People rush to their bank or nearest bank when they are ready for a mortgage application. 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. By having access to their lender pool, a mortgage broker can help you find the best mortgage.
A mortgage broker will help you navigate the maze of home loan products and can negotiate for you the best possible product.
What compensation are mortgage brokers given?
Most mortgage brokers don’t earn a salary and generally provide their services to borrowers free of charge. How do they get paid?
Many of these individuals are small-business owners or contractors and earn their income through loans. The lender will determine the amount of commissions or fees they receive.
The loan amount determines the commissions.
Commission payable up-front
The largest proportion of a mortgage broker’s payment is in the form of an upfront commission. The upfront commission is typically 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 upfront commission will be paid to the broker once the loan is closed. The mortgage funds are then transferred to the borrower.
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. Recurring commissions are not offered by all lenders. Other lenders offer 0.1% to 0.2% commissions depending on the property’s residual value.
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 fee will be terminated if the account is in default for more than 60 days. Some banks will lower the trail if the loan defaults longer than 30 calendar days. Some banks will reduce the trail after 15 calendar days.
Conflict of interest
Sometimes conflicts can occur because brokers often get commission-based compensation. 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.