All Topics / Opinionated! / Mortgage broker commission and trailing fees rebate

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  • Profile photo of Michael.LeeMichael.Lee
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    Gidday again APerry,

    I'm not altogether clear on what fired you up, or why you feel the need to 'throw' things back at me, however here are the answers to the questions you raise.

    I agree that borrowers often get the same lender terms (I presume you mean the loan contract terms),  whether they obtain their loan directly from the lender or via a broker.

    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).

    That borrower then pays a lower effective rate than they would had they obtained the identical loan from the lender directly or a broker that won't pay a mortgage rebate.

    As a result, regardless of the loan contract and lender terms, the borrower pays a reduced effective rate for the identical mortgage.

    In plain English borrowers get the same thing, spending quite a bit less money.

    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.

    It is also worth pointing out that brokers offer important value add services including the ability to maintain rapport and service regardless of a borrowers need to switch lenders; the ability to offer comparative analysis and quite a few other factors.

    It therefore follows that, if you can get the loan you want from a broker, then it's definitely worth thinking about getting it through a broker rather than going direct. This argument fortifies if the broker pays either ORP or an SRP as a part of their offering.

    Again importantly, from time to time, brokers do get better deals than retail and vice versa. Although this is true across all lenders, there is no clearer example than NAB Broker vs Homeside.

    However there may also be individual  factors too where the skill of a broker in deal submission may ecxceed that of the lenders branch service officer. This could mean deals may receive more favourable treatment than if submitted directly, which could be the difference between acceptance and declinature as well as a range of other concessions.

    The simple fact is that, from time to time, terms between channels vary and borrower outcomes such as cost, can be independent of the loan contract terms. It is simply incorrect to suggest otherwise. (i.e. via mortgage rebates etc).

    As for the 'advice' you're suggesting I dispense, I'm not sure exactly what you mean. Wherever I write, I make a genuine attempt to deliver as a complete a truth I can, in the most balanced way possible where any bias that might prevail is in favour of the borrower.

    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.  For the sake of completeness, this obviously does not include NAB Broker or Bluestone any other anomaly that PV commission rather than pay trail.

    I hope that clears it up for you.

    Profile photo of Alistair PerryAlistair Perry
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    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.

    Profile photo of TerrywTerryw
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    i haven't really been following this discussion, but was wondering why would any decent broker rebate commission? it doesn't make sense.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of Michael.LeeMichael.Lee
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    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.

    Profile photo of Alistair PerryAlistair Perry
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    mortgagedetective wrote:

    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.

    You might have interviewed a few people but I have been in this industry for a long time, as have some of the other brokers on this forum, and I'm sure they would all back me up on this. There is simply no need for a good broker to rebate as there is not that much competition around. I have also never come accross a good and successful broker who rebates commissions, I would suggest the few you have found are not particularly common, and those that you have found are fools if their service is that good. It is often difficult to justify the time taken to service smaller clients as it is, why anyone would do so and rebate commission, particularly if they are supplying a quality service, simply makes no sense. 

    mortgagedetective wrote:

    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.

     

    Offset is not ridiculous. Lumping rebates in with the value of having an offset account and then coming up with a 15% saving is. For most people rebates received would be very small.

    mortgagedetective wrote:
    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.

     

    I'm sorry you are speaking utter garbage. There are a range of fixed and variable costs that go into all business a bank does. They are able to allocate the exact cost of commissions to broker originated loans, but this does not mean that it is a cost to the customer. You have admitted yourself that it is not. Doing so suggests that the customer is paying extra to use a broker, they are not. P erhaps you should suggest that bank staf rebate some of their wages to customers.

    Profile photo of TerrywTerryw
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    mortgagedetective wrote:

    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.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of Richard TaylorRichard Taylor
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    Suprised it hasnt been suggested we rebate all of our upfront and trail commission back to the borrower.

    Richard Taylor | Australia's leading private lender

    Profile photo of Michael.LeeMichael.Lee
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    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.

    Profile photo of Alistair PerryAlistair Perry
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    How you get this 15% figure is totally beyond me. If you assume a mortgage of $250K and trailing comission of 0.15%, with 50% being rebated and paid into the loan, the saving over a 30 year mortgage is less than 3%. In most cases you can save a lot more than this by structuring your loans appropriately. 

    I think you'll find that Richard Taylor had already been in the industry for quite a while prior to 2000 by the way. Most of the rebaters i have come accross operate under a franchise model such as Refund Home Loans and Peach Home Loans, so even if they have been around for a while, most probably the loan writers haven't. If you have come accross independent brokers who use a rebate model, and are good bokers, they are just plain silly.

    Profile photo of lukentellukentel
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    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.

    Profile photo of lukentellukentel
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    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.

    Profile photo of Richard TaylorRichard Taylor
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    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.

    Richard Taylor | Australia's leading private lender

    Profile photo of Michael.LeeMichael.Lee
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    Gidday Lukentel,

    Good point. NAB’s Homeside products have generous commissions.

    Instead of saving up to 15% with an ORP mortgage broker, NAB’s Homeside borrowers would save 18% with the identical product compared to obtaining it through a non rebating broker – Yikes!

    I tend not to focus on NAB as they are quite unique, including their approach on Star Ratings, but let’s take a look at that.

    The brand new broker would be given a default rating of 3 stars. If we assume the experienced broker is achieving all targets, they get a rating of 4 stars. The impact is a +0.05% Upfront Boost to the 4 star broker. So let’s get that into context. On a $450,000 the difference is:

    – 3 star broker will earn a total of $28,435
    – 4 star broker will earn a total of $28,210

    Not a lot in it really. But you are right, there may be a difference, it's just hard to spot. However getting back to my original point that quality of advice has no bearing on mortgage brokers’ income.

    NAB’s Star Ratings have no bearing on the quality of advice, except to place a slight penalty on brokers undertaking predatory lending assuming 1% or more of their entire portfolio is in arrears. (Don’t we all want to get rid of those brokers anyway?).

    1. Up to two stars for achieving a conversion ratio >= 80% (conversion ratio is of course, a sales target).
    2. Up to one star is for having entry level qualifications, which can be achieved in less than a week of part time study. 
    3. T
    hen there’s the fourth star for 99% their loans staying out of arrears. i.e. profitable (again, another sales target).

    As you point out yourself, Westpac’s commission is the same regardless and that is true for virtually every other lender using brokers as a sales channel.

    On your point regarding differences between aggregators, I originally stated rates vary between aggregators. I think that it makes sense for you to shop around to get more commission and it doesn’t surprise me that you did.

    In so far as how clawback affects mortgage rebate brokers, the answer is that at least one of the long standing brokers that do it also protects borrowers against clawback. ie. The mortgage rebate is paid to the borrower for keeps – it has no impact on the borrower at all, no matter what happens.

    So yes, the experienced broker may earn a teeny, tiny bit more and borrowers arranging their NAB Homeside loan can save around 18% of their loan amount if they get it through the right broker.

    I hope this helps and thanks for the post.

    Profile photo of Alistair PerryAlistair Perry
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    Please explain how you get these % savings.

    Profile photo of Dan42Dan42
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    mortgagedetective wrote:

    So yes, the experienced broker may earn a teeny, tiny bit more and borrowers arranging their NAB Homeside loan can save around 18% of their loan amount if they get it through the right broker.

    18% of a $450,000 loan (from your example) is $81,000, yet you say the TOTAL a 4-star broker will receive is $28,435.
    Could you please explain your calculations.

    Profile photo of Michael.LeeMichael.Lee
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    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.

    Profile photo of Michael.LeeMichael.Lee
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    Gidday Dan,

    This tracks back to a matter that Alistair disagrees with.

    Borrowers I spoke with have the rebates paid directly to their mortgage accounts and this in turn creates interest offset savings in addition to the 'free' money they get from the mortgage rebates.

    So the saving that is realised are:

    Mortgage Rebates paid to the borrower + Interest Offsets from those Mortgage Rebate deposits = Total Saving

    It's just like paying a little extra each month into your account, only the broker is doing it for you.

    Profile photo of lukentellukentel
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    @lukentel
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    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. :-)

    Profile photo of lukentellukentel
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    please note i was doing the prior post inbetween phone calls so didnt see Michaels response ta

    Profile photo of Michael.LeeMichael.Lee
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    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.

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