Most sales professionals earn commission income. However, when applying for a home loan the commission income component does not get treated the same way as the base income and lenders vary in the way they will assess commission income.
Most lenders will “shade” commission income – usually taking only 80% of the value of it when assessing your ability to repay a loan. As an example, if you earn a base salary of $100,000 and commission income of $100,000 then the lender will use 100% of your base salary but only 80% of your commission income. In this case, despite you earning $200,000 in a year, the lender will only use $180,000 of it to assess your income.
The next challenge is how lenders will calculate your annual commission income. Some will take the lesser of the past two years as shown on your PAYG summaries. Others will take the average of the two years. If your commission income varies significantly from year to year then lenders may apply their own ad-hoc rules to your income.
The upshot of this is that it is a real minefield out there for those of you who are earning commission income, especially if you are trying to borrow close to your servicing limit.
Your mortgage broker will know the policies of the lenders and can help you find the right loan for your situation. For tricky cases, we can even ask lenders to pre-assess the commission income before making a formal loan application. This will give you assurance that your sales commission income won’t be a reason for your application being declined.
The 2018 Banking Royal Commission handed down some fairly radical recommendations to change the mortgage broking industry. Mortgage brokers never got a chance to put their best foot forward during this commission.
First up, I will admit that in any industry there are a few bad apples, but like most, we should not all get tarred with the same brush.
One of the main objections raised in the commission findings was that loan sizes tended to be a bit larger when using a mortgage broker as opposed to when going direct to the lender. While I can honestly say we always write loans that are fit for purpose, it is really the lender’s responsibility to approve or decline the loan. This should not be something that the mortgage broking industry should be beat up on. If the lender can see that the loan looks bigger than what the client requires then they have the option to decline it.
This resulted in a recommendation that the borrower pay for the mortgage broking services to ensure the mortgage broker was acting in the client’s best interest. We find the right loan first and worry about lender commissions second. The lenders all pay pretty much the same commission rates anyway (and we share all details on the commissions we earn with our clients before a loan is settled). To have clients pay for something they always got for free is crazy. Seriously, they just won’t do it. The suggestion is then to have the lender charge the same fee if you were to go to them directly. This whole scheme will become an extra expense when getting a loan – and ultimately make it even harder for first home buyers to get into the market.
The other item discussed was the trailing commission payments. These are the small monthly payments brokers receive over the life of the loan. Hayne recommended these be removed. Well, this is an area that we don’t have too much objection to, other than to say that if they are removed then mortgage brokers will want to see they upfront payments increase to cover these. If they don’t then a lot of mortgage brokers will leave the industry. That would be a shame since mortgage brokers do nearly 60% of home loans across Australia – it is clearly a great service that Australian borrowers love to use.
The royal commission recommendations around mortgage broking is the wrong approach to fix any problems associated with brokers that don’t work in the client’s best interest. Much better ways of solving this would be to introduce a “best interests duty” to the industry, along with means to properly police it, and hold the lenders accountable for declining loan applications that appear to be more than the borrower needs. Problem solved without destroying an industry that brings more competition to the big banks.
Anyway, look out for this to become a political hot potato at the upcoming federal election.