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
Now, 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 they’re not as motivated to ensure you’re set up with the flexibility to shop for another loan in a few years (with low exit costs).
It seems unfair to me that your loan repayments could be funding trailing commission paid to a mortgage broker you haven’t spoken with in years.
There are only a few mortgage brokers in Australia who refund commission – and only one truly independent broker who refunds 100% commission. Hopefully there will be more in the years to come.
An independent broker refunds 100% trailing commission and holds nothing back. They refund all upfront and trail commission and charge you a separate fee (often less than the commission you get back upfront). If you use an independent mortgage broker, you know they are working for you (and not a lender).
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. As I said, 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 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 few people know about how commission is paid, they happily keep the money they save from you cutting out the broker.
What if you have a current loan?
You can only arrange a commission refund when you set up your loan. Review your current arrangement so you can check if there are any benefits in refinancing.
To summarise, getting a commission refund on your mortgage:
- Puts money back in your pocket, reducing your loan term by years
- Removes potential bias towards particular loans
Call or email us if you want unbiased and independent mortgage broking advice with a 100% commission refund.
You may also like “9 Mortgage Mistakes Most People Make (and how to fix yours).”