Friday, October 21, 2011

Mortgage Brokers Rebating Commission

Next time I get myself a new mortgage, I'm leaning towards applying for my mortgage through a commission rebate broker. We've got to be careful with mortgage brokers. They're not always independent due to the commissions that they receive from the loan provider.

It's only natural for mortgage brokers and financial planners to recommend products that they receive the most commission and trailing fee from - if you were running a business, that's the course of action you would have taken too, so it's understandable. So as long as you are aware of the pitfalls, you can work to minimise this problem and also maximise benefits for yourself.

Research the various mortgage loans on offer out there. Once you find a loan that you want, check to see if there are commission rebate mortgage brokers that can broker the loan for you.Some of the commission rebate mortgage brokers are yourshare.com.au, refundeasy.com.au, mymoney.com.au and irefund.com.au

How does it work? If you went into a bank for a standard variable home loan with a variable rate of 7% then your interest rate will be 7%. If you instead obtained that exact same standard variable home loan via yourshare.com.au (the mortgage brokers) then they will broker that exact same 7% loan for you however because your bank (and most financial institutions) pays yourshare.com.au a trailing commission of a few percentage points out of that 7%, they rebate a portion of their commission to you - essentially the mortgage rate that you end up paying is less than 7% if you go through the broker as opposed to going to the bank directly.

That sounds awesome right? Getting a mortgage rate that is under the standard variable rate. You can even get that standard variable rate reduced even further by asking your financial provider for mortage home loan interest discount packages. All of them have some type of home loan interest discount packages available. You will end up saving tens of thousands and possibly even hundreds of thousands of dollars just by utilising those options (the bigger your mortgage the more you're saving).

The steps that I plan to take this time around for my new mortgage loan:

1. Research the property mortgage loan provider that I want to use and decide on the mortgage package that I want to go for. I already know that I want this mortgage to have the following features: variable, 30 year term, redraw facilities, offset account, ability to make unlimited extra repayments, no penalties for early loan repayment.

Eg: I aim for a CBA standard variable home loan which is 7.81% currently

2. Check for the professional discount package. All the larger banks have these mortgage discount packages. You pay anything from $200 to $400 for a package each year and you can get up to 1% off your mortgage depending on their "specials" and their discount package. This annual fee is cheap because the percentage discounts will save your thousands annually. I won't crunch the numbers here but you can do it yourself using the mortgage calculators freely available online. There are always branch specials happening so will remember to negotiate all the way throughout the whole process.

Eg: CBA has a 'Wealth Package' which costs $350 annually but its interest rate discount depends on how much I borrow. So if I borrow anything from $250,000 to $500,000 then I can get 0.75% off the 7.81% standard variable rate

3. Check out the commission rebate brokers to obtain my loan through them. They could rebate anything from 0.2% and greater depending who I go through.

Eg: I go through yourshare.com.au and they rebate 0.2% of my loan interest back to me offmy 7.81% standard variable rate.

The results?

1. Instead of paying the advertised standard variable interest rate of 7.81%, the mortgage loan rate has been reduced to 6.86% and it could be even lower depending on how hardball the negotiation process is and how prudent I am in checking on special rates and special discounts that some branches offer

Eg: Carrying on from my example above, if I borrow $400,000:
a) At 7.81% interest rate, total interest over the life of the loan (assuming no extra repayments have been made) is $637,612
b) At 6.86% interest rate, total interest over the life of the loan (assuming no extra repayments have been made) is $544,532.42
c) Total mortgage interest savings from going through the discounting process above saves me $93,000

If I have to pay the $350 annual fee for the 30 year term then that will cost me a total of $10,500. That's cheap compared to the savings of $93,000

How can you pay even less mortage interest?

I've already covered that topic extensively in '15 tips on paying your mortgage off faster' and 'Paying off your mortage faster- the scenarios'

I'm aiming to pay off the $400k mortgage in 10 to 15 years. It may take longer than that if I decide to buy additional investment properties along the way. 10-15 years sounds like forever but it'll come around faster than you think. Look how fast high school flew by. And the uni years went by just as quickly.

[Edit 12/02/2012: Other commission rebate providers are Commission Refunders and YourShare.com.au - they don't cover home loans but covers managed funds, insurances, managed funds. Commissions will be banned from 1/07/12 but that will only apply to new products and it doesn't cover insurances held outside super or to mortgages]

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