The business of mortgage broking is a core part of the Australian property finance industry, with the latest figures from industry body Mortgage & Finance Association of Australia reporting that Australian brokers settled over $161bn (yes, billion!) of residential home loans in the six months from October 2022 to March 2023.
As a result, the industry estimates that nearly 70% of all new home loans go through the broker channel in Australia*.
With such a large market share, how much do we really know about the cost of this service, and what does it mean for prospective home buyers?
Banks wear the costs
The good news is that, unlike brokers in several other countries, mortgage brokers in Australia will not generally charge their customers a fee directly. Some will charge customers a commitment fee – refundable on settlement – to cover their administration and valuation expenses, but for most the option to engage a mortgage broker involves no upfront cost.
Mortgage brokers make their money via commission from the lenders – typically around 0.65% of the fully drawn loan amount, and then an ongoing trail commission of 0.15% of the loan balance. With the current average home loan in Australian now reaching $600k according to the Australian Bureau of Statistics, that means mortgage brokers will get paid an average fee of $3,900 per loan settled, plus their trail commission component.
A common misconception is that these costs are then passed on to the borrower (ie. you) by being added to your loan – this isn’t the case!
What actually happens is the lenders build this cost into their home loan margin – typically 2% above the RBA’s base rate. In the case of a mortgage customer coming via a broker, they simply pay that broker for the pleasure of getting your business and sharing some of the processing / compliance risks.
Earning their living
Despite not paying directly for the service, customers may understandably think the commission brokers earn sounds excessive – after all, 0.65% of $161bn is a lot of money!
The truth is that they earn it – providing lots of services that a lender would normally do (and some they don’t), often with a more personalised touch than your average high street bank would provide.
A mortgage broker will do all the initial assessment work, collection of documents, managing the compliance and approval process, as well as issuing the loan contracts. They also spend time going back and forth with conveyancers to make sure that the settlement is as seamless as possible.
But what about those trail commissions?
Yes, brokers earn trail commissions, which are paid every month for the life of the loan. However, it’s worth bearing in mind that life doesn’t always going as planned – and neither do home loans.
If you refinance during the term of your loan – very popular these days given the number of interest rate rises recently – then the trail commissions end. So, a broker who has worked just as hard on your home loan, only for you to refinance it after 3 years, will only get trail commissions for those 3 years, and not the 25 or 30 years initially envisioned.
In addition, if you terminate the original loan within 12 months – maybe an enforced sale due to changing circumstances – in most cases the broker will have to pay 100% of the commission back to the lender, tapering down to 50% for the following 6 months. In this scenario, due to life events outside of anyone’s control, the broker may have worked hard to be left with no commission to show for it.
That said, no-one is claiming that brokers don’t get paid quite well for the work they do, but it’s worth considering the above when valuing their service.
A conflict of interest?
As we’ve established, mortgage brokers get paid by the lenders and both parties make money from issuing a home loan. If this is the case, are home loan customers the meat in the sandwich of a potential conflict of interest?
Regulation introduced in 2020 by the Australian Securities & investment Commission (ASIC) requires brokers to give priority to the consumer’s interests, which is called the “conflict priority rule”.
While there will always be unscrupulous operators in any industry, licenses can be lost for proven breaches in the mortgage industry. As long as you choose a reputable, licensed broker, you should be protected.
In reality, the difference between lenders on what they pay is negligible for the brokers, so it’s not really in their interests to favour one bank over another anyway, especially when reputation and referral business is such a major part of their business.
In summary, the case for using a mortgage broker is fairly well established – why limit yourself to one bank (and potentially the wrong home loan choice for you) when you can get a broker to canvass the entire market for the best deal available?
The fact that it costs you no more (or less) than going directly to your bank makes the choice fairly simple for most people – which is probably why over 70% of home loans in Australia go through mortgage brokers!
*source: MFAA report 2023 (March quarter)
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