Mortgage broker fees, costs and commissions

If you’re considering using a mortgage broker to find a home loan, you may be wondering how their fees are structured and how exactly they get paid. Do mortgage brokers charge a fee in Australia? The answer is more complex than you might think.

Generally speaking, when you engage a professional to perform a service for you, you’ll be charged at a flat or hourly fee. Mortgage brokers work differently though. In most cases, you won’t need to pay them any fees at all. Instead, they will be paid for bringing your business to the banks and lenders they have a relationship with. So how exactly does this arrangement work?

Do you pay a fee for a mortgage broker?

Generally speaking, mortgage brokers don’t charge a direct fee to consumers in Australia, nor are they typically paid a salary by an employer. When the Australian Securities and Investments Commission (ASIC) conducted a review into mortgage broker remuneration, it found that the most common way that brokers earn money is via commissions. These commissions will typically be paid by the home loan providers that brokers work with, and can come in a variety of forms.

Mortgage brokers typically don’t work with all the lenders in the market. They earn different rates and types of commission from different lenders they work with, so understanding how they’re paid is important if you are getting your home loan via a broker. It’s also worth bearing in mind that even if you apply for your home loan through a broker, you would still need to pay any application or establishment fees charged by the lender.

How do mortgage brokers get paid?

There are three main ways mortgage brokers tend to be remunerated: via upfront commissions, trail commissions and soft dollar benefits. The first two are in the form of direct payments from lenders for referring clients, while the third is paid in the form of perks.

• Upfront commissions: An upfront commission is a commission that is paid to a broker by a lender upon successfully signing up a customer for a mortgage. The amount of an upfront commision varies depending on the lender.
• Trail commissions: Trail commissions are smaller than upfront commissions, and are paid out by lenders to mortgage brokers for each year that a borrower remains on a home loan. The 2017 Banking Royal Commission recommended the removal of these kinds of commissions, but this has yet to be put into effect, so brokers can still receive them
• ‘Soft dollar’ benefits: ‘Soft dollar’ benefits are non-monetary ways for lenders to reward mortgage brokers. An example of this kind of incentive might be entry to a loyalty program, offering more favourable commission rates and other perks. Another example might be travel and hospitality-related bonuses, such as trips to overseas destinations for conferences.

While it is common for mortgage brokers in Australia to be paid by commission, ASIC has, in the past, warned that this payment structure has the potential to create a conflict of interest. If a mortgage broker is incentivised to channel customers to a particular lender – especially if they are trying to fill a quota or gain access to bonuses – then they may be working in their own interests rather than in those of their clients.

Consumers who are concerned about potential conflicts of interest in this area can take some reassurance from the fact that brokers are now bound by a statutory duty to act in their clients’ best interests when providing assistance. This Best Interests Duty came into effect in January 2021, and brokers are now bound to assess a consumer’s best interest with respect to the cost of a product and whether the product has a realistic possibility of offering the consumer good value for money or a net benefit relative to other options.

Nonetheless, if you are concerned, ask your mortgage broker upfront about how their commissions are structured, and if they receive any bonus incentives for signing you up with a particular lender.

What is the average broker fee for a mortgage?

According to ASIC’s review of mortgage broker remuneration, most brokers do not charge fees directly to consumers, and some are even forbidden from charging fees by the terms of their agreements with lenders. Around 85% of brokerage businesses told ASIC that they do not allow brokers to charge upfront fees to customers. Of those who do allow it, most said that the amount of fees was set at the discretion of individual brokers.

This means that if you do use the services of a mortgage broker, it is reasonably unlikely that they will charge you a fee. On the rare occasion that a fee is payable, though, this fee is likely to be set by your individual broker, so you will need to ask them directly how much they charge.

How do brokers’ commissions affect your home loan?

The fact that mortgage brokers work on commission has the potential to affect your home loan, in that if one lender offers larger commissions or more favourable perks than another, a mortgage broker might steer you towards this lender. If this happens, they may recommend a mortgage to you that has a higher interest rate than another, with their commission in mind.

That said, brokers are obliged to act in the best interest of consumers via the Best Interests Duty. They must consider the cost of a product relative to a client’s best interests, and whether or not the product has a realistic prospect of offering the consumer good value for money or a net benefit relative to other options.

You can ask upfront about what other options are available, and what commissions and perks (if any) your broker is receiving from the lender. Your broker will also have to provide you with disclosure documents, based on their obligations under the National Credit Act and other regulations.

On the flipside of this, it’s also possible that some mortgage brokers may have access to better deals via their panel of lenders than what you’d be able to find yourself. This could mean that you are offered a more favourable interest rate or a mortgage with lower fees than you could get if you were to approach a particular lender directly.

Above all, it is important to do your own independent research when deciding on a home loan, even if you are working with a mortgage broker. Brokers typically work with a panel of lenders, offering a range of home loans, and while this may cover a portion of the market, there may be other banks and lenders who don’t work with your mortgage broker who can  offer you a more favourable rate for a home loan.

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