The world of mortgage broking is an appealing one. Brokers work more flexible hours than a normal 9-5 job and have the potential to earn a comfortable income. If this career path appeals to you, however, there are quite a few steps you’ll need to take before establishing yourself as a professional mortgage broker. Aside from the necessary certificates and licences that you’ll be required to obtain, it’s essential that you have a firm understanding of what payments will make up your potential income flow.
How do commissions work?
Mortgage brokers make the bulk of their income based on commissions from the lenders they work with.
As a mortgage broker, you will be earning two kinds of commission: an up front commission and a trail – or ongoing – commission.
Up front commissions are payments from the lender for bringing business to them. Because you are acting as a proxy between the home buyer and the lenders, it is in the banks’ best interest to reward you for the new business you bring to their door.
Any up front commission you earn is paid out only once the home loan settles. In other words, the home purchase must be finalised before you can pocket any money. This will form the bulk of your income, at least for your first few years as you establish your broking career.
The amount varies from lender to lender. However, it will generally be calculated based on a percentage of the loan amount, as well as the loan-to-value-ratio also known as the LVR. This is one of the most important elements of a home loan that the lender examines before approving or denying a loan.
Essentially, the LVR is how much the loan is for versus the appraised value. If a loan is close to the total value of the home, it’s considered a higher risk for the lender. Therefore, loans with a lower LVR are more desirable for the lender and are thus rewarded with a higher commission for the broker.
According to The Conversation, the average up front broker commission is between 0.46 per cent and 0.65 per cent of the value of the home, which works out to be about $3,000 on a $500,000 loan.
But up front commissions are only part of the income of a mortgage broker. For your first year or so, up front commissions are likely to be your only revenue source, but once you have established yourself and created relationships with various clients, you may begin to add trailing commissions to your income.
In order to encourage you to continue to use a given lender, and to keep your existing loans with the same lender, many banks will pay a trail commission. This is generally a lower percentage of the loan that you will get paid monthly for the life of the loan. These commissions are generally between 0.1 per cent and 0.35 per cent, according to The Conversation, and will continue for the life of the loan unless your client leaves the lender or falls into arrears or defaults on their loan.
Trailing commissions also act as an incentive to ensure you provide your clients with a loan that truly fits their financial needs and that will work for them long term. While many lenders pay a fixed trailing commission, there is also a chance for the percentage to incrementally increase over time. For example, the lender may not pay anything for the first year, but increase to 0.165 per cent in year two, 0.22 per cent in year three, and continue to rise until five or six years, when it might plateau at 0.385 per cent.
While there is greater risk with this type of trailing commission – if the client defaults or changes their loan in the first year, you won’t see any additional income aside from the up front commission – a client that stays with their loan for many years could mean a healthy monthly commission for you.
What are other financial matters should you know about?
Up front and trailing commissions should be expected to make up the bulk of your income during your mortgage broker career, but there are also additional opportunities to earn money. For example, some lenders may offer a bonus payment or loyalty payments for your continued business with them. In addition to monetary rewards, lenders can provide you with “soft dollar commissions,” which translates to compensation that doesn’t necessarily take the form of cash. This may include tickets to sporting events, shopping vouchers, and even complementary overseas holidays. While these bonuses aren’t likely to help you pay your bills, they’re an exciting fringe benefit to the life of a mortgage broker.
There are also instances when your commission will come from your customer, as opposed to the bank. While this is rare, there are a litany of reasons why you’d need to charge your client directly. For example, if your loan is short term – 24 months or less – the lender will charge what’s known as a claw-back fee. Essentially, it’s a penalty for introducing an unprofitable loan to the lender. These fees may be up to 0.77 per cent of the original loan, and it is then your prerogative to pass that fee onto the customer.
If a customer comes to you with an especially complicated loan, many mortgage brokers will charge a fee for the extra work it entails. In addition, small loans – usually less than $300,000 – might constitute an additional fee, as the commission you make may not make it a cost-effective use of your time. Finally, commercial loans, which require a level of expertise beyond that of a mortgage broker who only does home loans, often come with an additional fee that is charged to the client.
As you can see, there are many revenue streams that come with a mortgage broker career. While it may seem complicated or even intimidating at first, consider that you have opportunities for both short- and long-term steady earnings.
Visit our site to request an information pack on how to become a mortgage broker.