How do Brokers get paid??

[OU812]

Silly question really but...

The last time round getting a loan (almost 8 years ago) we were talking to a broker (it may have been mortgage choice???) about our next purchase. Somewhere on the paperwork it said that if we payout the loan within a certain amount of time we have to pay the broker X amount, cant recall if it was $4k or $10k...needless to say I didn't call back and went directly to my bank.

Is this still standard practice?

Cheers

 

[Aaron_C]

Brokers get paid commission by the lender they introduce the business to. Standard fare these days is if the loan is discharged (by being refinanced/paid out) within 0-24 months the broker's commission is 'clawed back' by the lender. I imagine the paperwork you saw envisages that scenario so the broker doesn't lose money on the deal.

 

[Jamie M]

We get paid an upfront and trail commission from the lender.

The upfront is usually between 0.5% and 0.7% of the loan amount. The trail is usually 0.15% of the loan amount p.a (but paid monthly).

The fee you're referring to was probably a clawback provision. With most lenders, they'll claw back the commission the broker is paid if you close down the loan (refinance or sell the property) within a certain timeframe (usually up to two years).

Cheers

Jamie

 

[Peter_Tersteeg]

Brokers are paid an upfront commission and a trail commission. This is usualy about 0.6% and 0.15% of the loan amount respectively. It does vary between lenders, but this is about the average.

If you pay out the loan within about 2 years most lenders will take back the upfront component of the commission. Given that many lenders don't pay a trail commission in the first year, this can mean that if you pay out the loan or refinance to another lender, the broker doesn't get paid for their work.

To compensate for this, many brokers charge a fee to cover any claw back. As long as they quote this up front in writing this is perfectly legal. Most would argue that it's a reasonable thing to do, after all, everyone deserves to get paid.

Personally I've found that the number of times where I've felt it would be necessary to charge a claw back recovery fee are very few. I won't speak for the other brokers on the forum, but we don't put any clauses like this into our client agreements.

 

[TPI]

What is the likelihood of commission-based remuneration of brokers being legislated against?

Are there many "fee-for-service" brokers around?

 

[Aaron_C]

What is the likelihood of commission-based remuneration of brokers being legislated against?

I don't know but some people think it is inevitable given the thing that happened to financial advisers. I personally hope it doesn't.

Are there many "fee-for-service" brokers around?

No, I wouldn't have thought so. Some people 'in the industry' are calling for it but I doubt that they are the ones who are busy and actually doing broking for a living.

 

[Colin Rice]

From the banks healthy profits for introducing clients to them or serving the ones they already have.

Upfront payment is for the initial work done and the idea of the trail is for ongoing services to the client.

The rates are the same and in many cases better than if you went direct to the bank.

 

[Rolf Latham]

What is the likelihood of commission-based remuneration of brokers being legislated against?

Are there many "fee-for-service" brokers around?

probably but unlikely in the middle term

the conflict of interest in real money terms isnt as large as it was in financial planning causing FOFA, in fact comparativley, its minute

I have no doubt that there are comms conflicts in my industry.

its pretty clear that when lender X introduces a limited time comms bonus, their processing times blow out from 3 days to 3 weeks. The product and credit policy hasnt changed......... so peops can draw their own conclusions.

Fee for service works when folks are willing to pay a fair fee for a fair service, and on average thats not yet for the average borrower since the "value add" for someone with a specified need of "I want the best rate" just isnt there.


ta
rolf

 

[Shaneelastic]

If commissions were abolished, you would need banks to lower there rates respectivley

 

[Rolf Latham]

If commissions were abolished, you would need banks to lower there rates respectivley

probably not. Because if that was likely then lenders wouldnt be using the services of brokers now.


Since the client acquisition, marketing, pre qualification,submission and maintenance and settlement work needs to be done by someone ................ and invariably the average human on "fixed" remuneration, bricks and mortar and on costs are a greater impost to a lender than a results only remuneration structure.

ta
rolf

 

[OU812]

Thanks all,

I would not have baulked at a 2 year time period, I cant remember the exact details but it was ridiculous (It was either a $10k break fee or a 10 year period) and had put me off brokers all together ........until now. Starting a new business 12 months ago, the expertise of a good broker is needed. I don't want unapproved applications littering my CRA.

 

[Peter_Tersteeg]

It was either a $10k break fee or a 10 year period

Either of those two parameters is completely ridiculous, I'd do the same if I saw a clause like that.

Are you sure that it was a broker? There were a few mortgage managers and lenders that had massive break fees back then. A mortgage manager may dress themselves up to look like a broker, but they're basically selling a product with their own brand, not offering a range of products across a range of lenders.

 

[Terry_w]

I haven't had a clawback yet since I started my broking company. Everyone has stayed put so far. So I haven't bothered drafting an agreement up for payment if the loan is discharged. I am sure it will happen one day, a client will sell etc, but they will probably take out another loan in its place so it will all even out.

I have had some forumites come and see me saying they want a loan and then they try to get free legal advice on structuring and other things- then they have gone to another broker for the loan. That for me is the main thing to be wary of.

 

[Scott No Mates]

I have had some forumites come and see me saying they want a loan and then they try to get free legal advice on structuring and other things- then they have gone to another broker for the loan. That for me is the main thing to be wary of.

The risk of wearing too many hats?

 

[Rolf Latham]

I haven't had a clawback yet since I started my broking company. Everyone has stayed put so far. So I haven't bothered drafting an agreement up for payment if the loan is discharged. I am sure it will happen one day, a client will sell etc, but they will probably take out another loan in its place so it will all even out.

Quite more common once you start doing more tricky and larger scale developments, so you either charge an upfront fee or put in place and enforce a claw back provision. Its somewhat rare that a client expects you to do 100 hrs FTE of work and then pay them to do it, while they have made a 6 figure profit on the transaction. I havent had an issue with any client accepting same.

Dont mind doing a fair amount of bro bono work, but not in that sort of domain

ta
rolf

 

[Aaron_C]

Not to mention that commercial deals tend to have a very low conversion rate compared to your standard resi home loan.

 

[Mick C]

Clawback is just the cost of doing business. We don't have any clawback provisions as we don't believe in charging a clients for claw backs especially when it's outside their control... because 99.9% of borrowers who are clawed back in that 2 years gap are genuine borrowers

1. they sell for good reason ( we never ask why, as it's non of our business)
2. they refinance, but always come back to us or at least provides us with an opportunity to provide a quote so it's still a repeat business for us
3. The bank has switched their product, client was not aware. ( channel conflict)

We do however scan and interview potentially clients and if it's going to be a short term loan ie 2-4 month etc ( Flip/renovators) where we don't get paid a cent ( in fact will cost us money- pay for credit checks etc and staff and support) ...then we will negotiate for a "fee for service"; but this is always disclosed upfront.

 

[Spades]

Hi OU812,

Going with a broker is a no brainer for me.

Rather a broker getting paid via the bank,afterall the bank scr3ws customers in fees,so someone moz well scr3w'em back

Also,Throw a banker in the mix and they'll stuff things up,as friend and i have experienced.

Bare in mind too,there are deals that don't eventuate eg:you pull out or bank rejects you.
The above example does not put food on the table for the effort put in.


Cheers Spades.

 

[santaslayer]

How do you become a broker if you're interested?

 

[Spades]

Hi santaslayer,

G.0ogle-How to become a broker.

Cheers Spades.