Mortgage Broker Commissions
I’m not sure if you’ve read it in the press but there’s plenty being discussed about Mortgage Broker Commissions in our industry press. This has prompted me to write an article on how I get paid so please read on to find out more about Mortgage Broker Commissions.
Currently Mortgage Broker commissions are under review by ASIC and all the industry stake holders are submitting their recommendations to the investigation. As you can imagine this is making me nervous as I’ve invested so much time and energy into building up a small business and I don’t think I’d survive if I had to start charging my clients a fee for service.
I don’t think that Mortgage Broker Commissions will be scrapped thankfully but there will be some changes. The fact of the matter is that any changes or reductions to mortgage broker commissions will lower our service offering to the industry and will just make the banks richer. I imagine the banks are just licking their lips over this debate. If commissions are scrapped and we are forced to charge clients for our advice then that means we offer the banks business at no cost to them. The consumer pays a fee to a broker to be recommended to a bank or lender that will then charge them another bunch of fees to set up a loan. Banks 1 – Brokers / Consumers 0.
The fact that I can provide a service to my clients and not have to charge them for it is what attracted me to the business in the first place. Some well-established Brokerages already charge a fee to their clients and they swear by it but that’s just not my style. I’ve thought about a commitment fee which I’d refund once a loan settles. The reason for that is that I do a lot of work for people who don’t follow through with the application or go directly to the Bank branch after I’ve recommended them a product. All this work I do is what justifies my trail commission in my mind.
How do I get paid?
Upfront Commission PLUS Trail Commission
This is the figure I get paid once a loan settles and it’s based on a percentage of the loan amount. The typical upfront commission payment is 0.065% of the loan amount. 10% of that is GST which I have to pay back so it’s technically 0.055%.
0.055% x $500,000 = $2,750
Trail commission is paid to me for the life of the loan as long as it’s not in arrears. Typical Trail is 0.015%. My clients aren’t loaded with a higher rate to pay for my commission. It has no impact financially on them.
0.015% x $500,000 = $750 over 12 months so $62.50 per month.
This is the word that instills fear into every Mortgage Brokers heart. Not many people are aware of this little trap for us but if you refinance or pay off your loan within 2 years then I have to pay all my commissions back. Let’s use the above example to see what happens if my client refinances after 12 months.
$2,750 + $750 = $3,500. This gets deducted from my commission account straight away. No payment plans! Do you think that this money I earned 12 months ago has been spent yet? Clawbacks hurt!
So you are probably thinking to yourself if I look after my clients well then clawbacks shouldn’t happen. This is very true. I’ve been a bit unlucky though having had 4 clawbacks in my 6 years as a broker. 3 of my clients actually came into a lump sum of money and were able to pay their loan off which is awesome for them and the other one was just talked into getting some cash out by another broker. My client thought he was just doing a small increase but the broker refinanced the full amount to another lender. I can only hope that Karma catches up with that broker.
Do Certain Lenders Pay Higher Commissions?
As I’ve disclosed above the average upfront commission is 0.55% and this is pretty uniform across the Big 4 and Tier 2 lenders like ING and AMP for example. This rules out the misconception that I would want to place my clients with the lender that pays me the most commission.
A couple of lenders do charge higher Mortgage Broker Commissions like Liberty and Pepper but only for applicants with a bad credit history. For these particular clients I’m not able to place them with a regular lender so I let them know they can go with a specialist lender but they’ll charge you a higher rate. If my clients want to go ahead with the loan after I’ve explained this then I’m happy to help them.
Choice magazine have been publishing some articles recently that aren’t that flattering to Brokers. Here’s a quote and link to one article I’ve read.
Quotes attributable to Erin Turner, Head of Campaigns & Policy at CHOICE: https://www.choice.com.au/about-us/media-releases/2017/march/mortgage-broker-mayhem
“With the market riddled with harmful behind-the-scenes payments and benefits that lead to aggressive home loan sales, it’s time the federal government took urgent action to protect consumers.”
“The sad fact is incentives paid to brokers result in consumers being stuck with bigger loans as brokers seek higher commissions. With brokers arranging 54.3% of all home loans and interest rate rises likely in the near future, this creates an environment where broker commission structures are increasing risk across our housing market.”
I’m sure there are some shady operators out there but I honestly believe that the majority of Mortgage Brokers have their clients best interests at heart. I definitely do and the main reason is that it’s so hard to come by new clients. My main source of new business comes from my clients referring me to their friends and family. If I don’t do an awesome job for every client then I won’t get any referrals. It’s funny actually because I’ve spent thousands over the years on marketing and advertising but my clients still trickle in from client referrals which don’t cost me anything. It’s good to know that I’m doing something right though!
The other reason I need to do the best job for my clients and set them up with the lender and loan product that best suits their needs is because of clawbacks. The last thing I need is for unhappy clients to refinance their loan away in 12 months time.
I just find the talk about bias towards certain lenders and only looking after myself absurd. It’s just not the way to build a strong and long lasting business.
How To Know Your Broker is the Real Deal
- They ask you plenty of questions in the first discussion to identify your objectives
- They can answer most of your questions on the spot and don’t have to “Get Back To You”
- Good reviews from real people!
- They only suggest larger loans if it fits in with your objectives – Suggesting a line of credit or extra funds to sit in an offset account when you don’t have a specific plan on how to use it is not necessary and so it’s probably a case of “upselling”.
- They give you at least 3 Lender Options and detail the fees and repayments.
- They let you know why these 3 options are the most suitable and the reasons why and workshops with you on picking the most suitable option.
- Once your application is in a good Broker will give you a realistic time frame for the whole process to play out and keep you updated along the way. If your broker is unresponsive and doesn’t keep you in the loop then you should consider using another broker for your next purchase or refinance.
- Be careful of brokers strongly suggesting a particular developer or investment property firm to buy investment properties from. There are some big kickbacks on offer from some of these firms which can sway a brokers opinion.
- A good broker will also have good contacts to offer you for accounting, financial planning, and legal services. We work with these other professionals closely so it’s easy to determine who the good honest operators are.
For an appointment with a Good Broker please let us know.