Some participants in the mortgage industry are mounting a push to argue a switch from mortgage broker commission payments, which normally includes an upfront fee and a trailing payment for the life of the loan paid by the lender to the broker, to a fixed fee for advice would be “anti-competitive.
The former Mortgage Choice chief Michael Russell in evidence to the currently running Productivity Commission (PC) Inquiry into Financial Services said:
Is the outcome of directing more consumers that can’t afford the fees for service back to first party [in] any way in the consumer’s best interest? Is that outcome, in any way, a positive thing to be promoting competition in the lender market?
This is in response to the PC suggesting there was no rationale for the trailing commission payments and that mortgage brokers should move towards a fee for service payment, instead of a commission, paralleling changes in the financial planning sector. The moves in the financial planning sector was a response to perceived conflicts of interest where planners perhaps shaped their advice driven by the remuneration they might receive.
Non-transparent fees and trailing commissions, and clear conflicts of interest created by ownership are inherent. Lender-owned aggregators and brokers working under them should have a clear best interest duty to their clients.
The commission’s draft report released in early February says that based on ASIC’s findings, lenders pay brokers an upfront commission of $2,289 (0.62%) and a trail commission of $665 (0.18%) a year on an average new home loan of $369,000. $2.4bn is now paid annually for mortgage broker services.
The discussion of trailing commissions centered on whether there was downstream value being added to mortgage broker clients, for example, annual financial reviews, or being the first port of call when the borrower has a mortgage related question. The interesting question is how many broker transactions truly include these services, or is the loan a set and forget, whilst the commissions keep flowing? There is very little data on this.
In the UK, mortgage brokers work within a range of payment models. Many mortgage brokers are paid a commission by lenders of around 0.38% of the total transaction and some mortgage brokers also charge a fee to their customers.
On average, you pay £500 for a broker to arrange your mortgage. But different firms charge in different ways:
- Fixed fee. Your adviser will agree to arrange your mortgage for a fixed amount of money. This should be agreed in writing so there isn’t any room for dispute.
- Hourly rate. Some advisers will charge per hour. Make sure the adviser gives you an estimate of how long the work will take.
- Commission. If a mortgage adviser is ‘fee free’, they may be receiving payment in the form of commission from the lender. Make sure you ask about it right at the start so you can’t be misled.
- Percentage. Some advisers will charge you a percentage of your mortgage. For example, if you agree a 1% charge for a £300,000 mortgage, the fee will be £3,000. Some advisers will cap fees to a certain percentage.
- A combination. Some advisers will charge fees but still receive commission. Others will charge fees, but agree to cap them at a percentage of the mortgage.
So, a fee, is not always simple to calculate and compare.
A fee for service may be cleaner, but it might put access to broker services out of the reach of some potential borrowers, as has been the case in the UK. Would better disclosure of the commissions and the relationships with lenders would offer an alternative path? But then, would that remove the conflicts?
The final PC report will be out later in the year, and it appears the question of broker commissions, which are often not disclosed in a way that is meaningful to clients, will certainly be an area of interest.
