What are Mortgage Broker Fees?
Mortgage brokers can sometimes charge fees to consumers directly for their services. Mortgage brokers provide services to their customers to help identify and find a suitable home loan for their circumstances and financial situation. As part of their services, they will recommend lenders to those borrowers. Generally, the bulk of a mortgage broker’s revenue will come from the referral fee that lenders pay them. Brokers receive a commission from banks for writing loans to them and therefore can offer a free service to the customers. In most cases, you will not pay anything to the brokers. However, there are a number of fees that mortgage brokers might charge upfront in order to earn themselves additional revenue or protect themselves from time wasters.
What type of fees do mortgage brokers charge?
Some mortgage brokers may charge you different fees for their services. However, very few of them do this in practice as they are paid by banks and there is a lot of competition between mortgage brokers. At Airbroker, we have seen the following types of fees that have been charged:
- Commitment fee: Some brokers may charge a commitment fee from clients and will refund it after settlement. To avoid receiving no income for consultation and works done by them, this is used if a client moves to another broker or decides to halt the process after applying with a bank.
- Administration Fee: The administration fee is used to cover any upfront costs and time incurred by a broker to provide recommendations and other documents, such as property reports, valuation reports etc. to you. Some brokers may return this fee after the settlement of a loan, akin to the commitment fee.
- Small Loan Fee: Most brokers charge a small loan fee if the loan amount is less than a certain amount. The threshold and fees could vary with brokers but if you are applying for home loans less than $300,000, expect a small fee to compensate for their efforts.
- Complex Loan Fee: A complex loan fee is charged by some brokers primarily for businesses (or individuals) such as commercial loans, corporate trustees, and multiple entity businesses whose situations demand more research, time and effort.
- Commission Clawback fee (or short-term loan fee): Brokers charge the clawback fee when a customer either refinances or makes the entire loan payment within two years of settlement. The clawback has been banned these days, so brokers may charge a short-term loan fee as their commission might also be clawback by banks partially or completely if the loan is discharged within two years.
- Cancellation Fee: Brokers charge this fee for borrowers who apply for a loan, and receive approval but decide not to proceed. Since brokers lose potential revenue, they might opt to charge the borrower.
- Flat fee: Instead of earning a commission from the banks, the brokers simply charge a flat fee for their services. They reimburse the commission they receive from the loan lenders to the clients. This model of working has significantly decreased due to the slim profit margin and high overhead costs of brokerages.
These fees are not a norm but an exception. Since mortgage brokers are paid by banks for writing loan applications, there is no need to charge the customers and most brokers do not. Mortgage brokers are required to disclose these fees upfront prior to providing services to you.
Mortgage Broker commission
Typically, a mortgage broker’s commission consists of upfront payment and ongoing payment. They may charge a clawback fee for unusual and complex deals. Keep in mind that they have to disclose all these fees and commissions to the clients before proceeding with the home loan option.
All these commissions are determined by factors such as the total loan amount, the loan to value ratio, or LVR, and the quality of the loans they write to the banks. Banks pay these commissions to the brokers only once your home loan settles, and you receive the funds for your mortgage.
Types of Commission
The two most common types of fees received by the brokers are:
Upfront commission
This is the largest chunk of the commission brokers receive after introducing loan applications to the bank. Although this varies from lender to lender, it ranges from 0.46% to 0.70% (+GST) of the total loan amount. It implies that the larger your mortgage, the more a broker will get paid.
Trail commission
This is an ongoing payment the mortgage broker receives every month for the life of the loan. It is also calculated as a percentage of the loan balance and will be anything from 0.10% to 0.35% (+GST) of your home loan depending on the lender.
For example, you have taken out a home loan of $500,000 through a mortgage broker. The broker will be paid between $2,300 and $3,500 as upfront commission. Similarly, the same broker will receive a trail commission of between $1,000 and $1,750 every year on the home loan.
Do Brokers receive bonus commissions from the bank?
Apart from upfront commission and trail commission, brokers may receive other additional bonuses from the lenders based on the quality of the loans submitted to them.
This has nothing to do with one individual deal instead, banks analyse the submission quality and conversion based on the total number of loans the brokers send to them.
Brokers also receive bonuses, loyalty rewards, and soft dollar benefits offered by banks in the form of international conferences and vacations, shopping vouchers, and sporting event tickets, among other things.
Lenders give these kinds of rewards to encourage the brokers for sending good quality deals to them and obviously in high volume. It means brokers are being compensated for doing good work, and the borrowers also benefit from getting a suitable home loan for them.
Mortgage Broker Trail Commission
Ongoing trail commissions are continuing payments to a broker over the life of the home loan. It is paid monthly and is usually a percentage of the loan balance.
Usually, the trail rate varies with the lenders. Generally, the amount would lie somewhere between 0.10 and 0.35 per cent of the loan balance. Some banks would fix this rate, or some would even give increased trail commission over time, as it is profitable for them if a borrower stays longer.
From a bank’s viewpoint, it is paying the broker trail commission as a premium for introducing good quality of business and managing the relationship with the customer. Simply, banks prefer long-term loans and will continue paying the trail to the broker as long as the client keeps the same mortgage and does not default.
Mortgage Broker Commissions: Is there a conflict of interest?
No, this isn’t the case.
Moreover, this standard commission model is almost universal. That means brokers essentially receive commissions paid by the supply side of the market, i.e. lender rather than by the customer.
Mortgage brokers are also legally obliged to work in the Best Interests Duty of the customer. As holders of the Australian Credit Licence (ACL), they also must adhere to the protections of the borrowers set in the NCCP (National Consumer Credit Protection) Act 2001.
Regardless of how much money a broker stands to make on a house loan, they must not offer an unsuitable product based on customers’ reasonable inquiries about their financial condition.
The four major banks of Australia, Commonwealth Bank (CBA), Westpac, National Australia Bank (NAB), and ANZ, have conducted studies and concluded that there is no link between higher commissions and increasing business. As a result, banks compete on interest rates rather than commissions.
The non-conforming lenders indeed give a higher commission on non-conforming home loans, such as for people with adverse credit. However, this is becoming rare, and the government is cracking down on such higher commissions.
If mortgage broker commissions are removed…
There is criticism of the current commission structure, like a broker pushing a bad loan or a high-value loan to customers. Brokers are keen to obtain referrals and repeat business, which relies on brokers giving good service and thus have very little incentive to push bad loans.
However, if the government decided otherwise and removed the commission, then borrowers need to pay the brokers instead of the lenders.
Most borrowers would go directly to banks, and this would raise costs for them. These increased costs would be passed to customers through additional borrowing fees. It would also mean more time and effort for consumers, as they would have to sort out products and lenders, assemble documents and do other legwork which would have been otherwise done by the mortgage brokers.
Without commission, competition in the mortgage lending space will also be substantially eliminated because borrowers may tend to directly go to big banks that they know, but with little to none knowledge that there are dozens of other lenders existing in the market who might be able to provide a cheaper, better, and more suitable alternative for them. And in some other situations, when borrowers get rejected by a major bank, they might think they could not get any loans, while they may actually have multiple options with other lenders that they do not know.
Look Around for Help
Finally, before applying for a loan, make sure to read your agreement with a mortgage broker. You should be completely aware of your obligations and commitments, particularly in regards to fees, if applicable.
We, at AirBroker, want to represent the epitome of what it means to be a mortgage broker – providing exceptional service and customising home loan solutions to our customers. Call us or enquire online to find out how we can assist you on your home loan journey.
