You’d think a mortgage broker would hunt down the most appropriate home loan deal possible for you when lining up finance for the biggest purchase of your life. After all, isn’t that what they’re paid to do? While many brokers do exactly that, the law only requires that mortgage brokers do not suggest a home loan that’s unsuitable for your needs.
With the proportion of loans arranged through brokers, rising to around 60 per cent in just a few years, the industry has attracted all manner of people and organisations wanting to enter this lucrative commission-based industry. Sadly this means borrowers may be exposed to pressure sales tactics, inappropriate advice, lack of commission disclosure and upselling with little consideration of risk.
A number of lenders are also now acting as brokers and some borrowers may be confused over whether they’re dealing with an independent broker offering a range of loans, an agent for one lender only, or someone who wears both hats. Borrowers must establish with any loan representative just what their role is and how they’re being paid so they can judge the integrity of loan recommendations being provided.
The benefits of using a mortgage broker to source and arrange your finance can far outweigh the alternative of doing all legwork yourself. A good mortgage broker can be worth their weight in gold and provide valuable expertise, so why do some mortgage brokers charge a fee and others don’t?
There are two types of mortgage brokers;
- Mortgage brokers who don’t charge a fee to the customer as they are paid by the lender on settlement
- Mortgage brokers who charge a fee to the customer andare paid by the lender on settlement
Mortgage brokers who charge a fee to the customer refer to the fee as a ‘mandate’. They are required to notify the customer in writing that they charge a fee for their service. This practice can be seen as ‘double dipping’ as they are essentially paid twice for the service, once from the customer and from the lender, if the loan goes through to settlement. Mortgage brokers in competitive areas such as Sydney often mandate their clients to ensure they receive income for their work, even if the loan doesn’t finalise or settle.
Mortgage brokers who don’t charge a fee to the customer do so because they are paid commission by the lender once the loan settles. This means they often provide their services without any guarantee that they will generate any income.
WHY DO SOME MORTGAGE BROKERS CHARGE A FEE?
Mortgage brokers who are new to the industry and/or have less experience may feel the need to charge an upfront fee or ‘mandate’ for their service to gain commitment from the client, in case they spend time on the customer’s application but it never eventuates into a settlement.
They may have experienced a lot of ‘tyre kickers’ and found that they were spending more time fielding enquiries and not settling many loans. To mitigate this, they charge a fee at the point of engagement to satisfy their operating costs. This could be in the form of a percentage of the loan amount or a flat fee which may or may not be refunded on settlement.
Generally, if a mortgage broker is confident in their ability and expertise, they will have more success in taking a loan through to settlement and won’t charge a fee for their services.
HOW DO MORTGAGE BROKERS, WHO DON’T CHARGE A FEE GET PAID?
Similar to other service providers like recruitment agencies or real estate agents, most mortgage brokers don’t receive any payment unless they are successful. Without a fee for service, most mortgage brokers receive a payment from the lender once the loan settles. This can be in the form of an up-front payment and/or a ‘trail’ payment. Up-front payments are calculated on the total loan amount and paid once. Often the lender will recall or ‘claw back’ the payment from the mortgage broker if the loan is discharged within a short period of time.
Some lenders will also pay ‘trail’, a small monthly payment for the life of the loan, however this component isn’t offered on all loan products. Some lenders don’t pay trail at all or if they do, it must be over a certain loan amount.
Remember, it’s always best to ask if there are any fees associated with any services. And good brokers see themselves as educators and advisers, not just salespeople so make sure you find someone that works in your best interest, matching your needs with the lender’s and helping you decipher the mortgage application process.
As a last resort, the independent Mortgage Industry Ombudsman Scheme (1800 138 422) is available if there is a dispute you can’t resolve with your broker directly
For more information or an honest and unbiased opinion on your loan, talk to Think and Grow Finance today on 03 8390 5855 or email email@example.com