A mortgage broker offers home loan advice and can help you with all the administrative details of securing a loan for your home or property investment. Mortgage brokers generally have a panel of lenders so they can pinpoint the right loan package for your individual needs and goals. They offer an invaluable service if you are not sure how to navigate the process of securing a home loan or if you want expert assistance to identify the right loan for your circumstances. Best of all, a mortgage broker’s expert recommendations are generally free –but when you are accepting expert advice from someone, it is important to know how they receive their income.
So how do mortgage brokers get paid, and how does this affect their expert opinion?
The simple answer is that mortgage brokers are paid on a commission basis by the banks and lenders who provide the property loans. When the broker introduces a client to a particular lender, the lender will pay the broker a commission once the mortgage application has been approved. The broker will continue to receive small “trail” commission payments while the borrower retains the mortgage with that lender.
The cost of commission
Commissions are calculated on a percentage of the home loan’s value, as the value of the loan determines how much money the bank will make from repayments. As different lenders tend to base their commissions on a different percentage, some borrowers are concerned that a mortgage broker might intentionally steer them towards the high-earning commissions. However, there are a few safeguards in place to protect you from a costly and unsuitable home loan. First of all, your broker is legally required to recommend loans that are compatible with your financial situation. They cannot recommend an unsuitable loan simply because the commission is higher. The trail commission also helps keep mortgage brokers accountable. When your broker sets you up with a suitable loan, you should be able to make the payments comfortably, demonstrating to the lender that you were a good risk, and bringing in extra long-term income for the broker. If the loan is not suitable, the broker is also financially disadvantaged – so it is in the broker’s best interests to protect your financial interests.
Secondly, the lender does not adjust the commission if the mortgage broker offers a loan package that includes discounts and lower interest rates. This means the broker receives the same fee even when offering you a better deal, which will cut into the lender’s profits. As the lender will bear the cost of your savings in interest and discounts, the broker does not have any incentive to offer you the more expensive unsuitable loan packages.
If you are concerned that the mortgage broker might have an ulterior motive for a particular loan, ask directly about how the commissions vary between different products. As the broker can only offer recommendations, you have the option to turn down any particular loan if you are concerned about the terms.
In certain circumstances, a mortgage broker will charge fees rather than a commission. The fee will be paid by you, so you might find this method of payment is less cost-effective than having the commission covered by the lender. A broker running a fee-based service is also less likely to have a diverse lending panel, as he is not building up a relationship with various lenders.
Always ask your mortgage broker upfront how they will be paid for providing you with their services. When the broker offers you recommendations, you can also ask about the commissions for each product to assess whether you feel this has influenced the broker’s recommendations. However, you will generally find that mortgage brokers are more motivated to provide you with a good loan package rather than a bad one.