Mortgage broker commission and trailing fees rebate

Hi Michael,

I'm not fired up, sorry if i came accross as agressive. I think this is a good topic to discuss and appreciate your input and point of view, although i disagree with a lot of what you have said. With regard to the comments directed at you, you stated that  "I have neverinterviewed a borrower" I wrongly assumed that yolu were in the business of giving advice to borrowers, I have read some earlier parts of the thread since and it seems you are a journalist, my mistake and i appologise.

Back on topic.

So let's assume a borrower is rebated commission (which a lender just won't do, but a broker might) and the borrower deposits that rebate against their loan (via offset or the loan account itself).

The simple answer to this is that the structure of the loan is often more important than the direct cost. This may not be the case for people with very simple needs, but it is always the case for investors. The small saving they would make frome receiving rebates inc onsiquential if they don't set up their loan properly. I would consider it very unlikely that anyone will get valuable advice from a rebater, brokers who know what they are doing have very little trouble acquiring customers and are very unlikely to agree to paying rebates. This is a point we could argue, but i am in the industry and know a lot of very good brokers, none of them would c onsider rebating commssions, in fact it is more likely that they will start charging additional brokerage.

 Although that may not be important to you, it might be to others, especially when mortgage rebates and offset savings can represent 15% of their actual borrowings.

Lumpling in savings from offset with potential sav ings from commissions is ridiculous in the extreme. I agree savings from offset can be very valuable but trailing commissions are often as low as 0.15% of the loan amount, any rebate is always going to be miniscule compared to the loan size. If a broker is rebating upfronts, there are either going to be very strict  discharge penalties or they won't be around for long, given that the threat of claw backs hangs over their head for a long period after the loan is settled.

And of course finally commission. Regardless of who is collecting the commission  it is the borrower who pays it (if the lender doesn't pass it on to a broker, they call it profit). This never more clear than when a borrower ceases to make loan repayments and trail commission payments also cease.

This just semantics, but it is important, stating that the borrower pays for broker commissions gives the impression that they are paying more because a commission is being paid, this is plainly not the case. Why not include that if a boorrower goes through a branch they are paying the wages of the loan office, credit person, teller, rent on the branch etc.

Thanks APerry,

That's okay, it seems assumption rules in places like this.

On quality:

I think your perspective that brokers that rebate commission are inferior is flawed. Quite clearly the commission Broker A gets paid with Lender A is exactly the same as completely inexperienced Broker B who just wrote his/her first loan with Lender A (assuming the same aggregator). It therefore follows that earnings do not reflect experience or capability.

I have interviewed quite a few customers of rebate brokers both simple and complex. At least two of them who went with the most generous ORP Broker had extremely complex mixes and requirements (i.e. multi (not two or three) million dollar portfolios, mix of investment vehicles and jv structures and in one case mixes of local and foreign income). They have used this particular ORP broker for years and wouldn't think of going anywhere else.

On savings:

I'm not sure what is ridiculous about depositing the rebates against the loan to deliver offset savings. However I struggle to understand why someone who takes pride in being both in the industry and skilled, would suggest that the borrower shouldn't do it.

If they did, the 15% of loan amount is achievable on a product as simple as ING's Mortgage Simplifier (smart packed) assuming a normalised rate of 7.03%. Ironically, this is product carries the exact trail rate you quoted, which as you would also be aware is the lowest in the industry (save again, for a few scant exceptions). So greater savings are highly accessible.

On whether the borrower pays commission:

I fear it's you that's playing with semantics. There is nothing even slightly incorrect about my explanatory paragraph and what I did include (as I usually do) was the statement that "(if the lender doesn't pass it on to a broker, they call it profit)". I refer to it as profit as the branch staff and related infrastructure and on costs are fixed, ergo an extra sale for the lender = profit.

And finally for you Terry. I can't see what is indecent about a business that is willing to give the borrower a better deal than the broker up the road. It seems a simple matter of how much a broker values commission over the interests of the borrower.

Maybe not indecent, but would any decent broker do it? Maybe someone starting out trying to attract clients, but can't see any established brokers wanting to do it.

Gidday Terry,

Remember, we are talking about brokers that rebate up to 100% of trailing commission in the case of ORP. Like you, those firms and brokers don't have to, they simply want to help borrowers leap ahead further than the next guy or gal (you'd have to agree that 15% of the loan amount in savings is a BIG boost).

On that note, I'll take the Australian Oxford English Dictionary on 'decent' which defines the word as: kind, obliging, generous.

So yes, clearly brokers paying mortgage rebates through sharing commissions are not just decent, but arguably more decent than those who don't – according to the dictionary and I suppose, clients who support those brokers.

As for experience, firms paying mortgage rebates in Australia date back to 2000, which is as old as your company Terry, and over half a decade longer than Taylored Financial Solutions Pty Limited.

Which shows the idea clearly isn't new and the experience is not as light on as you are so willing to assume. Although you are challenged to admit it, people behind those businesses are simply more generous to borrowers than you are willing to be.

So there's the challenge gents, why not be more decent? It's clearly possible and surely is the right thing to do.

A 15% shot in the arm for your borrowers. Seems pretty decent to me.

To add in to this…
Its not necessarily correct that brokers earn the same amount from one lender.

For example, NAB have different broker 'star' ratings which range from 1-5 stars.  The higher the star rating, the more commission the broker earns, as well as has more product access, higher lends etc (leaving their service quality out).

With Westpac as another example, you have brokers who are Aplus versus 'normal'.  While the overall base commission is the same, the Aplus's can get the loan assessed more quickly than a normal broker can.  Sometimes this can be a day or two, or when the banks get backlogged this equates to weeks.  So the ability to have the loan approved versus not approved…

Point being that commissions brokers earn from the same lender can vary on these points, as well as the arrangement that brokers have with varying aggregators who negotiate things, collect fees etc.

In my case, when I first started broking I was on a 80/20 split, where I kept 80% and the aggregator kept 20%.  Shortly after I switched aggregators and went to Fast, who charged about 150 a deal, which meant I increased my turnover by @19% the day I switched aggregators.  So initially one could think that you could give 15% back as a rebate and still be better off than on the 80/20 split.  But with the commission cuts by the lenders the reality of this is that financially (for me) not a viable proposal. 

The other thing which I'll admit I'm not clear on is the issue of clawbacks, where say a rebater receives the money back and then refinances the loan to another institution within say a two year timeframe (say for whatever reason – assume the brokers the greatest in the world but the couple split up and sell the house).   Normally the bank then claws back all the commission paid to the broker.  Since the broker didnt receive the money or they passed it on, they could be running at quite the loss.  On that note though, lenders like NAB and CBA dont pay trail in year 1 anyway, so in these cases it could be a bit of a moot argument as 100% of nothing is nothing.

Alistair Yes thanks for that started in 1984 in the UK and 1994 here in Oz but i guess ASIC doesnt show that when you do a Company Search.

I thing we are all still waiting for Michael to tell us what or who he is in depth.

Please explain how you get these % savings.

Gidday Alistair,

I presume you are referring to the savings to the borrower of 18% in the above example (actually it's probably higher as I didn't model the 6 year+ step in because NAB – Homeside are the exception as you know.)

If so, I'm not sure what you don't understand as this is the same basic modelling you would need to use to get to make recommendations to borrowers on any loan (assuming cost factors in your recommendation somewhere).

To get the savings, model mortgage rebate cost on:

– Loan Amount $450,000
– Monthly P&I (Interest only savings would be far more significant)
– Term 30 Years
– Normalise the interest rate +2% (because SVR has averaged at around 7.10% since April 1994)
– 1st rebate at settlement + 3 months (because it is unlikely to happen on the day of settlement)
– 100% of trail rebated monthly to the loan account (I know you disagree that borrowers should do this, but it saves interest and is what borrowers I interviewed prefer to do)

Then;

(Retail Cost – Mortgage Rebate Cost) / Original Loan Amount x 100

As per my note, NAB Homeside savings are over 18% of loan amount for borrowers who take their loan via an ORP mortgage broker over brokers that keep the commission for themselves although again, I maxed the out years at 0.30% p.a. when it actually steps to 0.35%. ie, mortgage rebate savings will be much larger.

Let me know if you are struggling and I will help out.

If I am correct… the assumption is that the loan runs for a full 30 years and the balance is $450k.

I.e. 450k * .60 = 2700 upfront and, 450k * .2=900 trail. 900 p.a. trail * 29 years = 26100 (assumes no trail paid year 1).
So 2700+26100 = 28000

But the reality is that loans dont run for 30 years without reducing (I couldnt tell you the last loan I did see which ran for 30 years to begin with) so this figure is flawed and likely less.

Now if they did, assume that 70% was rebated back, this equals 18270, and the broker would then earn trail at 30% or 7830+2700 = 10530. Or over 30 years 351 a year.

or its the math that the comm paid to the broker is a %age of the loan. ie.. 28k/450k, however that works out to be @15%. Less the 70% yadayadayada.

As far as the clawback – from my understanding, the commissions get paid to the broker, then the broker transfers it out to the client, and its not the clients business liability – its the brokers. Now if I’m a client, repay my loan in 18 months and my broker said to me – hey remember that loan you just paid out, well I got clawed back and its come from my income on other loans. Can you please give me 2700 for my upfronts and 70% of the trail for 6 months and that’ll fix me up.

Dont know what the likelyhood of this is for the MB to be successful in getting it back in these instances.

But if all you’re earning out of it is 350 a year per client less than a dollar a day before expenses – I think that will impact.

I might have to go buy this magazine to get me some enlightenment.

Gidday Lukentel,

You are incorrect. The 18%+ saving on loan amount is based on real life examples (although plugging in the NAB-Homeside commissions which you have understated).

I understand why you are cynical about mortgage matters given there is so much baloney out there. Being able to objectively cut through that baloney is how I got my job and ORP and SRP mortgage brokers are legitimate broker models that have been operating throughout Australia for many years.

Arguments about sustainability went out the door years ago, because the mortgage rebate brokers are still here and they are still doing it. I'm sure that if they were dodgy, people like Richard and Alistair who are so keen to poo-poo them would have had them thrown out by ASIC, the MFAA or FBAA by now. They haven't because the mortgage rebate brokers do what they say they do and the savings to the borrower are real.

I also understand your difficulty in grasping the concept because you keep applying the idea to you as a mortgage broker, your values, your experience and your commission, so you can't make it add up. However, it isn't about you.

It's about the borrowers. One of whom originally raised this post.
 
As difficult as it may be for you to accept, these brokers are more committed to the needs of borrowers than you are and as a consequence, save the borrowers around 18% of their loan amount for this $450,000 example.

Again, if you are struggling with the actual math, let me know. Finance is just numbers and I'm surprised the loan amortisation is proving so hard for the professionals.

The borrowers saving you should come up with is 18.147% (flatting year 5 onwards @ 0.30% p.a. rebate) for the identical loan through a lower cost mortgage broker.

Thanks for taking the time to work with the idea and good luck if you ever decide to re-introduce mortgage rebates to your business. Borrowers will always benefit from more brokers willing to do it.