Let’s face it — buying a home for the first time can be really tough. You’ve got to deal with chunks of money that seem unimaginable, there are about a million lenders who are trying to snag your business, and it’s all on you to make the right decision. Talk about nerve-wracking!
Adding to the stress, you’re probably looking for ways to save some money WITHOUT cutting corners. And, you’re realising that all of the hidden fees and extra costs exceed what you ever thought possible.
That’s why knowledge is power. If you know how the process works — and what you can do to catch a break — you can make buying your first home easier.
In fact, one of the most important things you can learn is how mortgage broker commissions work.
Who are mortgage brokers?
A mortgage broker will work as a middleman to help you secure a loan, and in exchange for his services, he will receive a commission from the bank once your loan is all setup. That commission may be paid in full upfront, or it may be done as a “trailing commission” — a series of payments made over several years. As the buyer, you’ll also be responsible for paying the broker an initial fee, which you’ll be on the hook for, whether you sign on the dotted line of your mortgage or not.
Those initial fees can vary from broker to broker, so check to see exactly what your specific broker’s terms are. Typically, though, an upfront fee will consist of 0.6% of the total loan. So, if you get a $300,000 loan, your broker will be entitled to $1,800. A trailing commission, on average, is about 0.15% of the total loan amount. So, on a $300,000 mortgage, your broker will get $450 each year.
If that seems like a big chunk of money that you’d rather not spend, don’t worry. Luckily, you can get much of your money back in an upfront refund or a trailing commission refund. To do it, you’ll need to take out a “cash back mortgage”.
These mortgages are usually offered by commission rebate services. That’s a fancy way of saying that they’ll provide several home loan options, and you can choose the one you like best. That’s a big difference from a traditional broker, who will try to convince you to choose one loan over the other (after all, he’s getting a commission from the bank, so he’s got a stake in your decision!).
Under a cash back mortgage, all you have to do is pick a loan, and the rebate service will refund some or all of your upfront commission. The exact amount you’ll get back will depend on which company you work with. For example, some rebate services only return 50% of your money, while others will refund 100%. This is money that would normally go straight to your home loan broker. Instead, it will go back in your pocket!
Things will work a little differently on a trailing commission. Your rebate service might make a slight profit on these deals, while others will offer you a refund based on a specific percentage. So, talk to your rebate service to see how their exact process will work.
Bottom line — getting a commission rebate is a great way to save yourself thousands of dollars over the life of your loan. So, before you sign on the dotted line, see if it’s an avenue that’s right for you!
Sam Nathan is a freelance writer. His interests include finance, sports, travel and health.