Welcome to the finance update for the week ending 8 July, 2023.
What a relief that the RBA chose to keep interest rates steady when they met earlier in the week. The consequences of the their rate decisions over the past 18 months have been felt at many levels, whether it simply be the pressure borrowers are now under to service their debts, the inability for borrowers to refinance due to greatly reduced borrowing capacities, or the fixed interest rate “cliff” so many people are having to contend with as they come off fixed rate loans. Far be it for me to predict what they might do next month!
In this week’s newsletter, we take a look ‘clawbacks’ and the toll they can take on broking businesses.
Let’s start at the beginning with a quick refresher about how we brokers get paid.
Mortgage brokers receive commission from the lenders when they place a loan with them. Some brokers may also charge a fee, however we do not. This means that our clients are able to receive expert advice, support and guidance, without having to pay us for our experience and time, the bank pays us instead.
What is ‘clawback’?
If a client repays their loan in full within a period of up to 24 months of the loan settling, which happens if they refinance to another lender, the original lender will “clawback” all or part of the commission paid to us for helping the client establish their loan.
Although this varies from lender to lender, this generally happens as:
- 100% of the commission within the first 12 months
- 50% of the commission within 12-24 months of the loan settlement date
Given we don’t charge a fee for our service, this can result in us effectively not being paid for the work we did for the client on the original loan.
Time taken on loan applications
We can easily spend over 20 hours handling an average loan from start to finish for a client. This includes but is not limited to:
- Client meetings and ongoing discussions
- Lender and product research
- Processing of all application forms
- Liaising with various providers (i.e. lenders, loan assessors, valuers, real estate and settlement agents, accountants etc)
- Providing ongoing updates and answering questions clients might have through this process
Reducing the impact
Given the risk of a client leaving us and refinancing directly with a lender or with another broker within the first 24 months resulting in a commission clawback, we ensure that the client experience with us is such that they won’t consider having a replacement loan written elsewhere.
We benefit most if a client does not refinance a loan within the first two years of it being put in place, but if it makes sense for them to do so, if we are helping the client with the refinance instead of someone else, our losses are limited.
Any changes in interest rates from last week are highlighted in orange.
Note – Increases announced by lenders as a result of RBA decisions normally take 1-2 weeks to come into affect.
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR.
1 Year Fixed
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR. At the end of the three year fixed period, the borrowers interest rate will revert to a standard variable rate for the life of the loan.