Probably the most common mistake to avoid when refinancing (or even getting your first loan) is not getting the commissions from the actual loan paid back to you. Or taking it one step further, it is taking a loan that pays the highest commissions to the person that sourced it for you.
This is the most common mistake because it is probably the least known fact about the mortgage and financing industry. That ‘free’ service you are taking advantage of isn’t so free. Now you probably understand that nobody is going to provide their services out of the goodness of their hearts and be paid with bottle tops. They have mouths to feed, bills to pay and goals to achieve just like you.
So the common method of payment is via a commission that is built into the home loan rate you secure. And then on settlement of the loan, the broker will receive an upfront payment that usually ranges in the vicinity of 0.7%. So if you got a $500,000 loan the commission payable would approximate $3,500. Brokers in Sydney and Melbourne are loving life while Tassie brokers have to work a little harder given loan sizes in those markets.
The real rub is the fact that annual commissions are also paid. Although much smaller they are paid for the life of the loan. They tend to approximate 0.22% of the outstanding loan balance. So on the $500,000 loan example there could be an annual commission of around $1,100 payable. And this continues each year you hold the loan.
How are they funded?
These commissions add up to a pretty sum over time. It begs the question – how are they funded? They are built into the interest rate you pay.
What can you do?
What if you approached the lender directly and asked for a lower rate without the commission? Good thinking but they won’t do it. They might give you a minimal discount but it is likely to be negligible. They simply don’t want to alienate the mortgage brokers that now account for more than 50% of all lending in Australia. They also love it when you go direct as it increases their profit margin as no commissions need be paid.
You could try to get a broker to refund the commissions. There are brokers throughout Australia that will refund a portion of the upfront and all annual commissions (or just the annual commission). This will go a long way to offsetting the total cost of your loan as you can make extra repayments to the loan.
Or what about using a product that has no commission built into it in the first place? That type of product would offer a lower interest right from the start as there will be no need to fund any commission payments.
The calculator below illustrates the differences between 6 major banks in Australia and a commission-free home loan as offered by Moneybright is can somewhat account for the popularity of some lenders versus others. Not all brokers would think like this but they do exist.
This is a very good calculator to use in conjunction with the other calculator that looks at what term to refinance your home loan to given your goals. When you combine a commission-free home loan with the right term you can make massive inroads into your home loan and save enormous amounts of interest.