How Mortgage Brokers Work

In simple terms, a mortgage broker acts as a link between a borrower and a lender so that the home loan application process is as streamlined and efficient as possible. Brokers do this by becoming accredited with all major banks and non retail banks as well as other alternative lenders that emerge in the marketplace from time to time. They also maintain a regular program of professional development so that their skills and knowledge can ably assist you through the maze of home loans on the market and the requirements of lenders in processing loan applications.

One of the major advantages in using a mortgage broker is that there is no cost to the borrower. This is because banks pay brokers an upfront fee for every loan that is settled. They may also pay a trailing commission to the broker for the life of the loan.

Here's how the payments work.

Mortgage brokers are independent operators in their own right, but they invariably belong to a larger overriding body called an aggregator. Aggregators negotiate deals on behalf of the group with all the major banks so that upfront and trailing commissions are maximised for everyone in the group. Whilst every lender has its own schedule of payments, most will pay an upfront commission of between 0.5% and 0.6% of the loan amount.

Trailing commissions can commence at the start of the loan or, in some cases, a year after the loan is settled. The amount varies from lender to lender but an average is 0.15% of the loan amount. As the loan is paid down, the trailing commission decreases accordingly. These commission payments are always disclosed in the Loan Contract for the information of the borrower.

Many lenders also have what is known as a clawback policy. This means that if the loan is refinanced to another lender, all paid out within the first year, the bank will force the broker to repay any money which has been paid. Some banks do this on a sliding scale during the first year of a loan.

With the introduction of new legislation on 1 July 2010, broker’s business costs have increased substantially and it has been suggested by many commentators that banks will soon cease the payment of trailing commissions. This would substantially bite into a mortgage broker’s income and it has been suggested that many brokers will start charging fees to borrowers. Not all commentators or brokers agree however.

How does a mortgage broker obtain business?

Brokers derive a large part of their business by way of referrals from existing customers or business partners. The prime driver of a mortgage broker’s business growth is through referrals from satisfied clients and that is why you can expect to receive high service levels and a request for referrals from your friends or acquaintances.

However, alliances with associated businesses can also be a lucrative source of referrals for a mortgage broker, for example real estate agencies, solicitors, accountants and financial advisers. Whilst many of these will have their own mortgage broking services, many small operators like to work as a cooperative group of professionals that support each other through a mutual referral program.

Do mortgage brokers pay for referrals?

The short answer is yes. Many brokers are happy to pay a fee to their business partners or clients in order to get a stream of referrals. Don't be afraid of asking a broker whether they pay for referrals, many regard it as a compliment and will be only too happy to make an arrangement with you.

However, the recent legislation mentioned above places restrictions on how referrals can be generated because of possible breaches of the privacy act. The broker will advise you the circumstances and methods by which they can accept a referral from you as well is details of how you will be remunerated.

Brokers also develop business alliances that are free of remuneration because members of these ‘cooperatives’ are happy to work on a mutual referral basis where every member of the group benefits equally.

Professional skills.

All brokers are obliged to undergo regular professional development training so they can keep up to date with various bank products and credit policies. Every lender runs regular training sessions to encourage brokers to become more familiar with their products which in turn may stimulate the broker to choose them as a nominated lender.

Many of the smaller lenders are the nonretail banks like ING and Macquarie Bank, who, because of their low overheads are able to offer reduced interest rates and niche products that may not be available elsewhere in the market.

Knowledge of the products offered by these banks is probably the single greatest benefit of broker can offer a client because the only way to obtain a loan from these lenders is through a mortgage broker.

Copyright © 2010 - Homeloans Central. All rights reserved. Web Design & SEO by Web Profits.