Failing to use a mortgage broker who will refund commission is one of the biggest mistakes people make when they choose a loan.
Commission refunds are probably the easiest way to put $10,000’s back into your pocket over the life of your loan – reducing your loan term by years, if you use the cash to make additional payments.
It’s the strategy that’s possibly the most effective and least utilised, as not many people know about it, or how to use it properly.
When a mortgage broker arranges your loan, they receive a lump sum commission payment from the lender. For a $450,000 loan, your broker would receive around $3,000 at settlement.
In addition, that broker will receive a yearly commission payment (called trailing commission) of about $700 for the life of your loan. That’s every year, for up to 30 years.
Getting this money back and using it as additional repayments can take years off your loan.
Refunding trailing commission avoids loan bias
If you have been reading the financial section of the paper, you will notice that financial planners are rightly coming under scrutiny for receiving trailing commission on products they recommend.
But it’s not so much for the fact this trailing commission inflates your overall fees (which it does), but for the fact that it creates a potential bias towards particular investments, insurances and super funds. Put another way, your adviser might favour one product over another because they are paid more.
The same is true for mortgages. Different loans pay different amounts of commission to mortgage brokers. And this can create a bias towards particular loans (or lenders, if those lenders give that broker favourable terms).
Perhaps the most worrying conflict created by your broker receiving trailing commission, is that the more you borrow, the more they are paid.
There are only a few mortgage brokers in Australia who refund commission. Hopefully there will be more in the years to come.
These brokers refund commission and charge you a separate fee or simply cap the commission they take.
Either way, do not fall for the upfront “cash back” deals where you get a cash payment at settlement, with the broker keeping all trailing commission. Generally, these brokers are not as motivated to recommend a loan you can easily refinance, as their business model depends on the ongoing commission from your loan. And, be under no illusion: over just a few years, trailing commission adds up to more than upfront commission.
Don’t fall for the broker who tells you they don’t get 100% commission passed on to them or that they get bonuses or a salary. Their employer (and/or aggregator) gets 100% commission, so the result is the same: someone else is keeping it and not passing it on to you.
Can you avoid commission by going direct to a bank or lender?
No. Lenders will not bite the hand that feeds them by undercutting their sales force (external brokers all over the country). Providing you with a discount would upset every mortgage broker who recommends their loans on a commission basis. And, because they need to provide the loan service if you go direct, they use the money they save to provide the service.
What if you have a current loan?
After referring to various brokers over the years, I have taken the best of each and we now have our own independent mortgage broking service with a 100% refund of commission. Contact us to check if there are any benefits in refinancing.
To summarise, getting a commission refund on your mortgage:
- Puts money back in your pocket, potentially reducing your loan term by years
- Removes potential bias towards particular loans
You may also like “9 Mortgage Mistakes Most People Make (and how to fix yours).”