What are mortgage broker fees?
Most mortgage brokers are small businesses or contractors so they only earn an income from the commission they receive from the lender.
These commissions are calculated based on a few factors such as the loan amount, the Loan to Value Ratio (LVR), and the quality of the overall loans they write.
So if brokers are getting paid by lenders, do you ever have to pay for their services?
How do mortgage broker commission rates work?
In most cases, mortgage brokers are paid an upfront commission and a trail or ongoing commission for the business they bring to the bank.
These commissions are paid out only once your home loan settles.
The commissions themselves are based on a percentage of the loan amount and the LVR.
Although the details around when and how brokers receive commission varies from lender to lender, generally speaking:
- Upfront commission: 0.65% (+GST) to 0.7% (+GST)
- Trail commission: 0.165% (+GST) to 0.275% (+GST)
As you can see, the upfront commission is the largest component of the commission.
The broker receives this once your loan settles and you receive the funds for your mortgage.
Trail commission is what the broker receives every month for the life of the loan.
Usually, this trail is set at 0.15% per annum based on the remaining loan amount each year.
Alternatively, trail may increase incrementally over time. For example, XYZ bank might pay trail in the following way:
- Year 1: 0%
- Year 2: 0.165%
- Year 3: 0.22%
- Year 4: 0.275%
- Year 5: 0.33%
- Year 6 onwards: 0.385%
To be clear, mortgage brokers don’t work for the banks, although there are some mortgage brokerages that are partly-owned by banks and larger lenders. You should ask the brokerage about this upfront so you’re fully informed.
For more information about how our mortgage brokers get paid, please call us on 1300 889 743.
Why are brokers paid trail commission at all?
Put simply, lenders like long-term loans and they will continue to pay the broker trail as long as the client stays with the same mortgage and doesn’t fall into arrears.
Arrears means that your late with your mortgage repayments and this can escalate to default if you haven’t made repayments for 60 days.
Trail won’t be paid to the broker while an account remains in default for 60 days or more.
Some banks will cut trail if the loan is in default for 30 days but others will cut trail after 15 days in default.
That’s actually good news for you because it separates the good brokers from the lazy ones.
Brokers who have fully understood your financial situation and goals work hard to recommend a home loan that best suits your needs.
They will also complete regular mortgage health checks to ensure that your loan is still working for you.
This is particularly true if you’ve signed up for a fixed term home loan.
If the broker has done their job right, you should be comfortably making your repayments with little financial stress.
From the bank’s perspective, they’re paying the broker a premium for the quality of the business that they’ve brought in and for managing the relationship with the borrower.
The aggregator also takes a cut of the commission
The costs of running a brokerage are high and comes with various legislative and compliance requirements.
To alleviate some of these costs, most mortgage brokers actually operate under a head broker group known as an ‘aggregator’.
The aggregator acts as the third party, bringing together lenders and brokers and distributing commissions.
Mortgage Choice, Aussie Home Loans, Connective, AFG and Yellow Brick Road are all examples of aggregators.
The aggregator takes a cut of the commission that they receive from the lender before they pass it on to the broker.
The cut is pretty much an administration cost and service fee for the services they provide such as distributing commissions, software, systems, marketing and professional development.
The broker can also leverage the negotiating power that the aggregator has in order to access special interest discounts not generally available to independent brokers or the general public.
There is strength in numbers and you see the benefits!
The aggregator cut will vary from aggregator to aggregator the same way that upfront and trail commissions vary between lenders. It can be anywhere between 5% to 50%.
Will I ever have to pay for a mortgage broker directly?
So we’ve talked about how brokers get paid but the truth is you’ll rarely have to pay for their services at all!
The only times a mortgage broker may charge a fee is for:
- People with a complex situation.
- Small loans, typically under $300,000.
- Commercial or business loans.
- Loans that paid off or refinanced within 2 years.
You can find out more information on the ‘Our Fees‘ page.
What is clawback?
‘Clawback’ is a fee charged by the banks to the mortgage broker for home loans that are paid or refinanced within the first two years of settlement.
Again, it varies from lender to lender but the bank will typically clawback 100% of the upfront commission in the first 12 months of the loan and 50% between 12 and 24 months.
Some will even charge 25% in year 3!
Why should you care about this?
Because, in most cases, the broker will pass this fee onto you.
However, they have to make this clear upfront when you speak to them about getting a home loan, specifically in a written contract if you decide to proceed.
If they don’t make this clear to you, you’re in a position to dispute the clawback fee.
Unless it’s stipulated otherwise, the clawback penalty should be the same amount that the bank charges the brokerage so there are no extra hidden fees.
Keep in mind that some lenders don’t charge clawback at all so let us know upfront if you prefer this, specifically if you believe that you’ll likely pay off your mortgage quickly.
Some lenders actually reduce the clawback rate to 50-75% after just 6 months if you’re simply switching to another product or a better interest rate with the same lender.
No matter what though, it may sometimes be worth incurring a clawback fee if you can save thousands more over the life of the mortgage just by switching to a cheaper interest rate.
This is particularly true when the cash rate is low and banks are fighting for business!
You should speak with your mortgage broker about this to weigh up the costs of clawback and refinancing.
If you’re in this position, give us a call on 1300 889 743 or online enquiry form for a free assessment.
Do brokers ever receive bonus commissions from the bank?
Additional upfront commissions may be paid to the broker’s aggregator based on the quality of the applications that the aggregator submits (known as ‘submission quality’).
So they look at the total number of loans that an aggregator submits (the volume) to consider the submission quality and the conversion rate.
This bonus commission is then passed on to the broker after the aggregator’s cut.
Example of bonus commission
Bonuses for submission quality are based on the ratio of loan application received without any errors:
- Less than 80%: no bonus
- Between 80% and 90%: 0.0275
- 90% or higher: 0.055%
Bonuses for conversion rate are based on loan volume:
- Less than 75%: no bonus
- Between 75% and 80%: 0.055%
- 80% or higher: 0.11%
Sometimes bonus commissions are based on the volumes of individual brokers.
Ultimately, brokers are rewarded for doing a good job and you benefit by getting a home loan that’s right for you!
No commission mortgage brokers
There are some brokers that simply charge a fee for their services instead of earning a commission from the lender.
Any upfront commission is paid back while trail commissions are paid back to you each month as mortgage rebates or cash back payments.
Sounds great but there’s a catch.
So far the majority of these business models have gone bust as they are not financially-viable.
With the cost of compliance and processing so high, profit margins are already quite slim.
Refunding commissions adds another layer of cost that most brokerages can’t afford.
Isn’t there a conflict of interest in getting paid commissions?
Mortgage brokers are holders of an Australian Credit Licence (ACL) and must adhere to the protections set out in the National Consumer Credit Protection Act 2001 (NCCP Act).
No matter the commission a broker stands to earn from a home loan, they must not recommend a product that is ‘unsuitable’ based on ‘reasonable enquiries’ of your financial situation.
Many of the major banks like Commonwealth Bank (CBA), National Australia Bank (NAB), ANZ and Westpac have actually completed studies and have not seen a link between increased commissions and getting more business.
For this reason, banks compete on interest rate, not by increasing commissions.
Some specialist lenders or “white label” lenders (broker is the lender) pay higher commissions but these are different business models and loan types and a small part of the market.
What about commissions on non-conforming home loans?
It’s true that some of the commissions paid by some non-conforming lenders, such as those providing loans for for people with adverse credit, charge a higher upfront commission rate.
However, these type of rates are becoming rarer and it’s likely the government will be cracking on these types of commission rates and set an industry average of around 0.65%.
Need help with your home loan?
Whether you need a mortgage or you’re looking to refinance, mortgage brokers are usually free!
You can read more about the services that a broker provides on the ‘What Is A Mortgage Broker?‘ page.
Alternatively, call us on 1300 889 743 or complete this free assessment form.