How do mortgage brokers get paid, and does it cost you anything?

The short answer

The lender pays. A broker is paid a commission by the lender when your loan settles, and on a standard residential home loan you pay the broker nothing.

The rate you are offered is not increased to fund it. Commission is paid out of the lender's own margin, and it is not a charge added to your loan.

There are exceptions, and they cluster at the complex end. Some commercial, development and specialist files do carry a fee to the client, and where one applies you are told the amount in writing before any work starts.

Upfront and trail, the two parts of broker commission

Broker commission is not a single payment. It is split into an upfront amount paid once the loan settles, and a trail amount paid on an ongoing basis while the loan remains open.

Both are worked out as a percentage of the loan rather than as a flat sum. The trail is commonly calculated on the balance still owing, so as you pay the loan down, the trail on it falls.

1. 1

   The loan settles

   Nothing is paid to the broker until the loan you chose actually settles. Work on a file that never reaches settlement is not paid for at all, which is worth knowing when you are weighing up how a broker spends their time.

2. 2

   The lender pays the upfront commission

   A one-off payment from the lender, calculated on the loan amount. It is paid through the broker's aggregator, which is the group that holds the lender accreditations and reconciles the payments.

3. 3

   Trail begins

   A smaller ongoing payment for as long as the loan stays with that lender and stays open. It is the part that is meant to pay for the broker still being contactable long after settlement.

4. 4

   The loan ends, or moves

   If the loan is repaid, discharged or refinanced away, the trail stops. If that happens soon after settlement, the lender can also reclaim the upfront commission it paid.

None of that changes what you pay, because you are not the one paying it. What it does change is the broker's incentive to still be there when your fixed term expires or your circumstances move, which is the honest argument for trail existing at all.

Does commission decide which lender you are recommended?

It is the right question to ask. The answer is that it should not, and there are two reasons for that.

The first is structural. Commission is broadly similar across a broker's lender panel, so there is rarely a meaningful difference to chase, and any difference that does exist is small next to what a well-chosen credit policy does to whether you are approved at all.

The second is legal. Mortgage brokers in Australia operate under a best interests duty when providing credit assistance, and recommending a lender because it paid better would breach it.

The practical test is one you can apply yourself. Ask why this lender and not the next two, and see whether the answer is about your income type, your deposit and the property, or about nothing in particular.

Clawback, and why a broker asks what you plan to do

If a loan is repaid or refinanced soon after settlement, the lender can reclaim the upfront commission it paid. That is called clawback, and it applies within a set period after settlement that varies by lender.

The clawback sits between the lender and the broker. It is not a charge to you by default, and it is never a reason you cannot refinance a loan that no longer suits you.

• It applies for a limited period after settlement, and the length of that period varies by lender
• It is triggered by the loan being repaid or refinanced away, not by anything you did wrong
• Selling the property, a large lump sum repayment, an inheritance or a relationship change can all trigger it
• It is why a broker asks whether you are likely to sell or repay soon, and a straight answer helps them recommend properly
• Whether a particular broker can pass a clawback on to you is set out in the credit guide and the agreement you sign

Most brokers absorb it. Where a broker does pass a clawback on, it has to be written into the documents you are given before you engage them, which is the part of those documents worth actually reading.

The reason any of this matters to you is that it shapes the conversation you are about to have. If you know you may sell or repay within a year or two, say so early, because it changes which structure makes sense as well as who wears the cost.

When a broker does charge you a fee

Charging the client is uncommon on residential lending and ordinary on some other kinds of file. The rough distinction is how much work the file takes relative to what the lender pays for writing it.

Where a fee applies, you are told the amount before any work starts, in writing. A fee that surfaces at the end of the process, or that you learn about from an invoice, is not how this is meant to work.

What you should be shown, and when

Disclosure is not a favour a broker does you. A broker has to give you a credit guide setting out how they are remunerated, and has to disclose the commissions payable on the loan they recommend.

You should see it twice. Once before you apply, and again in the credit proposal that sets out the actual recommendation.

• A credit guide, given to you early, naming the licensee and how the broker is paid
• The lenders considered, and why the recommended one was chosen ahead of them
• The commission payable to the broker on the loan being recommended
• Any fee payable by you, the amount of it, and what triggers it
• Whether a clawback could be passed on to you, and for how long after settlement
• Who to contact if something goes wrong, including the external dispute resolution scheme

If you want the numbers rather than the structure, ask for them on your own file. They depend on the loan amount and the lender, which is exactly why a page like this one does not print them.