It's been few weeks since the Banking Royal Commission dropped a few bomb shells that are set to have some serious impacts on mortgage brokers and other parts of the finance industry. Just to be clear, I'm not writing this because I want to debate the pros and cons but more so to clear a few things up. I have seen countless videos, articles and comments in the news and social media of people putting in their two cents with a serious lack of information especially when it comes to understanding how mortgage brokers get paid and its impacts on the customer. Lets clear a few things up.
Why do banks use mortgage brokers to sell their home loan products?
The short answer is that the majority of banks in Australia recognise the broker channel as very cost-effective and fast distribution arm especially for small to mid-tier lenders. But how? Consider this, some of largest banks in the market generally spend between 35 to 40 cents per dollar of income earned to operate. That includes keeping the lights on with staff, equipment, systems and so on. The Big 4 are lucky enough to be able leverage their extensive store networks to sell their products but for small to mid-size players they simply can’t compete on a level playing field. It would be too expensive and to slow to compete. For them brokers become a very valuable source with a cost of 20 to 30 cents per dollar of income earned. I have simplified the costs above because the reality is of coarse not all the costs of operation in a bank are attributed to providing home loans to customers, but the disparity is obvious.
How do mortgage brokers get paid?
While this will change in the future currently brokers receive commission payment in the form of an upfront and trail from the bank. This payment comes from the bank via a reduction in their profit margin earned on the loan product sold. If you were to get your loan through a broker or go through a bank branch, you’re likely to earn a similar interest rate on your loan (negotiation techniques dependant). While you can say the customer of broker indirectly pays for there service the same is true for a customer who gets their loan from a branch. In one way or another customers are paying for the bank to operate.
How much do mortgage brokers get paid?
On average, the commission a broker receives over the life of a loan will be between $4000 to $5,000. This can be more or less depend on the loan size because the current commission structure is percentage based. Before jumping to conclusions on the amount remember the operational costs a broker has as well as referral fees, ongoing support to customers (the good ones should be doing this) and lets not forget about the amount of free work without pay. This accounts for 30-40% and in some cases even more. The above logic only really applies to self employed brokers it is worth noting that in some cases the result could be higher or lower.
Whether broker remuneration changes in the next couple of years is still up for debate but one thing is clear and that is that brokers fulfil a massive need in the market place. Evidence shows that brokers introduce close to 60% of all home loans, showing a customer need and since there inception we have seen home loans get cheaper. I also think that it is important to note that changing the way mortgage brokers get paid is not going to solve the fact that bad advice will still exist. This is why there are still average accountants, financial planners, lawyers, etc. The only thing you can do it research and make educated decisions.
Feel free to contact Beyond Broking for further clarification on the above.