How a broker gets paid, and why it matters to you

On a residential home loan, the lender pays the broker. In the overwhelming majority of cases you are not charged a fee for the broker's work, and your interest rate is not increased to fund it.

Commission comes in two parts. An upfront commission paid once, shortly after the loan settles. And a trail commission paid monthly for as long as the loan remains open. Both are paid by the lender, both are calculated as a percentage of the loan, and both must be disclosed to you.

That is the short answer. The longer one, which is where the useful detail sits, covers how those percentages are calculated, what clawback does to a broker's incentives, when a fee is charged instead, and what the law actually requires.

Upfront commission

Paid once by the lender shortly after settlement, calculated as a percentage of the loan amount actually drawn down.

Trail commission

A smaller percentage paid monthly by the lender while the loan remains open, calculated on the outstanding balance.

Clawback

The lender reclaiming some or all of the upfront commission from the broker when a loan is discharged soon after settlement.

Credit Guide

The document a credit representative must give you, setting out who they act for, how they are remunerated, and how to complain.

Fee for service

A fee charged to you by the broker rather than paid by the lender. Normal outside residential lending, and it belongs in writing before the work starts.

Upfront commission is paid by the lender after settlement, calculated as a percentage of the loan amount drawn down. The percentage varies by lender and is disclosed to you in the credit proposal and the Credit Guide.

Who pays it

The lender

Calculated on

The amount drawn

Paid

After settlement

Reduced by

Offset balance

Two details in that calculation matter more than the percentage itself.

1. 01It is paid on the amount drawn, not the amount approved. If you are approved for a limit and draw part of it, the commission follows what you drew.
2. 02At most lenders it is calculated net of any offset balance at the time of calculation. If you settle with a large sum sitting in the offset account, the commission is reduced accordingly. That was a deliberate industry change, made so a broker has no incentive to arrange a larger loan than you need.

Construction and progressive-drawdown loans are handled differently again, because the money is released in stages over months. If that applies to you, ask how and when the commission is calculated, because the answer affects nothing about your loan but tells you a good deal about how carefully your broker reads lender policy.

Trail commission is a smaller percentage, paid monthly, calculated on the outstanding balance of the loan. It begins after settlement and continues for as long as the loan is open, reducing as the balance reduces.

Trail draws the most scepticism of any part of broker remuneration, and the fair defence of it is simple: it pays for the work that happens after settlement. Annual reviews, repricing requests to the existing lender, fixed-term expiry checks, hardship conversations, and restructures when circumstances change. A broker paid only at settlement has a reason to move you. A broker paid a trail has a reason to keep the loan working.

The honest counterpoint is that not every broker does that work. The remedy is to ask at the outset what the ongoing service actually consists of, get the answer in specifics rather than in adjectives, and then hold them to it.

Not every deal is a residential home loan, and outside that lane a fee is normal and entirely legitimate.

• Commercial and business lending. A broker fee often applies, because the work is bespoke, the lender panel is different, and lender commissions are structured differently or are not paid at all.
• Private lending and short-term facilities. Fees are common here and should be set out in full, in writing, before you commit to anything.
• Complex or specialist residential lending, where the work substantially exceeds a standard application and no commission is payable by the lender.
• Some brokers charge a fee as a matter of business model across everything they do, and disclose it at the first meeting.

The rule is not that fees are wrong. The rule is that you should know about every fee before you apply, in writing, including what it covers, when it becomes payable, and whether it is refundable if the loan does not proceed. A fee that appears late in the process is the problem. The fee itself usually is not.

Several obligations sit over broker remuneration in Australia. They exist because of past behaviour, not because of theory.

• Best interests duty. Since 1 January 2021, mortgage brokers arranging consumer credit have been under a statutory duty to act in the borrower's best interests, and to give the borrower's interests priority where a conflict arises. It is a duty to the client, not a duty to disclose and move on.
• Conflicted remuneration restrictions. Volume-based bonus commissions and volume-based soft-dollar benefits were removed from mortgage broking under the reforms that followed the Financial Services Royal Commission. A broker is not supposed to be steered by a lender's volume incentive, because that incentive is no longer permitted.
• Disclosure. A credit representative must give you a Credit Guide setting out who they act for, how they are remunerated, and how to complain. You should also receive a credit proposal disclosure describing the credit assistance being provided and the commission expected.
• Responsible lending. Credit assistance for consumer credit must be assessed as not unsuitable for you, based on reasonable inquiries into your requirements, objectives and financial situation, and reasonable steps to verify what you have said.
• External dispute resolution. A broker must be a member of AFCA, so there is a free and independent avenue available if something goes wrong and the internal complaints process does not resolve it.

Business-purpose lending sits largely outside the National Consumer Credit Protection Act. The best interests duty and the responsible lending obligations do not apply in the same way to a genuine business loan. That does not make commercial broking unregulated, but the protections are different, and it is another reason to have the fee arrangement in writing before the work starts.

1. 01Which lenders are on your panel, and how many did you genuinely compare for me?
2. 02What commission will you receive on this loan, upfront and trail, and from which lender?
3. 03Will I be charged any fee, and if so, what does it cover, when is it payable, and is it refundable?
4. 04If I discharge this loan inside the clawback period, do you charge me anything?
5. 05What happens after settlement? What do you do at twelve months, and when a fixed term is about to expire?
6. 06Are you a credit representative or a licensee, and who holds the licence you operate under?
7. 07Why this lender rather than the second-best option you looked at?

The last one is the most revealing. A broker who has genuinely compared the options can answer it in a sentence, and the reason will relate to your circumstances rather than to the product. A broker who cannot answer it did not compare much.