In most cases a mortgage brokers client do not pay for their services. So how do we get paid? We are paid by the lender that we refer our clients to. We are most often paid 2 fees – an upfront fee and a second fee that is usually referred to as a trailing commission.
Before the Global Financial Crisis (GFC) brokers were more regularly paid an upfront only, and it was a larger amount. During the GFC many lenders came to brokers asking that the upfront fee be split into 2 – a smaller upfront, with the balance deferred and paid over time (this is what is now referred to as a trail). There were several reasons for the change, but mostly it brought the needs of the client, the lender, and the broker into line. The trail fee encourages brokers to provide ongoing support to our clients, and evens out our income.
Many people believe that these fees increase the cost of lending. In the 1990’s (when there were very few brokers) the banks average margin on a loan was about 4% – that is, the difference between the rate they paid investors and the rate that they charged borrowers. Today that average is closer to 2%. So even if you use a broker or not, you gain a benefit from the very fact that we exist. Brokers balance the field between the established major players, and the smaller lenders that do not have the same branch footprint.
Also remember that we do a lot of the work for a lender in preparing an application, gathering information, and packaging up your application. For the lender our commission replaces things such as staff wages, superannuation, advertising, branch rent and all the costs that go with operating a branch. So, to a lender the cost of doing business with a broker is very similar (or cheaper) to doing the loan themselves. We are seeing that in lots of towns the banks are closing branches, this is means that in many regional centres locals are left with no branch, but still have a great broker to help them.
What’s the go with the trail fee? This is a small amount that is paid each month based on the balance of the loan. It is paid to the broker so he or she can provide an ongoing service to their clients. Putting it simply, each day brokers do lots of things – big and little – that we are not paid directly to do. This is what the trail fees covers.
What is less known about a brokers income is that if our client is to refinance their loan within the first 2 years of having it, then all or part of our upfront fee is taken back by the lender (this is called a clawback). This penalty exists for a number of reasons; if a broker puts you into a bad loan for example. There are times when the clawback is unfair to the broker – for example a couple separate and decide to sell their home. Mortgage brokers are one of the few industries that can have their income taken away for work done up to 2 years earlier.
There is often commentary about brokers placing clients with the lender that pays them the most commission. Since early 2021 brokers have worked under the “Best Interest Duty†(ASIC Act RG175). This is legislation that means that a broker has to act in their clients best interest, above and without consideration to anything else including their income. Interestingly this legislation does not apply to lenders staff, but this is because they can only sell their own products, while a broker can sell the products of 100’s of lenders.
In reality a broker was always unlikely to provide you with a loan that is not a good fit to you anyway – because if the client were to find out they would refinance and the commission would be clawed back.
Recently we have observed some brokers that are offering to refund all or part of their upfront to use their services. Many quality Brokers do not do this however, as they provide a quality service and deliver value for money. When you need a plumber you look for quality and don’t ask them to give back part of their bill. The same with an electrician, mechanic and so on. Our view is that we provide a quality service. Why do others feel the need to hand back their income? You can decide for yourself.
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