I saw your post about mortgage brokers and am considering this option. But I want to know how they get paid?
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Once upon a time, everyone believed that financial advisers worked for free. A benevolent unicorn from Middle Earth paid the bills as an act of love for the universe.
Financial advisers do not work for free, and neither do mortgage brokers. Before you choose to work with one it is a good idea to understand how their compensation actually works.
Mortgage brokers paid on commission
In most cases, a mortgage broker earns a one-time commission from the lender. The amount can vary from 0.50% to about 1.20%, depending on the type of mortgage they sell and what the lender is offering. For example, a lender would pay a higher commission on a 10-year mortgage than a 5-year because it is more profitable for them, and because it means the broker would be selling one mortgage in a decade, instead of two, five-year mortgages.
If you sign a $300,000 mortgage, your broker would earn about $2,250 on the deal, based on a commission of 0.75%. This amount comes from the lender so you never actually see the bill.
Hitching on the trailer fees
Trailer fees are very common for financial advisers, but are only starting to catch on for mortgage brokers. Basically with trailers, the broker collects a lower commission when the mortgage is signed, but then earns a trailer fee of say 0.15% from the lender every year for the life of the mortgage. The advantage for brokers is two-fold: first it gives them greater financial stability, and second it gives them an ongoing revenue stream that they can sell if they decide to leave the business.
Holding on to objectivity
One of the advantages of working with a mortgage broker is that they can work with many different lenders, whereas a mortgage specialist at a bank can only offer products from their employer. But that doesn’t mean the broker’s objectivity is sacred. In addition to trailer fees, which might influence a broker’s judgment, lenders often offer other incentives like bonuses to do more deals with the firm.
Bonuses can be based on volume, or on the number of deals that avoid going into arrears. (It’s no surprise lenders value good quality borrowers.) Lenders can also offer travel, gifts and other perks, like conferences.
Ask a lot of questions
As you would do when interviewing financial advisers, ask prospective mortgage brokers how they are compensated in terms of commissions, trailer fees, bonuses and other perks. Then ask what the risks are that these would affect their ability to place your needs above the lenders.
Mortgage brokers, like mortgage specialists at a bank, deserve to get paid. But the onus falls on you, the client, to ensure that you are getting value for the services they provide.