There has been articles in the press lately about the possibility of mortgage brokers going out of their way to push clients into taking out bigger loans so that they get paid bigger commissions from lenders. I wanted to comment on this since, while is sounds like a good story, the practicalities of it are quite a bit more challenging and unlikely to occur.
Let me say up front - yes, mortgage brokers are paid by the lenders based on a % of the loan amount. This comes in the form of an upfront payment of around 0.6% and a trailing payment of around 0.15% per annum of the balance of the borrowings. This is a payment in return for the broker services which includes searching for the loan, talking to lenders, doing the loan application, talking to the assessors and working with conveyancers and sometimes accountants.
Now back to the theory that mortgage brokers go out of their way to jack up loan amounts.
Firstly - it is hard to do. Customers know what they want to buy, they know the buying costs, they know how much deposit they have saved. The math is pretty simple to work out how much they need to borrow. For a mortgage broker to say "Oh let's increase the borrowing amount by an extra $50,000" then they will get the customer response of "Why? I don't need any more". I don't know about you but I just can't see how you would be convinced to borrow more than you need.
Secondly - let's say the morgage broker was able to convince a client to get into debt by an extra $50,000 for no great reason, what would the broker stand to gain? They would get an extra 0.6% upfront, which in this case would be $300 and an extra $75/year in trailing commission.
Would any broker risk their credit representative status for the sake of an extra $375? I seriously doubt it and any that do don't deserve to be operating. Their licensee will be checking their loans regularly and a pattern will emerge fairly obviously if they consistently write loans where clients are borrowing more than they need.
A tip for dealing with a mortgage broker is to be on the lookout for any suggestion that you should be borrowing more than you really need. If you feel that they are overly pushy then it will pay to shop around for a new mortgage broker.