We review how mortgage brokers earn their commissions from lenders.
The majority of home buyers will engage the services of a mortgage broker to organise or refinance their home loan. These brokers are either full-time employees of the bank or represent and act on behalf of a panel of lenders in the market place.
What Is A Mortgage Broker?
A mortgage broker acts as an intermediary between a borrower and a lender. They operate under a credit licence and are certified by the Australian Securities and Investments Commission ASIC to recommend mortgage products based on a thorough assessment of a client’s situation.
How Does A Mortgage Broker Make Money?
A lender will pay an upfront commission to the broker on the signing and approval of a loan. From there the lender will pay the broker a monthly trailing commission for the life of the loan.
Are All Broker Commissions Equal?
This is where it becomes cloudy. Lenders offer different upfront once-off payments and varying trailing commissions on the creation of a loan. A diligent broker who is employed on your behalf will find you the best loan that suits your needs. Or will they? There are lenders that offer brokers a larger signing on commission and a greater trailing commission. In effect, they are trying to buy your loan via the broker by offering greater rewards. For example, upfront commissions can range from 0.5% to 0.8% and annual commissions from 0.1% to 0.35%.
Of the Big 4 banks, it is the NAB that offers the best reward to brokers being 0.15% above the average of 0.5%. Let’s say your loan amount was $500,000 via the NAB. The brokers upfront commission would be $3250 or $750 more than what the other 3 major banks are offering brokers. The NAB is not alone in their upfront commission payment with Bank of Sydney, Bank of Queensland, Citibank, Heritage Bank, Macquarie, ME Bank and St George all paying the 0.65% commission. Of all the big lenders Bankwest offers the greatest upfront commission of 0.7% which rewards the broker a full $1000 more than the average of 3 of the Big 4 banks.
Going one step further ING will offer brokers 0.725% if the loan is less than 60% of the value of the property.
How Can You Trust Your Broker?
Firstly, the majority of brokers rely on word of mouth and networking to build their client base. It should be in their interests to give the lender the best possible loan package outcome. Their commissions should be secondary when they suggest a lender to you. And I would say that this is generally the case. Most brokers carry with them a “tool” that will deliver the best loans dependent on your situation. The ideal scenario is to be present when the broker enters all your particulars and the software delivers the results. You should ask the broker why they chose one lender over another and then ask what is their signing on commission and trailing commission structure.
There are many lenders out there that offer lower interest rates than all the major players. And they pay smaller commissions to brokers to offset their lower interest rates. This is all good news for the borrower but can cut into the broker’s commission. However, this is not your concern. Make sure the broker is working for you first and not themselves.
Advantages of using a mortgage broker.
- A broker is more flexible with their time and can visit you (for free)
- Offer a wider range of products from most of the lenders
- An experienced broker will be able to tell you exactly how much borrowing power you have
- Give you comparisons from a large panel of lenders
- They will do all the hard work for you
As of July 1, 2020, legislation came into play that was passed by the Federal Government on January 17, 2020. It cited that mortgage brokers must act in the best interests of their customers. This has led to mortgage lenders investing more effort in training their brokers in fully understanding the consequences of not providing their client the best loan.