Using a mortgage broker can simplify the home loan application process and help you find the right lender for you, but it might leave you wondering — how exactly do mortgage brokers get paid?
From upfront fees to commission rates, let’s take a look at how mortgage brokers make their money in Australia (and whether you’re losing out by using one).
What is a mortgage broker? Why would I use a mortgage broker?
A mortgage broker acts as a go-between for a borrower and a lender, whether a bank, credit union or non-bank lender.
It is their job to act in the borrower’s best interests in mortgage broking, considering their client's financial situation and needs. A good mortgage broker should explain home loan products to you and break down the costs of your loan options with different lenders, like the interest rate and how this will impact your repayments, as well as any features and fees. They may also handle the home loan application process.
Buying real estate can be complicated, especially for first-home buyers, and it can be helpful to have someone providing financial advice and guiding you through your options in choosing a new loan.
Suppose you are unsure of what loan-to-value ratio (LVR) tier you are eligible for or whether an offset account will be helpful for you. In that case, these are the type of questions a mortgage broker can help you navigate around a particular product. As aggregators of a panel of lenders, they can also help you find the best fit for your needs.
Looking to refinance? A mortgage broker can also help to find the best home loan option for refinancing. They can also easily re-apply for you if your pre-approval for a home loan expires, or help you navigate Lenders Mortgage Insurance (LMI).
All of this sounds brilliant and like a compelling case for using a mortgage broker. So what’s the catch? Sky-high fees, perhaps?
How does a mortgage broker get paid?
Thankfully, you aren’t the one footing the bill for a mortgage broker’s service in most cases. Most are paid for brokerage with an upfront commission by the lender you select. This is because their service acts as a referral to the lender you choose, so they receive remuneration based on this.
The bigger your loan amount (and the more expensive the real estate is that you’re getting a home loan for), the larger the mortgage broker commission is likely to be.
An upfront commission to a mortgage broker is usually roughly 0.65%-0.70% of the loan amount, plus GST.
There are other types of commission received by mortgage brokers as well.
Mortgage brokers may also receive something called a trail commission. This is an ongoing commission of a smaller amount, calculated off of your loan balance, paid monthly over the life of the loan. It ends if you refinance, default on your loan repayments, or pay your home loan off altogether.
Trail commissions came into question in a recent royal commission. Instead, updates have been made to ASIC regulatory framework for mortgage brokers. The trail commission framework is set for review again in the future.
The royal commission called for a user-pays model in which the borrower would pay the mortgage broker, banning trail commissions. It was argued that trail commissions were “money for nothing” to mortgage brokers and that this would be in borrowers’ best interests. A call for borrowers to pay upfront commissions would likely see mortgage brokers falling to the wayside.
What should I watch out for if I’m using a mortgage broker?
Since mortgage brokers are paid on commission by lenders, they don’t always operate with a full panel of lenders and might offer you a limited range of home loans. Incentives may differ between lenders, which could incentivise one loan product being pushed over another.
This type of thought can lead to a level of distrust of mortgage brokers.
Are mortgage brokers trustworthy in Australia?
You should always do your research before choosing a mortgage broker. Since experience and skill level can differ between professionals, there are regulations and requirements put upon the mortgage broker industry in Australia.
ASIC requirements state that Australian mortgage brokers need to hold a minimum of a Certificate IV in Finance and Mortgage Broking. They must operate under an Australian credit licence as either a Credit Representative or a Licensee and are regulated by ASIC and the National Consumer Credit Protection Act.
Amendments in 2021 state that a mortgage broker must act in a borrower’s best interests to protect you from a greedy broker picking the lender who’ll give them the best commissions.
To further incentivise brokers to provide accurate financial advice and find you the right home loan, they may face fees from a lender if you exit your home loan quickly after choosing it. These are called clawback fees.
These clawback fees also prevent mortgage brokers from advising that you refinance to a home loan for a cashback offer, for example. If you exit a new mortgage before 1-2 years have passed, not only will you potentially incur break costs and new establishment fees, but your broker would also face clawback fees for your early exit.
If you have a problem with a mortgage broker, you can complain to their business directly or seek dispute resolution through the Australian Financial Complaints Authority (AFCA).
Should I use a mortgage broker?
There are many pros and cons to using a mortgage broker, and it all comes down to your individual wants and needs.
When it comes to ease of home loan application, financial advice, and comparing the options, it’s hard to compare to a mortgage broker — particularly while they operate on commission rates from lenders. You’ll need to be clear about what you want and don’t, but the role of a mortgage broker is to find the right fit for you.
Suppose you’re willing to do some extra legwork. In that case, you might find yourself able to access smaller non-bank lenders with competitive interest rates beyond the typical mortgage broker’s panel of lenders. It may take some extra time and a fine-toothed comb (don’t get caught up in headline rates when a sky-high comparison rate hints at hidden fees!), but other loan options that suit you better could be out there.
If we see a shift to the royal commission's recommendations, where borrowers are required to pay fees to their mortgage brokers, it may cease to be an option for many.