Explaining mortgage broker fees

Explaining mortgage broker fees

Working with mortgage brokers offers you access to an array of home loan products and lenders. However, you may be wary of the fees your broker charges. This breakdown will tell you everything you need to know.
Alexi Neocleous
Alexi Neocleous

The first thing you need to know about mortgage broker fees is that most brokers don’t charge them so you usually won’t have to pay a penny. Some charge a fee for service, as detailed in their credit assistance quote.

Instead, the broker earns a commission from the lender or credit provider for each loan they help secure. The size of this commission depends on several factors, which we detail further down.

How do mortgage broker commissions work?

Most mortgage brokers receive an upfront commission for their services. They also add the goods and services tax (GST) on top. Many also receive an ongoing or recurring commission, known as “trail” or “trailer” commission, for each loan they secure. These commission payments are made by the lender – not the customer.

Lenders pay the upfront commission upon settlement of your home loan. They’ll then pay the trail commission for each year of the loan’s life.

The amount of money your broker receives depends on two factors:

  • The size of the loan; and
  • The loan to value ratio (LVR).

Your broker will receive a percentage based on these figures. These usually amount to the following rates:

  • Between 0.65% and 0.7% of the loan amount, plus GST, as upfront commission; and
  • Between 0.165% and 0.275% of the remaining loan amount, plus GST, per year as trail commission.

Some lenders offer mortgage brokers a trail commission structure that sees the commission increase each year. For example, the broker may receive no trail commission during the first year of the loan, up to 0.165% in the second year, and so on during the lifespan of the home loan.

Many lenders also take the strength of the borrower’s application into account when deciding on fees. They’ll offer bonus commission to brokers who have a history of delivering strong mortgage applications. These commissions rarely exceed 0.1% of the loan value. Even so, they encourage the broker to deliver strong applications.

This may raise the issue of bias in your mind. (Just so you know: uno has broken the link between the size of loans and choice of lender/ product and employee remuneration – it’s one of the many things that makes us different from traditional brokers.)

The upfront and trail commission amounts that a broker expects to receive in relation to your home loan should be detailed in the Credit Proposal Disclosure Document.

What is trail commission?

Trail commissions are the broker’s reward for delivering a good borrower to the lender.

Lenders prefer long-term loans and reliable borrowers. From the lender’s perspective, a good borrower makes repayments on time, ensuring the home loan doesn’t lose money for the lender.

The borrower will also keep the same home loan, rather than refinance or look for other options later.

Sometimes lenders will charge “clawback” fees to your broker if you stray from the original loan structures. We discuss this in greater detail below.

If you default on your home loan repayments, the lender will not pay trail commission to your broker. Some stop their payments if your loan account stays in default status for more than 60 days. Others stop paying trail commission within a month of you defaulting on a payment.

How much should I pay a mortgage broker?

It depends on the mortgage broker, but often, absolutely nothing. As outlined above, lenders pay the upfront commission upon settlement of your home loan. Some brokers charge a fee for service, as detailed in their Credit Assistance Quote.

What percentage does a mortgage broker get paid?

Your broker will receive a percentage based on the size of the loan and the loan to value ratio (LVR). These usually amount to between 0.65% and 0.7% of the loan amount, plus GST, as upfront commission; and between 0.165% and 0.275% of the remaining loan amount, plus GST, per year as trail commission.

The percentage your broker receives also depends on whether they go through an aggregator or not. If they go through an aggregator it will be dependent on the aggregator’s agreement with the lender and furthermore, the broker’s agreement with the aggregator. We explain more about aggregators further down.

Can a mortgage broker pay a referral fee?

Yes. A referral fee is often a percentage of the commission received by the broker and is paid to the referrer. For example, if a financial planner recommends their client see a particular broker, that broker would then pay the financial planner for the introduction and/or the client, depending on the agreement.

How much are solicitors’ fees for buying a house?

It depends but usually they will be somewhere around $1000 or $1500.

What is the average salary of a mortgage broker?

It is entirely dependent on how many loans they write. Most brokers rely on commission.

How much does the real estate agent make on a sale?

A real estate agent will make whatever their commission agreement is as a percentage of the sale price. It might be around 6 or 7% of the sale price.

What are the responsibilities of a mortgage broker?

The role of a mortgage broker is to recommend a product that is not unsuitable for the customer. Mortgage brokers also help customers apply for their home loan. According to a recent article published by Business Insider, more than half of new housing loans in Australia now originate through brokers, many of which are owned by major Australian banks such as the CBA, NAB and Macquarie.

The mortgage broking industry has come under fire in recent years for aggressively pushing various deals. Last year, the High Court drew a hard line on brokers where it believed undue pressure had been applied to parents to “guarantee” their children’s property deal.

The Australian Securities and Investments Commission (ASIC) regularly reviews the mortgage broking industry. At the request of the Government, in 2015, ASIC conducted a review of the mortgage broking market to determine the effect of current remuneration structures on the quality of consumer outcomes.

The findings of that review, published in 2017, can be accessed here.

This year, ASIC is conducting a shadow shopping exercise to consider whether “broker advice” results in “positive consumer outcomes” and “how consumer outcomes could be improved.”

What do aggregators do?

Aggregators are third parties that connect brokers with lenders. Many brokers use these broker groups to head their operations, help them lower the costs of business and for professional development training.

A portion of the broker’s commission is usually passed onto the aggregator for these services. This fee can range from 0% to 50% of the broker’s commission.

In return, your broker can use its aggregator’s position in the home loan industry to access better products. This can benefit you because it means you have more choice and access to special discounts.

What are “clawback” fees

Lenders want reliable borrowers who stay with the same home loan product for a long time. As a result, if you stray from the original loan structure you signed up for, a lender will charge “clawback” fees to your broker. Just as it sounds, this is the act of clawing back money.

Lenders typically charge clawback fees to the broker if you refinance your home loan within the first two years, or if you pay it off completely in the same period. The clawback differs depending on the lender, but some take back all of the upfront commission if the loan ends within the first 12 months. This may drop to half if the mortgage ends in its second year.

The bad news is that some mortgage brokers will ask you to pay this clawback fee. This should be detailed in the broker’s Credit Proposal Disclosure Document. It’s also wise to examine your contract for mentions of this fee before signing it. Happily, you can dispute your broker’s clawback fees if the contract you signed does not mention them.

And, just so you know – uno absolutely does not charge customers clawback fees.

Those who want to pay their home loans quickly should look for the few lenders who don’t charge clawback fees. We can help you to do this, in addition to finding lenders who charge lower clawback fees than most.

Also, keep in mind that it’s sometimes beneficial to pay a clawback fee if it means you gain access to a better home loan product. You should always speak to an adviser before doing this.

What other fees are involved?

Your mortgage broker may ask you to pay additional fees if:

  • You want to borrow less than $200,000
  • You have a difficult financial situation
  • Your loan is for business or commercial purposes
  • You want to refinance or repay the loan within 24 months

Furthermore, some mortgage brokers operate using a direct fee structure. This involves you paying an upfront fee in return for receiving the commissions the broker would usually claim. However, such brokers are few and far between, as most find this structure is not financially viable.

If the broker does charge any upfront fees for their service, these should be detailed in the a Credit Assistance Quote.

At uno, we don’t charge our customers any fees for our service – so we’d encourage you to get the process started with us so we can help you.

What is an Australian Credit Licence?

A mortgage broker must hold or be covered by an Australian Credit Licence (ACL). Furthermore, they must provide all of the protections that the National Consumer Credit Protection Act 2001 outlines.

This prevents them from recommending unsuitable loan products that could damage your financial future.

You’ll also find that most lenders compete for your business using their home loan packages. As a result, commission rates don’t vary too much between lenders. This ensures your broker isn’t motivated by the possibility of a higher commission with a particular lender.

What to do next

Now you know about the fees, it’s time to start looking for a mortgage broker. At uno home loans we don’t charge a fee for service when we help you find a loan.

If you have more questions about broker fees, we’d be happy to help answer them.

This information is general in nature, and you should always seek professional advice when making financial decisions.

This information in this article is general only and does not take into account your individual circumstances. It should not be relied upon to make any financial decisions. uno can’t make a recommendation until we complete an assessment of your requirements and objectives and your financial position. Interest rates, and other product information included in this article, are subject to change at any time at the complete discretion of each lender.

Alexi Neocleous
Alexi Neocleous

* Two year fixed rate, owner occupier, P&I package loan with a maximum LVR of 70% and a loan amount >=$150k. Lender rates and products may change. We cannot suggest you remain in or switch to any loan until we complete our assessment. Fees and charges apply. ^WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. The comparison rate is calculated on the basis of a loan of $150,000 over a term of 25 years. ± All loan applications are subject to uno assessment and lender approval. uno does not guarantee that it will be able to find a customer a better loan than the one they currently have or to save them money.