Yahoo Finance The death of the mortgage salesman is unfortunately premature
We thought the “commission hungry salesman” had been consigned to the museum of financial horrors, next to the exhibits on Equitable Life and endowment mortgages. But are these relics in fact still alive and crawling back into the mainstream?
On the quiet the major mortgage lenders have begun making “retention” payouts to brokers, alongside the “procuration” fees they have long paid. If you have no idea what this means then that’s probably the idea – to keep you in the dark.
The procuration fee is the commission a lender pays to the mortgage broker who procures the business of a first-time buyer or mover. Historically, the fee has been around 0.35%-0.4% of the sum borrowed, which means bonuses all round as house prices (and mortgage sizes) have gone up. On a £200,000 mortgage, for example, it means the broker pockets around £800. Some firms, such as London & Country, consider that enough, but other brokers will additionally charge either a flat-rate fee of around £500, or a percentage-based fee of around 0.25%, which means they make a total of around £1,300 from you.
On buy-to-let mortgages the commission rates paid by the banks and building societies are higher, usually around 0.5%, which may explain why they are promoted so heavily. And remember, you have to pay the separate “arrangement fee” (aka the booking or completion fee) to the lender as well, which is usually around £500-£1,000 on a fixed-rate deal. All in all it means you are parting with as much as £2,300 in fees when you take out a mortgage – and then face paying it all again when the deal period comes to an end.
Around 60% of mortgages in the UK go through brokers, so the commission sums paid out by the lenders are vast. Last year, according to the Council of Mortgage Lenders, new lending was around £245bn, so we can assume the brokers’ cut is at least £500m.
But none of this is new, if barely understood by most homebuyers. What has emerged in recent months is the number of lenders who have introduced “retention fees”. Until now, commissions have largely only been paid to brokers arranging new mortgages for first-time buyers and landlords, or for existing homeowners and landlords remortgaging to a new lender.
Now, however, lenders are paying commissions to brokers who simply roll you over from one two-year deal to another at the same lender. This month, Santander starting paying them, with a minimum cost of £400. Nationwide, which had long held out against them, is introducing them from this summer. NatWest and TSB have also agreed to start paying retention fees.
The commission rate is lower than for standard business – mostly around 0.2% – but brokers are rubbing their hands in glee. Retention business is huge – at £80bn-£100bn a year it is the largest slice of the mortgage market. If half of that goes through brokers it’s worth around £200m a year. That’s £200m that wasn’t being paid out in the past, and will have to be found from somewhere. Will it (a) mean shareholders of the banks will receive lower dividends; or (b) be passed on to the customer? I’ll leave you to work that one out.
Brokers argue the commission should be seen as an administration fee, as they now carry out a lot of the legwork traditionally done by the lender – from affordability checks to regulatory and compliance paperwork. They also say Halifax has always paid retention fees, which hasn’t distorted the market.
But commissions always create incentives to behave in particular ways. Should a mortgage broker recommend you take a five-year fix or a 10-year fix? Or will they say that a two-year fix is in your best interest – when it might actually be in the best interests of the broker, who can earn commission again in 24 months’ time?
