How are mortgage brokers paid?

Mortgage brokers receive a commission or fee from lenders. This compensation will vary depending on the lender as well as the volume of the transaction.

Upfront commission

The largest proportion of a broker’s payment is in the form of an upfront commission, which is normally around 0.3-0.5% of the loan value. For example, for a $850,000 mortgage, a 0.3% commission would amount to approximately $2,550 in the broker’s pocket.

Recurring commission

Also known as a “trailing commission”, the second portion of their payment is through a recurring commission that is calculated based on the remaining loan amount each year, which is paid to them on a monthly basis. While some lenders offer no ongoing commission, others offer an ongoing commission of 0.1-0.2% based on the remaining value of the property.

Clawback commission

If a customer refinances the home loan suggested by their broker to another lender, then the initial lender can take a clawback commission fee from the broker. This is because it can be costly for a lender to set up a new loan for the customer, and the lender loses out if the customer then decides to discharge the loan.

Many brokers argue that this is unethical because self-employed brokers do not have an industry body to protect them from this occurring.

Some brokers in these situations have opted to pass on the fee to their clients. This is not illegal in Australia as long as they follow the correct guidelines.

It’s estimated that only 1-2% of total loans are subject to clawback each year and therefore it doesn’t represent a major issue for the broking industry, but it’s still important for brokers to educate their customers about how clawback provisions work.

There has been criticism and debate in recent years around whether or not clawback fees are in breach of Australian Consumer Law, but it appears that clawback commissions will not be removed from the mortgage broking industry.

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