Who pays your mortgage broker?

Financial advisers do not work for free, and neither do mortgage brokers. Bruce Sellery explains how their compensation actually works.

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Question

I saw your post about mortgage brokers and am considering this option. But I want to know how they get paid?

Answer

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.

Yeah, right.

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.

ask@moneysense.ca

10 comments on “Who pays your mortgage broker?

  1. Pretty good and informative article!

    Reply

  2. This is true for clients with great credit and we are dealing with "A" lenders. When you look at a"B" lenders for credit poor clients they lender may or may not pay a fee to the agent. An acceptance fee may be added on and a fee could be added to pay the mortgage agent. In the worst case scenario and a private lender is required the entire agent's fee is paid by the borrower .

    Reply

  3. Nice article on the mortgage process!

    Reply

  4. As a mortgage broker… I can confirm that this is true. It'll never cost you more money going through a broker than it will your bank. In fact, you'll have access to many lenders so it should end up being cheaper for you. Great post!

    Reply

  5. The broker is the one who is responsible for all of the brokerage activities.

    Reply

  6. I used aussie home loans as my mortgage broker to but my property as they told me ( and advertise) as being totally independant. Despite my request not to use any of the “big four” banks they arranged my loan through the commonwealth bank . I have since discovered that aussie is 85% owned by the commonwealth bank therefore all loans arranged by them are through the cba. I told aussie (david penda) that I do not want anything more to do with them and contact the bank directly when I have to. I have been subjected to ongoing harrassment by david penda and aussie laughing at me through emails for the past two years. No wonder he thinks it’s funny as it turns out he is taking yearly commissions-‘ trailers’ from me via my loan payments. DO NOT USE AUSSIE HOME LOANS!

    Reply

  7. hi I jusyt want to ask how much is usualy fee for mortgage broker, like fpr example my mortgage is 239,000, how much do I need to pay for my mortgage broker?

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  8. It depends on the brokerage and client credit rating. good ratings bring you free goodies and bad rating you have have to pay yourself. overall great article.

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  9. I’m curious does the mortgage broker get a higher commission if the buyer puts a higher down payment say 45% instead of 25% or 30% and if so do pvt lenders give higher commission than big banks?

    Reply

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