Many people are curious about how much a broker gets paid and whether that would disadvantage you in any way as a customer.

Hence the creation of this article to hopefully clarify this once and for all.

First and foremost, there is a misconception in the lending industry that because there is a broker as “middleman”, hence the customer’s loan at the end of the day will be more expensive fees and interest rate wise because the broker’s commission now needs to be factored in.

While this may be true in many industries like butchers and groceries wholesale vs retail, it must have come as a surprise that how I have always managed to get better rates and fees for my customers than they would visiting a bank directly? And I have managed to achieve this over and over again without charging my customers any fees.

You see when you walk into a bank applying for a loan directly, the staff you are dealing with gets paid a base salary regardless of whether he gets your loan approved or not, and whether or not at the best possible rates.

The many branch operating expenses, from the high rent in busy retail area, to renovation, stationeries, marketing, tellers & staff wages and back end administration ensure that any revenue generating activity (such as loan writing) must be able to cover the cost.

When you are dealing with a broker however, yes there’s a commission that keeps him working in this industry: a commission which he doesn’t get any of if your loan is not approved with features and rates acceptable to you; a commission that gets clawed-back (returned to the bank) if you choose to refinance and pay off your loan within 2 years.

A broker on average gets paid about 0.6% of loan amount upfront, plus 0.10-0.15% per annum trail income depending on loan amount, before their professional body or boss takes a cut, normally range between 5-20% to cover licensing, insurance, and software fees. Then of course there’s GST and referral fees (20-50%) paid to business referral partners.

Hence this explains why most brokers never continue beyond first year of operation. In fact the average draw down of loans for brokers in Australia is less than $1 million a month, due to generally low conversion, customer change of minds and loan application declinals. If you do the maths correctly this could work out roughly $50K annual salary.

The exact gross % commission that a broker make are normally detailed in a “credit guide” before a loan application is submitted on your behalf.

Now that we have a good idea how brokers get paid, how does this benefit you?

Well it doesn’t really. Because it is not how your service provider gets paid but how he operates that benefit you.

And the one thing that we really know will drive down prices and interest rates is competition, and there’s no lack of it in the broker’s channel.

Now it must have sprung to mind how the 20-30 lenders accreditation many brokers hold can benefit you.

Imagine all these lenders competing to approve your loan at the lowest possible rate, to win not just yours, but the relationship with the broker as well to encourage more loan broker’s submission through the particular bank.

Not to mention different lenders run special campaigns from time to time to try meet their budget within a limited time frame. These specials are not normally advertised to the market and normally only active brokers are aware of them.

All in summary, I hope this article explain how a finance broker gets paid, and it should be how he operates not how he gets paid that benefit you.

Every customer is encouraged to speak to different bankers and brokers before making a decision who to go for, and the best piece of advice I can give is:

Always pick the most empathetic and experienced broker, the one you feel most comfortable with, the one who’s willing to go through the fine details with you, one who is confident, but one who doesn’t over-promise and under-deliver.
Frank Chan
0403215314
frank@bestmelbrokers.com.au