Many people head straight to their own banks (and sometimes the nearest bank) once they decide to apply for a home loan. While there’s nothing wrong with going straight to a bank, you could be missing out on some significant benefits by bypassing a mortgage broker.
If you’re looking for a viable home loan, sourcing a local mortgage broker allows you to leverage their industry experience and knowledge. A mortgage broker can also help you find the right home loan by giving you access to their portfolio of lenders.
Among other things, a mortgage broker can negotiate for a competitive product on your behalf, help you sift through an often bewildering range of home loan products, and help you understand the processes involved.
How are mortgage brokers compensated?
Most mortgage brokers don’t earn a salary and generally provide their services to borrowers free of charge. So how do they get compensated?
Many operate as small businesses or contractors and earn their income from the commissions they receive from the lenders. The commissions or fees they receive from the lenders will vary depending on the lender as well as the volume of the transactions.
The commissions themselves are based on a percentage of the loan amount and the loan-to-value ratio (LVR).
The largest proportion of a mortgage broker’s payment is in the form of an upfront commission. This is normally around 0.3% to 0.5% of the loan value. For example, for an $850,000 mortgage, a 0.3% commission would place around $2,550 in the broker’s pocket.
The broker receives the upfront commission once the loan is finalised and the borrower receives the funds for the mortgage.
Also known as a “trailing commission,” a recurring commission is the second portion of the broker’s compensation. It’s calculated based on the remaining loan amount each year and is paid to them on a monthly basis. While some lenders offer no recurring commissions, others offer a recurring commission of 0.1% to 0.2% based on the remaining value of the property.
Lenders will continue to pay the broker the recurring commission as long as the client stays with the mortgage and doesn’t fall into arrears. Arrears mean the borrower was late with the mortgage repayment, and this can escalate into default if repayments haven’t been made for 60 days.
The recurring commission is discontinued if an account remains in default for 60 days or more. Some banks will cut the trail if the loan is in default for 30 days, and a few will cut the trail after 15 days in default.
Conflict of interest
Since most brokers receive commission-based compensation, a conflict of interest can occur in some cases. For instance, a broker might promote a particular home loan with a lender because that lender offers a generous commission over one that offers a lower commission, irrespective of whether or not it’s the best product for the borrower’s needs.
Fee-based brokers charge borrowers an upfront fee instead of an earning commission from the lender, so they will theoretically recommend only suitable products based on the borrower’s needs.
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