commission
They are only paid once the home loan settles. Generally, the upfront commission is between 0.65% to 0.7% of the home loan value. Trail commissions, also known as ongoing commissions, are about 0.165% to 0.275% of the home loan.
The upfront commission is a significant lump sum. With our earlier example of a $400,000 loan amount, the broker would receive between $2,600 and $2,800 for organising the home loan.
The trail commission continues for the life of the loan. The mortgage broker receives a set amount of 0.15% of the home loan value every year. Alternatively, some lenders pay increasing percentages over the years. For example, with a $400,000 home loan:
- Year 1: 0% or $0
- Year 2: 0.165% or $660
- Year 3: 0.22% or $880
- Year 4: 0.275% or $1,100
- Year 5: 0.33% or $1,320
- Year 6 onwards: 0.385% or $1,540
Even though the bank pays the broker, they don’t work for banks. Mortgage brokers work independently, with your best interests in mind.
Why are brokers paid Trail Commission?
Lenders like long home loans. The more time the borrowers have a home loan, the longer they pay interest on the remaining loan amount. Therefore, the lender continues to pay the broker a commission as long as the client stays with the same home loan and doesn’t default on payments.
Now, you may be wondering what’s in it for you if the banks encourage the brokers to organise longer home loans, which end up more expensive for you. Well, it actually works in your favour. The broker isn’t paid trail commission if an account remains in default for more than 60 days. Some banks stop paying the trail at 30 or 15 days.
Accordingly, your broker will work hard to understand your financial situation and find a home loan best suited to you. If they match you with a poor home loan product and go into arrears, the broker loses their commission. Moreover, good brokers complete regular health checks to ensure that your home loan still works for you, especially with fixed-term home loans.
If your mortgage broker has done their job correctly, you should feel comfortable making monthly loan repayments without mortgage stress.
Mortgage brokering comes with many legislative and compliance requirements. Brokerage costs are high. Therefore, many brokers operate under an aggregator.
The aggregator is the intermediary between lenders and brokers in charge of distributing the commission. They take a percentage of the commission before handing it over to the broker. Generally, it’s an administrative cost and can vary depending on the aggregator. Usually, it’s around 5% – 50%.
What if trail commissions are banned?
The Australian government considered banning trail commissions on all new loans in July 2020. This could have meant brokers charging customers an upfront fee for their services. Borrowers may have thought twice about refinancing a home loan if they have to pay for a mortgage broker’s services again. Additionally, borrowers may have faced fewer home loan products and lenders.
The government backed out of its decision. However, the possibility remains that they’ll reintroduce the idea one day.
Is there a conflict of interest?
If the bank pays the broker to organise a loan with them, how can you trust they are working in your favour? Well, don’t worry; mortgage brokers must hold an Australian Credit Licence and adhere to the National Consumer Credit Protection Act. This means they are bound by law to work in the customer’s best interests.
In fact, brokers must not recommend “unsuitable” home loans based on “reasonable enquiries” of your financial situation.
Furthermore, some major banks, like Westpac and the Commonwealth Bank, have completed studies that show no link between the commission and home loan products. As a result, banks compete with interest rates rather than increasing commissions.
Will I ever have to pay for a mortgage broker directly?
Rarely you will ever need to pay mortgage brokers for their services if you don’t want to. The only times a broker may charge a fee is:
- Someone with a complex situation
- Smaller loans under $300,000
- Commercial and business loans
- Loans paid off or refinanced within two years
No commission mortgage brokers
However, a few brokers charge a fee rather than earning commission from the lender. Instead, the broker pays back the upfront and trailing commission each month to the borrower as a mortgage rebate or cash back. Yet, it’s not as good as it seems. This type of business model isn’t financially viable. Fee-based brokers face slim profit margins.
Therefore, if you opt for a fee-based broker, you might find they’re not able to offer you a quality service. Moreover, if the company goes bust, they won’t provide an ongoing service throughout the loan term.
Will I save money on my home loan with a mortgage broker?
Mortgage brokers save customers time and effort. They’ll help you make massive cost savings on your home loan product.
When you engage a broker, they’ll ask you about your personal objectives and financial circumstances. They’ll use the information provided to determine which lenders and home loan products suit your needs. Essentially, they do all the legwork. The average home buyer doesn’t have the industry experience necessary to research hundreds of home loans.
Your broker will offer you recommendations and explain why they might be a good deal for you. Ask them about the comparison rate, interest, and other ongoing fees. A good broker can negotiate lower interest rates, fee waivers, and additional benefits, such as an offset account.
Should I use a mortgage broker?
Many home buyers navigate the world of lending for the first time when getting a mortgage. You might have a credit card or student loan. But a home loan is often the first significant financial undertaking most of us have. It’s intimidating to understand comparison rates. With such a big decision, it makes sense to ask a professional for their advice.
Without expert recommendations, you could trap yourself into a home loan with expensive early repayment fees or redraw fees.
Moreover, as we’ve mentioned, mortgage brokers are free to use! Why wouldn’t you want an expert by your side during one of the most critical moments of your life?
How to find a mortgage broker
Finding a mortgage broker is straightforward. All you need to do is type into Google “best mortgage brokers in Sydney” to get results. Or better yet, contact us at Lendstreet today to find out more about how we can connect you with the perfect credit provider for your circumstances.
Mortgage brokers work for the customer. Despite getting paid commissions from the lender, they are legally obliged to work in the borrower’s best interests. When engaging a mortgage broker, ask them how they get paid. If they’re transparent about their commission, you can expect them to remain honest throughout the home loan process.
You should also check out your broker’s previous experience. It takes years to get to know the mortgage industry, and you want to ensure that you find the best broker out there.
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How do mortgage brokers make money?
Mortgage brokers are paid a commission by lenders when you complete a mortgage application with them. The commission is split into an upfront payment and trail commission, meaning the broker gets paid an ongoing commission throughout the loan term. The borrower doesn’t have to pay anything for the broker’s services.
How much do banks pay mortgage brokers?
Commission rates vary from lender to lender. Most mortgage brokers will receive around 0.15% of the home loan value per year of the loan term. The mortgage broker will stop receiving trail commission if the borrower defaults on their repayments. Therefore, you can trust that they’ll match you up with a suitable lender.
Do mortgage brokers charge fees?
Most mortgage broker services are free for the borrower. The lender pays them a commission when they organise a loan between you and them. However, this doesn’t mean brokers work for the bank. They work with the customer’s best interests in mind.
Is it okay to use multiple mortgage brokers?
You can switch mortgage brokers if you feel that yours doesn’t suit your financial needs. However, be mindful of changing brokers during the mortgage application process, as the broker may charge you for the lost commission when you leave. Speak to your broker about any cancellation fees before working with them.