When a prospective homebuyer finds out they don’t need to pay for the services of a mortgage broker, their first thought is often: “What’s the catch?”
Like many financial advisers, mortgage brokers typically get paid by commission. The lender providing the mortgage pays the broker that commission (finder’s fee) for referring and managing the application and mortgage closing.
How Much Do Brokers Earn?
Commission rates for mortgage brokers vary widely, depending on the lender, the mortgage type, the length of the mortgage term and so on.
On average, this compensation can range from roughly 50 basis points (0.50% of the mortgage amount) for one-year terms to 110 basis points (1.10% of the mortgage amount) for five year terms at prime lenders.
As a quick example, suppose your mortgage broker helps you close a $300,000 four-year fixed mortgage. Based on a commission of 0.90% they would be paid $2,700. Mortgage agents generally have to split this commission with their brokerage house, but they usually keep at least 80% of it or more.
Note: Broker compensation on non-prime mortgages is a little different with the broker typically charging a fee to the client instead of getting paid by the lender.
Trailer and Renewal Fees
Besides finder’s fees, mortgage brokers have various other ways to make money.
One is a trailer fee. That’s where the lender pays the broker an ongoing percentage of the mortgage amount for the life of the mortgage (as long as the client remains with that lender).
The trade-off for the broker is a lower upfront commission when the mortgage is signed, but in return they receive something like 0.15% of the total mortgage amount each year.
Some brokers go out of their way to push trailer fee lenders for this ongoing compensation. The upshot to trailer compensation is that the broker is less likely to churn your business (i.e., encourage you to switch lenders at renewal simply to get paid again).
A renewal fee is like a trailer but it’s a lump-sum payment that a lender makes to the broker at maturity (when their client renews with that lender).
In both cases, trailer fees and renewal fees should always be disclosed to the client since they have the potential to influence the broker’s mortgage recommendations.
How a Broker Can Get You a Better Deal
In today’s competitive mortgage market, many brokers willingly give up part of their commission in order to get their client a lower rate. This is known as “buying down” the rate. Not all lenders allow this but most do. That said, many lenders impose buydown limits (e.g., 10-15 bps).
In this situation a mortgage broker will trade a portion of their commission (or trades in “loyalty” reward points they have earned from the lender) in order to lower their client’s mortgage rate.
Buydowns are most common and aggressive at online brokerages that make their money by doing large volumes of deals. A volume-based model justifies them making less on each mortgage, and hence buying down your rate further. Just keep in mind that the less a broker makes, the less advice and/or service you might receive (but there are many exceptions to this).
Broker Commission Conflicts
One key criticism of broker pay is that it leads to some brokers sending the majority of their business to just a handful of lenders. They may do this to gain status benefits or because those particular lenders pay the most. But not all brokers favour one lender for selfish reasons. Often, they’re relationship with one lender affords them (and their clients) better service and faster turnaround times. Just be aware that brokers who push only a few lenders are usually not shopping the market for the best absolute deals.
Incentives offered by lenders, such as tiered pricing, points programs and volume bonuses can also lead to conflicts. This problem has led some provinces (like B.C.) to legislate explicit disclosure of broker compensation.
It’s important to keep things in perspective, however. Consider bank mortgage specialists, for example. They sell only their bank’s mortgage products, even though another lender may offer a much more competitive rate and terms. In most cases, bankers also get paid more for selling a higher interest rate.
Spy Tip: If you’re dealing with a bank, ask for at least 5-10 basis points off the banker’s “floor rate” (a floor rate is the lowest rate they can offer without management approval). This will require them to get a “pricing exception,” which you have every right to push for if you’re a well-qualified borrower.
Questions to Ask Your Mortgage Broker
If you want to be sure your mortgage broker is working in your best interests, here are some simple questions to ask:
- How many lenders have you sent business to over the past 12 months? (this is somewhat arbitrary but look for 7-8 minimum)
- What percentage of your business has gone to your top lender? (look for less than 50%)
- How much commission do you stand to receive if my deal closes, at closing and when I renew? (1% of the mortgage amount is routine for a 5-year term)
- Will you tell me if any other broker lender is offering a lower rate for the same term, compared to what you’re offering?
Conflicts aside, brokers know that websites like this exist. Therefore it would take a broker who has a very high opinion of their service, or one who is simply ignorant or stubborn, not to quote competitively these days.
And the truth is, most mortgage brokers genuinely want to offer great rates and close the deal for their client. After all, a happy customer is a repeat customer, not to mention one that is more likely to refer the broker to friends and family.