How Do Mortgage Brokers Make Money?
In the first quarter of 2016, the commissions paid to mortgage brokers has come under the scrutiny of both ASIC, the major government regulator. This has resulted in increased media coverage around commissions and the ethics that could potentially be involved.
The main question asked by both the media and by ASIC is whether the nature of the commission payments could lead mortgage brokers to connect clients with the loans that earn them a bigger commission, not the loans that give the clients the best mortgage for their situation.
So that you can be 100% confident that your mortgage broker will always put your best interests first when presenting you with loan products to choose from, our senior mortgage broker, Rob Murdoch, has outlined exactly how our mortgage brokers and the mortgage business is paid, and the legal and ethical obligations he is bound to abide by.
How is a Mortgage Broker Paid?
A Residential Mortgage broking Business is paid in two forms:
The first is via an upfront commission. Most Banks and Lenders will pay between a 0.50 – 0.60% of the loan amount that is settled.
For example, if a loan settles for $350,000 and the lender pays an upfront commission of 0.60% the Mortgage Broking Business will be paid $2100 plus GST for originating this loan.
No matter what the size of the loan the upfront commission paid remains the same.
The second form of payment is what’s known in the industry as “Trail” commission. This is a smaller monthly figure that Lenders pay the Mortgage Broking Business. Its calculated based on a set percentage.
Most lenders pay 0.15% of the loan balance and this figure is calculated based on the ongoing balance of the loan. In most cases where a home loan is a Principal and Interest reducing loan the Trail commission reduces over time.
For Interest Only loans the Trail commission figure is constant unless the loan balance is reduced.
Why is Trail Commission Used?
The main reason the Trail commission is paid to the Broking business is for the broker to service the client and their loan for the life of the loan. This might include things like assisting with loan variation requests like fixing a variable loan or doing a top up on a loan so a client can release equity in their home.
How is a Mortgage Broker different to a Bank?
Mortgage Brokers in Australia now make up over 50% of home loan originations. Banks and Home Loan lenders see the Mortgage Broking Channel as ultimately a cheaper option of delivering home loans to its customers.
When the banks, especially the larger big 4 banks have to employ thousands of sales staff and pay for the overheads associated with this such as taxation, super, Branch building overheads this makes the cost of them writing the loan higher compared to paying a Mortgage Broker to do the same loan.
Some Mortgage Broking businesses also charge what’s called a “Fee for Service”. This isn’t that common at the moment, and may apply if the Mortgage Broker feels like there could be a substantial amount of work put into trying to get a client, who has an unstable credit profile approved for a loan. This is done due to the fact that if a Broker can’t get someone approved and settle a client’s loan they don’t get paid.
All commissions and fees and charges associated with taking out a loan via a mortgage broker are 100% disclosed at the application stage. This is heavily governed by the Australian Financial Regulators.
In most cases a good Mortgage Broker will explain to a client in an initial appointment or conversation how a Mortgage Broker works and how they are paid.
Legal Obligations of Mortgage Brokers
The Mortgage and Finance Association of Australia Code of Practice is a comprehensive document that members are bound to abide by in all their dealings with clients, colleagues and other business dealings.
In clause 10 the Code requires that brokers disclose all fees and commissions and other benefits to their customers.
Clause 4 details the behaviour of a mortgage broker in relation to a client. The key provisions here are as follows:
Members are required to:
- Act with appropriate skill, care and diligence, and adhere to all reasonable instructions of Customers
- not engage in any acts or omissions of a misleading or deceptive nature
- not engage in any acts or omissions of a dishonest or fraudulent nature
- not engage in unconscionable conduct
- not engage in unfair conduct.
When a broker arranges credit for a customer, they are bound to abide by strict guidelines to:
- Only suggest or recommend to customers credit that they reasonably believe is appropriate for the needs of that customer, after an appropriate assessment of the customer's capacity to service the loan.
- Brokers are prohibited from receiving any commission, payment or incentive on a loan when the customer is not better off as a result of the refinance. The Code deems that a client is not better off if they can simply make extra or offset payments under an existing loan; or any potential savings through accessing these facilities is less than the cost of refinancing.
If you have any further questions, don't hesitate to ask your mortgage broker about how they get paid and the commissions from a mortgage you take out using their services. They will be happy to frankly answer all of your questions. You can also have a look at the Code of Practice that your mortgage broker is legally bound to abide by to find out exactly how they make decisions about the advice they give you.