Written by Gavin HarriganHow Do Mortgage Brokers Get Paid?
Mortgage brokers typically earn their income through commissions paid by lenders, not from their clients.
As someone who’s been in the industry for over 18 years, I can tell you that many first-time homebuyers and seasoned investors have asked me this question.
As such, I’ve provided an in-depth explanation of how this works below so that you are informed and in the loop.
Quick Summary
- Mortgage brokers primarily earn through commissions paid by lenders.
- There are two main types of commission; upfront and trailing commissions.
- Rarely do brokers charge clients directly.
- Regulations ensure brokers act in clients’ best interests.
Types of Commission for Mortgage Brokers
There are generally two types of commissions; upfront commissions and trailing commissions.
Upfront Commission
This is a one-time payment made by the lender when you settle on a home loan. The average rates for upfront commissions are around 0.65% – 0.70% of the loan amount plus GST.
Imagine a mortgage broker assists a client, Sarah, in securing a $400,000 mortgage. The upfront commission rate agreed upon between the broker and the lender is 0.6%. The calculation of the upfront commission would be:
| Mortgage Amount | Upfront Commission Rate | Commission Earned |
|---|---|---|
| $400,000 | 0.6% | $2,400 |
Trailing Commission
This is a smaller, ongoing commission paid annually, calculated as a percentage of the remaining loan balance, typically around 0.15%.
Let’s consider Emma, who has taken out a $500,000 mortgage. The trailing commission paid to her broker over six years would look like this:
| Year | Remaining Loan Balance | Trailing Commission Rate | Commission Amount |
|---|---|---|---|
| Year 1 | $500,000 | 0.165% | $825 |
| Year 2 | $490,000 | 0.165% | $808.50 |
| Year 3 | $480,000 | 0.165% | $792 |
| Year 4 | $470,000 | 0.1925% | $905.25 |
| Year 5 | $460,000 | 0.220% | $1,012 |
| Year 6+ | $450,000 | 0.220% | $990 |
Commission Comparison
| Year | Loan Balance at Start of Year | Upfront Commission | Trailing Commission Rate | Trailing Commission Earned |
|---|---|---|---|---|
| Year 1 | $500,000 | 0.6% | 0.15% | $750 |
| Year 2 | $480,000 | N/A | 0.15% | $720 |
| Year 3 | $460,000 | N/A | 0.15% | $690 |
| Year 4 | $440,000 | N/A | 0.15% | $660 |
| Year 5 | $420,000 | N/A | 0.15% | $630 |
In this example, the broker would have earned $3,000 for an upfront commission and $3,450 for a trailing commission after 5 years.
Clawback of Upfront Commissions
In the mortgage world, clawback happens when a mortgage broker helps someone get a loan and the lender pays them a bonus (an upfront commission).
However, if the person decides to pay off their loan super quickly or switch to a different lender, the original lender might ask the broker to return that bonus.
Imagine your friend borrows $20 from you and promises to pay you an extra $5 next week for your help. But then, they give you back the $20 the very next day. Now, you might think, “Hey, I didn’t really do much, so maybe I shouldn’t take the extra $5.” This situation is kind of like clawback.
Why Clawback?
Lenders give brokers this bonus thinking they’ll benefit from the interest on the loan over a long time. If the loan is paid back too soon, the lender doesn’t earn much, so they want their bonus back.
Example
Let’s say a mortgage broker helps Alex get a $300,000 loan, and the lender gives the broker a 1% upfront commission, which is $3,000. But, if Alex decides to switch to a different loan or pay it all off within the first year, the lender might have a clawback policy. They could ask the broker to return some or all of that $3,000.
What This Means for You
If you’re ever in a situation where you’re working with a mortgage broker, it’s good to know about clawback because:
- Your Decisions Can Affect the Broker: If you switch loans or pay it off early, your broker might have to return their bonus.
- Ask Questions: Always feel free to ask your broker about clawback. It’s a part of their job to explain these things to you clearly.
Why It’s Important for You to Understand
For borrowers, comprehending how mortgage brokers such as myself are compensated is not just about financial literacy; it’s crucial for making informed decisions.
Here’s why understanding both upfront and trailing commissions is important:
- Informed Decision-Making: Knowing about commissions helps you evaluate a broker’s advice more critically, ensuring the recommended mortgage products align with your needs, not just the broker’s financial gain.
- Transparency and Trust: Awareness of commission structures fosters transparency, building trust in the broker-borrower relationship. You’re more confident in the advice you receive when you know how your broker benefits financially.
- Financial Impact Awareness: Understanding trailing commissions and clawback clauses is essential, especially if considering refinancing. It helps gauge how these decisions might affect future interactions with your broker and potential costs.
- Promoting Ethical Practices: With knowledge of commissions, borrowers can encourage ethical practices. Brokers, aware that clients understand the commission system, are more likely to prioritise the client’s best interests.
- Broker’s Duty to Act in Your Best Interest: Brokers have a duty to act in your best interest, as per industry regulations. Knowing about commissions allows you to ensure that this duty is being upheld, giving you peace of mind that the advice provided aligns with your financial goals.
FAQs
What is a mortgage broker?
A mortgage broker is a professional who acts as an intermediary between borrowers and lenders in the home loan process. They offer advice, source loan options, and assist with paperwork, making the mortgage application process easier for the borrower.
Are there any fees charged by mortgage brokers to their clients?
Some mortgage brokers may charge a fee to their clients, especially in complex cases or when working with non-traditional lenders. However, many brokers offer their services free to clients, earning their income solely from lender commissions.
How does the commission structure affect my mortgage deal?
While mortgage brokers are incentivised through commissions, they are also legally required to act in the best interests of their clients. This means they should recommend a mortgage product that is suitable for you, regardless of the commission they might earn.
Is the commission rate the same for all lenders?
Commission rates can vary between lenders. Brokers are required to disclose their commission rates and any potential conflicts of interest, ensuring transparency in their recommendations.
Can I negotiate the broker’s fee or commission?
Generally, the commission rates are set by the lenders and are not negotiable. However, you can discuss any fees charged directly by the broker to ensure you understand all costs involved.
What regulations govern mortgage brokers in Australia?
Mortgage brokers in Australia are regulated by the Australian Securities and Investments Commission (ASIC) and must comply with responsible lending obligations under the National Consumer Credit Protection Act.
How can I ensure I’m getting the best mortgage deal through a broker?
It’s important to ask questions, understand the options presented, and consider seeking independent financial advice. Comparing different brokers and their lender networks can also help you find the best deal.
Do all brokers work on commission?
While most mortgage brokers in Australia work on commission, there are exceptions. Some brokers, though fewer in number, charge clients a fee for their services instead of, or in addition to, receiving commissions from lenders.
Conclusion
Basically, mortgage brokers are typically compensated by lenders through commissions.
This arrangement doesn’t cost the borrower directly, but it’s essential to understand how it works.
Regulations are in place to ensure brokers recommend loans that are in the best interests of their clients, not just those that pay the highest commission.
If you’re thinking about purchasing a home and are looking for assistance, me and my team of finance brokers in Perth are here to ensure you get the loan that’s right for you, not us.
*Disclaimer: This blog is for informational purposes only and not intended as financial advice. The contents reflect the author’s personal views and experiences in the mortgage industry and should not be taken as professional guidance. Readers are encouraged to consult with a financial advisor for specific advice. The author is not liable for any actions taken based on this information, nor for inaccuracies or omissions in the content. Financial decisions carry risks, and it is the reader’s responsibility to conduct thorough research before making such decisions.