Would you be as willing to pay your mortgage broker hundreds of pounds in fees if they made it clear exactly how much they were earning in commission from lenders too?
The question of fees and commission has raised its head again after a mortgage broker offering ‘free’ advice claimed others were ‘robbing’ their clients by charging fees.
The claim was made by Chippenham-based mortgage broker One 77 and suggested that 75 per cent of mortgage borrowers using a broker were paying a fee for the advice they received, despite their adviser receiving a commission payment from the lender too.
For a £150,000 mortgage the broker would earn between £525 and £675 in commission
Typically these fees came to around £400 per client but depending on the size of the loan and whether it was a residential home loan or a buy-to-let, fees could be as much as 1 per cent of the full mortgage balance.
On a £150,000 mortgage that would mean stumping up £1,500 for the work done by your adviser who will also earn a procuration fee or commission from the lender for arranging the deal.
Commissions are usually between 35 and 45 basis points on the loan, so for the £150,000 mortgage the broker would earn between £525 and £675 in commission paid by the lender.
Alastair McKee, director of One 77 Mortgages, said: ‘It’s truly shocking that brokers are double dipping on fees in this way and stinging the consumer in the process.
‘This is a colossal sum of money that’s being thrown away unnecessarily, in many cases by the people who can least afford it.
‘As ever, it’s a case of buyer beware but, understandably, many less experienced buyers believe this is the norm across the board and that they have no choice but to pay.’
Should commission be banned?
The question of how fair commission and fees are has come up repeatedly over the past five years.
In 2012 investment advisers were banned from receiving commission from fund managers for recommending their products after the financial watchdog concluded high commissions were biasing advisers into making inappropriate investments for their clients.
At the same time, the regulator looked into whether mortgage commissions were distorting the advice given by brokers to customers and concluded they weren’t.
However, the issue hasn’t gone away and in December last year the Financial Conduct Authority confirmed plans to investigate whether or not these commissions – known as procuration fees – cause bias and should be banned.
It’s due to reveal its conclusion later this year but given this isn’t the first time it has investigated proc fees, it seems unlikely they’ll be banned outright.
In the investment market, scrapping commissions led to all advisers charging fees and millions of savers and investors with small amounts to invest being priced out of getting advice at all.
The watchdog has already raised concerns that shelving mortgage commissions could mean those who need mortgage advice most wouldn’t be able to afford it.
Is an additional fee justified?
This leaves the question of whether brokers are justified in charging an additional fee for their advice and service – especially when some of the biggest mortgage broker firms in the country still offer their advice for ‘free’, choosing instead to rely on the commissions they earn for income.
David Hollingworth, of the UK’s biggest fee-free mortgage broker London & Country, said the most important thing for borrowers looking for a mortgage broker to consider is the service they’ll get.
‘With a huge and increasingly complicated range of mortgage options and criteria playing such a big part in choosing the right lender, it’s easy to see why borrowers want advice,’ he said.
‘Brokers can even have access to exclusive deals that may not be available on the high street. But some brokers will advise from a limited panel of lenders and still charge a fee,’ he warned.
‘That’s in addition to the commission that all brokers receive from the lender for introducing business to them.’
Hollingworth argued that leaving commission in play means that borrowers still have the option of getting mortgage advice for free, something their customers value.
But he recognised others are willing to pay the extra and added: ‘It’s important for borrowers to factor in any fees when assessing the value of a product. Some deals can carry big arrangement fees and broker fees are something that borrowers will also want to factor in to the total cost.
‘A 1 per cent broker fee on a two-year deal effectively adds 0.50 per cent to the mortgage rate so although different broker models work in different ways it’s a cost that needs to be considered.’
This formula is not reflective of every fee. Many brokers take a view and where borrowers are more strapped for cash, they’ll agree a lower flat fee of a few hundred pounds.
Complex mortgages and buy-to-let take more work to process for the broker, and are therefore more likely to attract a higher fee.
Generally speaking, firms that offer free mortgage advice can do so by opting to serve lots of customers with easy needs quickly and over the phone. This pulls down their cost per deal and allows them still to make a profit even relying just on commission payments.
Firms that deal with customers looking for multiple mortgages, dealing with very high value loans, complex income structures or helping to structure buy-to-let or commercial loan portfolios will typically charge a fee to cover the costs involved in processing these deals.
If they didn’t, they argue, the model wouldn’t be commercially viable and it would leave swathes of worthy borrowers fending for themselves when their complicated financial needs mean they need help more than most.
Andrew Montlake, of mortgage broker Coreco – a high-end firm that does charge a fee – said it should come down to choice and whether a customer feels it’s worth paying a bit extra for the extra service offered by some firms.
In any industry, you have different methods of charging and just as in other industries it can often be a case of you get what you pay for
He said: ‘In any industry, you have different methods of charging and just as in other industries it can often be a case of you get what you pay for.
‘As with most fees, it depends on the service a broker provides to the consumer and ultimately the consumer will decide if that fee is worthwhile or not.
‘A broker’s job is more time-consuming and complex than ever before and true professional brokers often charge a realistic fee for their service, which extends far beyond simply using an online sourcing system to find the cheapest deal, rather than the most suitable one.
‘There is, of course, a place in the mortgage market for both types of business, but there are many consumers who want something that offers that little bit extra, especially in the current climate.
‘As advisers, we are a relationship business rather than just looking at a transactional one, advising and maintaining our clients for the long-term and we have won business in the past from no fees brokers for this very reason.’