Buying a home is often the biggest financial decision for many people. And it’s also the most complex one. It’s not as simple as purchasing a shirt where you pick what you want, pay for it, and wear it the next day. In homeownership, there are several processes and hurdles to jump through before you can get the keys to your property.
This is where a mortgage broker can come in handy.
Mortgage brokers provide services to manage and simplify your homebuying journey. Primarily, their job is to help you find a suitable home loan tailored to your needs, whether you’re a first-time buyer, a refinancer, a property investor, or a client who wants to release the equity from your home.
They can be especially useful if you have a more complex home loan application to put together, such as if you’re self-employed, low-doc, or buying a more distinct property, such as land and a tiny home or a hobby farm.
Brokers also act as an intermediary between you and conveyancers and other advisors, and provide you with ongoing support and personalised advice throughout the mortgage process and after the loan is settled.
Generally, engaging a professional to perform a service will come at a cost – either a flat rate for the whole package or an hourly fee. However, payments and fees are different with mortgage brokers. In most cases, you may not have to pay them any fees at all. But all of this largely depends on your broker, and partly on your loan application
Fees charged by mortgage brokers
Mortgage broker services are typically free as they are compensated by the lenders whose home loan products they recommend to clients.
A review of mortgage remuneration by the Australian Securities and Investments Commission (ASIC) found that 85% of brokerage firms do not allow their brokers to charge upfront fees to customers.
However, it is important to note that brokers operate differently. In businesses where charging fees is allowed, the individual broker is responsible for setting the amount.
Upfront fee
“Some brokers charge an engagement fee or an upfront fee for their services,” said Tony Xia, former CommBank broker performance analyst and founder of Sydney-based brokerage business The Mortgage Agency.
Also known as an administration or engagement fee, an upfront fee is a one-off charge used to cover the time and costs a mortgage broker incurs in providing their services to customers. It also serves as a safeguard for brokers, ensuring they receive compensation for services rendered even if the deal falls through and they are not paid by the lender.
“A mortgage broker may spend hours conducting research, performing calculations, and organising valuations, only for the client to decide not to use their services,” Mr Xia said.
“To mitigate this risk, some brokers charge an upfront fee. It's then up to the customer to decide whether they want to proceed with the broker's services and pay this fee.”
This also helps brokers filter through clients committed to getting their home loans approved, disincentivising those who apply without the genuine intention of proceeding to settlement or who have incomplete documents or financial issues that may hinder their application.
“Even the most established brokers do not have the capacity for rate shoppers, and thus prefer to put their energy toward those who are ready to go through the loan application,” said Dr Lisa Bridgett, founder of Stellar Finance.
Complex loan fee
Some brokers charge a complex loan fee to borrowers whose circumstances or loan applications require more work.
“Some more complex structures like self-employed or trust loans can sometimes incur additional costs based on the amount of time required to write that particular loan,” said Tyler Cornish, principal mortgage broker at Your Advisor Group, a brokerage firm based in Queensland.
This fee is charged on a case-by-case basis and usually applies to commercial and SMSF deals where different entities such as corporate trustees are involved. Most individuals looking to buy a home or an investment property may not be required to pay this fee.
In some cases, brokers may waive this fee or include the costs of complex loan applications in the upfront fees.
Cancellation fee
A cancellation fee may be charged to home loan borrowers who received pre-approval or unconditional approval and elected not to proceed to settlement.
For some brokers, obtaining conditional or unconditional approval is considered revenue for the business as settlement periods can take 30 to 90 days, or even longer, depending on the lender. Consequently, a cancellation results in lost income.
Cancellations may also be covered by or included in the upfront charge, making this fee fairly uncommon among brokers in Australia.
Commission clawback fee
Another uncommon fee – yet something you need to look out for – is the commission clawback fee mortgage brokers might charge you. This fee is intended to recover the clawback of the upfront commission a lender pays to a mortgage broker.
“When a customer closes a loan account because they have paid it off, sold the property, or refinanced to another bank – the lender will 'clawback' the upfront commission paid to the broker,” explained Jason He, founder of Kaleido Loans brokerage firm.
The amount clawed back typically depends on certain situations:
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If the loan is closed within 12 months of settlement – 100% of the commission paid will be clawed back
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If the loan is closed after 12 months of settlement, but before clawback expiry (typically 18-24 months) – 50% of the commission will be clawed back
Should a clawback apply, Mr He said it is deducted automatically from the monthly commission the broker is due to receive.
“We therefore have a vested financial interest in not just placing our clients in the right loan now, but also in ensuring that our clients' lending remains appropriate and competitive for them on an ongoing basis,” Dr Bridgett added.
If a broker decides to include a clause in the contract that allows for the recovery of commission clawback, this must be clearly explained to you before any agreement is signed. So read the contract carefully. Customers unfairly charged a clawback fee can lodge a complaint with the Australian Financial Complaints Authority (AFCA) or seek advice from a consumer protection agency.
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Broker fee regulations and transparency
The vital thing to remember about these fees is that your broker must disclose them to you at the outset, so you can know the implications and thus decide whether to go through with the arrangement.
In Australia, mortgage brokers are regulated by ASIC and must adhere to the National Consumer Credit Protection Act 2009 (NCCP Act) which protects consumers when they take out loans and requires brokers to disclose all commissions and fees to their clients to ensure transparency.
How do mortgage brokers get paid?
Unlike other professionals who charge their clients for services rendered, mortgage brokers make their money off commissions paid by lenders at no additional cost to the borrower.
“The client does not pay a higher rate by going to a broker instead of going directly to a bank,” Mr Cornish confirmed.
Mortgage brokers receive two types of payments from lenders: an upfront commission and a trail payment.
Upfront commission
An upfront commission is paid by the lender to the mortgage broker upon successfully signing up a borrower for a home loan. This payment covers “the broker's assistance throughout the entire loan process,” according to Mr Xia.
“This includes offering product comparisons, tailoring products to your needs, advising on loan structuring, providing different scenarios and calculations, and guiding customers through the steps of purchasing or refinancing their home loans,” he added.
Commission offered by lenders varies, but it typically ranges between 0.50% and 0.70% of the settled loan amount, plus GST.
For example, if your mortgage broker settled a $500,000 home loan for you from a lender that pays 0.60% commission, your broker will earn $3,000 + GST from the deal.
To protect borrowers from signing on to loans larger than they actually need, given that brokers’ commissions are based on the loan amount secured, the Banking Royal Commission introduced the ‘net of offset’ which calculates the upfront commissions paid to brokers based on the net loan amount, which is the total loan minus any funds in offset accounts.
This means that if a borrower takes out a $500,000 loan and puts $50,000 in an offset account after the settlement, the lender will only pay an upfront commission on the $450,000.
“This impacts a mortgage broker’s revenue as very rarely you'll find a customer who does not have any surplus money in their offset account immediately after settlement,” Mr He said.
This approach helps align the interests of brokers and borrowers and reduce the risk of unsuitable lending.
Trail payment
In addition to the upfront commission, mortgage brokers may also receive a monthly trail payment - also called a trail(ing) commission. This is an ongoing payment made by the lender for the services brokers provide as long as the loan remains active.
“These services include regular home loan rate reviews and answering any questions [borrowers may have] about current and future loans, essentially making the broker your first point of contact,” Mr Xia said.
The trail commission is typically a smaller percentage of the loan balance, often around 0.15% to 0.20% p.a. For instance, if a loan balance is $400,000, a 0.20% trail commission will put $800 annually or $66.67 per month into your mortgage broker’s pocket.
“This remuneration structure exists because mortgage brokers are not employed by the lenders; they operate as third-party agents,” Mr Xia explained.
“If you go to a local bank branch, the staff there are paid a salary for assisting you with your loan. However, because mortgage brokers are independent and not bank employees, they receive service fees and trail payments instead of a salary.”
How broker commissions affect your home loan
While the commissions your broker may receive are not built into your loan or added in hidden fees (which is illegal), the way their remuneration is structured may still have an indirect impact on your home loan.
For one, your mortgage broker might be incentivised to recommend loans that offer higher commissions rather than those suited to your needs. Another thing is that you may be engaging with a broker that only works with a subset of lenders that offers competitive commissions, potentially limiting the range of home loans you can access.
To prevent a conflict of interest from influencing their recommendations, brokers are bound under the Best Interests Duty in the NCCP Act to recommend the best product that suits each client and to consider whether that product offers the consumer net benefit relative to other options.
“As a mortgage broker, the best practice is to always provide up to three comparable products for the customer to review. They must also provide details and explanations as to why any of those specific products may be the best fit,” Mr Xia shared.
“If only one product can be recommended, then in the same accordance, there needs to be detailed notes and proper explanations [to the client].”
Ultimately, you as the client have the right to ask your broker upfront about available options – especially if you believe the ones presented to you are unsuitable and unfavourable – as well as the commissions and fees they are receiving from the lender. Your broker is bound to disclose those matters to you.
How to choose a mortgage broker
Choosing the right mortgage broker involves thorough research and careful consideration. Do not settle for the first broker you meet; interview multiple brokers to compare their services, fees, and communication styles.
Remember, a broker acts as your agent, not the lender’s, so it’s crucial to find someone who understands your needs and can effectively help you get it.
Do your research and ask for referrals
Start your search by asking family and friends for recommendations. Often, personal experiences provide valuable insights. You can also look for reviews and testimonials online to gauge the reputation and performance of potential brokers.
Verify their qualifications
If you’ve already got a candidate or two, the next thing to do is ensure they have the necessary qualifications. A broker must at least have a Certificate IV in Finance and Mortgage Broking. Further, check if your broker is licenced by the Australian Securities and Investments Commission. You can verify this on the ASIC Connect Professional Registers.
Check their experience and expertise
Consider how long the broker has been in the industry. Experienced brokers likely have a better understanding of the market and a wider network of lenders.
In addition to the years in the industry, find out their specialisation (e.g. first home buyers, investment properties, low doc loans).
Mr He said, “Research the mortgage broker via their website and social channels to get an idea of who they specialise in assisting and what they offer”, and choose the one with expertise relevant to your needs.
It’s also a good idea to find someone who understands more than just mortgage broking, according to Mr Cornish. “Find a broker who also understands investment and tax strategy so they can work with your other advisors (accountant, financial planner, and so on.),” he said.
Enquire about their panel of lenders
Ask the broker about the number and variety of lenders they work with to ensure that you will find the right product that suits your specific situation. A broker with access to a broad range of lenders and a variety of loan products can offer you more options.
Ask about the broker’s fee structure
Ask upfront about fees the mortgage broker charges and commissions they may receive from the lenders they recommend. Remember, you have the right to ask this question just as the broker is obliged to disclose this to you.
Get to know them better
Evaluate the broker’s operations, procedures, and approach to customer service. They should be attentive to your needs and willing to provide ongoing support even after the loan is settled.
“During your initial call with the mortgage broker, have questions prepared to ask them about how they operate, who makes up their team, who will be assisting you at each stage, how they help customers in your situation, and their turnaround time,” Mr He advised.
Choose the mortgage broker you trust
Once you’ve asked all your questions and received all the necessary disclosures, the last step in choosing your mortgage broker all boils down to your preference.
“Choose someone you are comfortable working with and that shows you that element of trust. They should speak to you at your level of understanding and listen well so they can offer a product and lender that suits your goals and objectives,” said Melissa Mascioli, mortgage advisor at Your Mortgage Provider.
Ultimately, it is your choice – pick the one you believe truly has your best interests at heart, or as Dr Bridgett puts it, “Go with your gut instinct as this is a relationship built on trust.”
Photo by jcomp on Freepik
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