Mortgage Broker Commission

There has been much controversy and debate over how mortgage broker gets paid. Mortgage brokers were put into the spotlight by the Hayne Royal Commission who strongly opposed the current renumeration structure for mortgage brokers. However their review was misleading and did not truly reflect the ins and outs of the industry. We breakdown all the how the mortgage commission structure works and why the Hayne Royal Commission findings did not make sense and was not looking out for the best interests of consumers.

How much does a mortgage broker earn?

A mortgage broker’s earnings will vary between person to person, business to business and it ranges from as little as $10,000 per annum to $200,000 per annum. There is a wide income gap in this industry.

Most mortgage brokers will earn a commission income when a loan has been settled. So, the more applications a broker settles, the more money they earn. This article will briefly introduce the commission structure, broker income structure, and potential remuneration changes.

This is also excluding any potential fees that mortgage brokers might decide to charge!

What is a mortgage broker's commission structure?

Overall, mortgage brokers are paid (by lenders) a volume-based commission, that is, a percentage of the net loan amount. With a few lenders, the quality of a loan being written will also affect the commission a broker may receive. The commission is normally split into three parts:

  • Upfront commission
  • Trail commission
  • Clawback

In summary, we see lenders will pay similar commission structures and commission rates which will include an upfront commission ranging from 0.4% to 0.7% (excluding GST) equating and trailing commissions ranging from 0.1 to 0.2% (excluding GST) annually of the loan balance. On a $500,000 loan, this means a mortgage broker can receive up to $4500 (excluding GST) in commissions in the first year.

What is an upfront commission?

An upfront commission is paid by a lender following the settlement of a loan or property purchase. The commissions typically range from 0.4% to 0.7% (excluding GST) of the borrowing amount (or net drawdown). This equates to $2000 and $3500 (excluding GST) on a $500,000 loan paid by the lender to the mortgage broker in commissions.

What is a trail commission?

A trail commission is a deferred payment paid monthly by the lender to the mortgage broker based on the loan balance. The commissions typically range from 0.1% to 0.2% (excluding GST) annually of the loan balance. This commission varies as the borrower pays the mortgage off over time. Mortgage brokers will receive a trail commission for the life of the loan as long as the borrower does not change lenders.

What is a clawback?

A clawback is charged by lenders to mortgage brokers when a borrower discharges or pays off a loan in a one to two years period. It is the most frustrating part of being a mortgage broker. In general, lenders will recover (clawback) 100% of all the upfront commissions paid to the broker if the loan is paid off or discharged within one year of settlement. If loan is paid off or discharged in the second year of the loan term, lenders will recover a proportion of the upfront commission (for example 50%). This means, there is an industry incentive for mortgage brokers to not refinance a loan until one year after settlement. Unfortunately, we have seen mortgage brokers charge a “clawback fee” to borrowers even though refinancing, paying off or discharging a loan might be best for their personal circumstances.

At Reservoir Finance, we do not charge any clawback fee to our clients as we genuinely believe that sometimes discharging a loan is in the borrower’s best interest.

How are mortgage broker workers paid?

In general, there are two types of mortgage brokers an Australian will come across which is based on their working style: self-employed or working with a larger brokerage. With those who are self-employed, they rely on themselves for all incomes (upfront and trail commissions) and expenses (clawbacks, aggregator fees, regulatory fees, administrative fees).

For those working with a brokerage, most of them also work to a commission-only model where they earn a percentage of the commission for both upfront and trail commission. The rest of the commission is retained by the brokerage to cover administrative costs.

Some brokerages on the other hand will offer their employees a base salary plus commission model for payment. With this model, there generally is a higher base salary, lower commission rate, which provides less incentive for a broker to perform well and as a result is less popular in the industry.

What is going to happen to mortgage broker commissions in the future?

The Hayne Royal Commission bluntly and ignorantly made quite a few recommendations and comments regarding brokers’ commissions. The recommendations include banning all trail payments and changing the lender-to-pay model to borrower-to-pay model. And one of his most astonishing comments was that “The chief value of trail commissions to the recipient, to put it bluntly, is that they are money for nothing.” Certainly, it is blunt, and also ignorant.

A good mortgage broker’s job does not end at the settlement of a loan. With Reservoir Finance, we remind and help our clients to do a periodical home loan health check. We keep our clients on board with current market updates, helping them avoid paying “loyalty tax”. While the Liberal Party was cautious and wisely chose not to implement all the changes, the Labour Party was reluctant to show their care or understanding of mortgage brokers and small lenders, which arguably was one of the many reasons the Labor Party eventually lost the unlosable federal election in 2019.

At the moment, the remuneration model has been kept as it is, but will be subject to a review by the Australian Competition and Consumer Commission and the Council on Federal Financial Relations, which comprises the federal and state treasurers in three years time in 2022.

Want to deal with a mortgage broker who is honest and transparent?

Reservoir Finance is a values based mortgage broker who sees to be honest and transparent in all that we do. As we are independent and not owned by any bank or lender, we can genuinely seek your needs and benefits over a random corporate profit target.

Our aim is to be your partners in your financial journey to help you reach your financial dreams and goals. We do not charge any upfront fees for our services (unless your situation is extremely complex, but that is less than 1% of our applications) and it is also obligation free!

Speak with us today! Contact us using the form below or call us on: (02) 8288 9123.

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