Why does a mortgage broker get paid a trail commission?

You may have read or heard in the news about the Royal Commission’s recommendations relating to how mortgage brokers get paid. If these changes are passed as legislation, a mortgage broker’s home loan service will no longer be at no cost to you, and instead you may need to pay a multi-thousand dollar fee to arrange your home loan through a mortgage broker.

First of all, what commission is paid to a mortgage broker?

The current mortgage broker commission structure is made up of an upfront fee, clawback and an ongoing trail commission.

Australian lenders pay a commission to brokers for the introduction of home loans. This means your broker is paid by a lender for helping you find a loan. This is what we call an upfront commission.

Mortgage brokers also receive what is known as a trail commission. This is a deferred payment that the lender pays the broker over the life of the loan. The amount of trail your broker receives is calculated on the balance of your loan. This means that if your broker helps you secure a home loan, the broker will receive the initial upfront commission and then, for every month that you are still in that loan, your broker will also receive a trail commission from the lender.

If you decide that you no longer want to stay with the same home loan, or if you default on your loan payments, you reach a level of arrears, or if you pay the loan off altogether, your broker will no longer receive trail commission.

If you refinance into a new loan with a new lender, your broker will receive a new upfront commission plus an ongoing trail commission from that new lender.

This commission model is structured in such a way as to provide a significant proportion upfront to pay your broker for arranging the loan, while still deferring much of the payment to the broker in the form of trail commission to ensure that your broker provides ongoing service over the long-term.

How much do brokers actually get paid?

On average, a mortgage broker's commission is 0.15% of the loan balance. This equates to approximately $600 a year on a $400,000 loan balance.

Why is trail important?

Trail incentivises your mortgage broker to ensure that you are in a suitable home loan for your needs over the long-term and it means that your broker can continue to provide you with home loan service at no cost to you, throughout the life of your loan.

What does the Royal Commission’s final report say about trail?

Commissioner Hayne’s final report said, “The chief value of trail commissions to the recipient, to put it bluntly, is that they are money for nothing.”

We believe Commissioner Hayne got it wrong.

Mortgage Choice brokers periodically contact their customers and offer to review their loan to ensure their individual needs are still being met.

Our brokers are constantly talking to their customers after their loan is settled, whether that’s the broker reaching out to their customer, inviting them to complete a home loan review, or the broker taking calls or meeting with their customers to address their needs.

Our brokers know that many of their customers do not necessarily want to switch lenders just to secure a more competitive interest rate, so they get on the phone and do the negotiating for you in order to lower your interest rate, and if they aren’t successful with your existing lender, they will present you with other home loan options from other lenders.

Not only are they regularly negotiating lower interest rates on their customers’ home loans, they are also approached by their customers who are looking to do loan top-ups.

Home loan top-ups sound simple, but they can take just as much work to arrange as a new home loan. What you may not know is that these top-ups are not considered to be new business by the lenders. Trail commission allows our brokers to take the time to do all the legwork to arrange your top-up.

The important thing to remember is that sometimes a home loan review won’t result in a change at all but it’s important to keep in touch with your broker at least once a year after your loan has settled to ensure that you’re still getting a good deal. Our brokers know that lenders’ pricing and policy is constantly changing; they don’t expect you to know that.

If you’ve spoken to your broker recently to get a better rate, top up your loan, or switch home loans altogether, you’ll know the value of having a mortgage expert in your corner, that you can call on when your needs have changed.

What if trail commissions are banned?

Commissioner Hayne has recommended banning trail commissions on all new loans from 1 July 2020. This could mean you have to pay more for your home loan, you might think twice about refinancing as you may have to pay an upfront fee again and you might have less choice of home loan lenders and products.

What’s next?

At Mortgage Choice, we will continue to fight for competition within the home loan market to ensure that all Australians have access to competitively priced home loans from a range of lenders.

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