What commission is paid for my home loan?
The person assisting you with your home loan is paid depending on their role and who they work for. If a consumer sources their home loan direct from the bank/lender, then the bank employee is paid differently to a mortgage broker or an introducer.
The main purpose of these Q&A articles is to improve transparency for the consumer around the way mortgage brokers are remunerated, so we’ll focus on that for the moment.
For a mortgage broker arranged home loan, banks and lenders calculate an upfront commission based on the loan amount that is drawn down at settlement. Generally, the range is between 0.4% and 0.715% including GST depending on the lender, product and type of loan. On average, 0.6% is the standard for residential home loans. In addition to the upfront commission, in some cases (not all), an ongoing payment (trail) is made for the life of the loan. The range is usually between 0.165% and 0.275% for trail commission payments, which is paid monthly.
“Brokers have the potential to increase competition in the home loan market by reducing search costs for lenders and consumers and facilitating better matches between them.”
However, if the loan is discharged (paid out) within 2 years, most lenders ‘claw back’ the upfront commission paid. That means, if the consumer sells their property or pays off the loan within that time frame, the commission paid to the mortgage broker has to be paid back to the lender, resulting in either no payment or only a small percentage of the original payment. Also, if the consumer goes into arrears on their home loan, all payments stop.
Brokers can also receive volume-based commissions, which are paid on the total number of loans written by an aggregator, campaign-based commissions, which are paid for limited periods of time at higher rates than usual and soft-dollar benefits from lenders such as access to courses and conferences, competitions and hospitality, however following the Sedgwick Report, some lenders have removed or reduced these benefits.
Who receives payment for my home loan?
Who receives that money depends on who is involved with the preparation and introduction of the loan to the lender. The commission paid can be split between some or all of the following parties;
- The aggregator (the intermediary between the lenders and mortgage brokers)
- The mortgage brokerage (the company)
- The referrer or introducer (eg. The real estate agent who recommended the mortgage broker)
- The mortgage broker (the individual)
Here is an example of how a commission may be paid factoring in the above shares where the individual mortgage broker is paid on an 80/20 spilt with their employer rather than a base salary.
$500,000 loan @ 0.6% upfront commission = $3,000 inc GST
Aggregator share @ 20% = $600
Referrer/introducer share @ 20% (after aggregator share) = $480
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Mortgage brokerage (company) @ 20% share of remainder = $384
Mortgage broker (individual) @ 80% share of remainder = $1,536
The trail commission on a loan of $500,000 would equate to approximately $68.75 per month.
An estimate of commissions received must be disclosed in the ‘Credit Proposal Disclosure’ document which the mortgage broker must provide to the consumer.
Our story: How is Mint Equity paid and who receives commission?
Unlike some other mortgage brokers, we don’t charge our clients a fee for our service as we are remunerated by the lender the client selects. Depending on the lender, Mint Equity receives an upfront commission payment from the lender based on the loan amount drawn down on settlement. In some cases, we may also receive trail commission depending on the lender. Some lenders do not pay trail in the first year of the loan, others do.
We don’t think we should charge clients for our services as we already receive a payment from the lender. We understand some of our clients will pay off the loan (that’s the ideal for all our clients) and some will either sell their properties or need to refinance which means our income will be ‘clawed back’ by the lender. In those cases, we absorb the costs.
Mint Equity has never received any volume-based commissions or campaign-based commissions.
The vast majority of our business comes from existing clients and client referrals, rather than paid introducers or referrers. When we first started Mint Equity we had more referrers sending us their clients, and in return we would thank them via either a donation to their chosen charity or a payment. In most cases, our referrers do not ask for any payment because they just want their clients to receive the best service, rather than receiving income. We prefer this method as it avoids any conflicts of interest. We are required to disclose any referral payments and they will always be detailed on the client’s ‘Credit Proposal Disclosure’ document.
“Data obtained from ASIC suggested that loans obtained through brokers generally had lower interest rates compared to those obtained through nonbroker channels.”
Will the way mortgage brokers are paid change in the future?
Mortgage broking is an interesting industry. It is one of the few where you can do all the work and not know if you’ll ever be paid for it (as the client may not proceed with the proposed loan), or if the income you have generated will have to be paid back to the lender (if the client sells, pays off or refinances the loan within 2 years). The Royal Banking Commission is currently reviewing if the way the industry is remunerated and if it needs to be changed.
There have been several reports commissioned by the industry and government to review and suggest changes to the finance industry. Some of the reports few suggested modifying the way mortgage brokers are paid. Some suggestions are;
- Customers should pay for mortgage broking services and remove lender paid commissions
- Flat fee lender paid commissions rather than a percentage of the loan amount
- Removal of trail commission
The suggested changes are based on the idea that incentivising mortgage brokers financially can create questionable ethics, however these claims are unfounded. It appears that the major banks are driving the initiative as a cost reduction exercise and using the commission as a platform to point the finger.
At face value, consumers may think these changes aren’t an issue. However, these would be significant changes to the way the industry operates and affects customer outcomes.
Customer pays for mortgage broker services
The majority of consumers benefit from using the free service, particularly if a bank has previously declined their loan application. Its likely the customers wouldn’t want to add costs to their mortgage application by way of a fee, meaning brokers wouldn’t continue with their business model and lender competition would be removed. Consumers only option would be to go direct to the lender for each attempt at a home loan, reducing competition between the major banks and second tier lenders who rely on the broker segment to acquire market share.
Flat fee lender paid commissions
Sounds like a simple solution, however how will the fee be calculated? In most cases, the higher the loan amount, the more complex the loan application is. So, if a flat fee for a highly complex large loan application is the same revenue as a small loan, consumers may struggle to find assistance from the broker industry for larger loans, particularly self-employed or business borrowers, resulting in consumers having to go direct to the lender. Once again, this may well remove competition between the major banks and second-tier lenders.
Removal of trail commissions
From the outside trail commission may like money for nothing, but the value of trial commission is in the ongoing support and management a client receives from the mortgage broker after the loan settles. The trail income generated helps fund the operation of the business to carry out regular pricing reviews to ensure the client continues to get the best available interest rate, liaise with the lender regarding discounts, increases and changes in loan structure amongst other things. There are other services that many brokers provide their clients with after settlement, like property reports, follow ups to ensure they’re happy with internet banking, fee refunds and waivers. The broker uses their relationships with the lenders to continue to service the client and is the first point of contact if there are any issues throughout the life of the loan. Given the staff turnover in the banks and the reliance on call centres, the services provided by a mortgage broker beyond settlement is particularly valuable to the client.
What is the difference between a broker and a referrer or introducer?
Whilst the media has recently confused the terms ‘broker’ with ‘introducer’ they are vastly different.
A mortgage broker is formally qualified, registered and authorised by ASIC as a credit representative for the purpose of assisting consumers with sourcing credit/finance.
A referrer is not qualified or authorised to offer any credit advice or arrange finance. They generally have regular contact with consumers via a related industry such as real estate, financial planning or accounting. They may recommend the services of a mortgage broker to their clients and in return receive a payment or benefit for the referral. They must have signed a referrer agreement that stipulates how they can recommend the services and what they can and can’t say to the consumer.
An introducer is also not qualified or authorised to offer any credit advice or arrange finance. They can be either a person or company that directs consumers to a bank/lender. They are generally registered with one or more banks/lenders through an ‘introducer program’ and receive a payment for introducing the consumer to the lender. Whilst banks/lenders have recently changed who can become an introducer, previously they could be anyone, from a gym owner, online lead generation website or an individual who has a lot of contacts.
Further information
This article is part of a Q&A series to assist consumers with making informed choices regarding the way they secure their finance and to address issues raised in the Royal Banking Commission and Productivity Commission. If you need further information, have feedback, or have a specific question you want answered, please contact us.
References
Productivity Commission Draft Report