2 Year Contract for Mortgage Broker

Hi guys,

My friend just told me she is signing up to use a mortgage broker while she looks for a PPOR but he is making her sign a contract where she has to use him for 2 years. Is this as shady as it sounds or just normal?

 

It's not uncommon for brokers to have a deferred fee if you close down the loan within the first two years. That's due to the lender clawing back some/all of the commission they initially paid. Having said that - it looks like brokers won't be able to charge this fee as of next financial year.

I haven't heard of a contract where the clients MUST use said broker for a stipulated time though - that seems weird. What if the broker is crap?

Cheers

Jamie

 

Is it an actual contract or a clawback clause on a Credit Quote ?

 

It's not a promise to use the broker for 2 years, it's a commission clawback agreement.

In essence, if you refinance or otherwise pay out the loan within 2 years, most lenders will take back part of all of the commission they paid the broker. This agreement obligates the borrower to pay the broker for that loss.

I know it sounds harsh, but consider that the broker does a great job, but then has their income taken back for something the borrower did, completely out of the broker's control. It's not entirely unreasonable for the broker to expect the borrower to pay for their services in these circumstances. I can't think of many people willing to work for free.

This sort of clause is fairly common in the industry. Most brokers wouldn't charge it if the circumstances are reasonable (most I've spoken to will waive it if you refinance through them, or if there's financial hardship such as a marriage breakup).

Legislation currently in draft will ban this practice.

Whilst I do think that it's reasonable for brokers to do this, I decided a long time ago not to.

 

And its probably unlawful under consumer law. But a clawback clause is how some protect themselves from borrowers who churn and leave them without the income expected to cover their efforts and time. Some cop it on the chin but others dont.

And most lenders also have early repayments fees too.

 

BS - it's not a contract to use them exclusively for two years
It's more likely a claw back clause
This is what happens when you play Chinese whispers

 

I'm not aware of being challenged under current consumer law. It did get legal attention with NCCP legislation in 2010 and has been allowed as long as certain disclosures are met and agreed to in writing upfront.

Residential lenders don't charge early repayment fees, that was specifically banned in 2011. They're allowed to charge a reasonable processing fee which isn't an early repayment fee as it applies if you close the loan tomorrow or in 20 years time.

Some commercial contracts still have early repayment clauses, but there's little to no regulation around commercial lending.

 

Such a contract could not be binding. But you have probably either interpreted it incorrectly or misreported it.

 

Ok thanks guys will let her know about the clawback clause so she can do her own research before selecting a broker. Getting this information second hand so just thought it sounded weird as I had never been shown or told to sign one when using a mortgage broker in the past.

 

What about NAB's "Economic Costs" - NAB has large "economic costs" on top of the break costs for breaking a fixed rate loan with them, and if you've ever tried to work out how they come up with the $ figure you'll know how confusing it is.

 

"Economic costs", and, "Early repayment fees", refer to very different things.

Every lender has large fixed rate economic costs and I've noticed that they tend to be about double the saving the borrower might save by breaking for a cheaper rate.

 

Usually they're charged as break costs but then NAB have economic costs on top of the break costs - Can work out the break costs fairly easily, there's a formula to follow, not so with the economic costs

 

Deferred Establishment Fee - banned

Early Repayment Adjustment - yes (breaking fixed agreed loan term)

 

I think I know what you're talking about. They're charging a flat processing fee for the work done, then the economic cost. NAB isn't the only lender that charges the flat fee. I once saw Westpac charge a fee even though the economic cost was $0.

 

The issue for a broker must be very hard to quantify. The time taken on a $100K loan is not different to a $1m loan generally. Yet the $1m loan pays the broker ten fold. So two years for that loan and its remuneration potential v's say a $100K loan are very very different. I tend to see only a fee clawback of $XXX. Expecting two years of trail as a base seems excessive but maybe OK for a small loan.

And working with a broker I know some are slam dunk jobs and race through and others take endless effort (even repeated effort).

 

Lender need to get rid of clawbacks after 6 or 12 months max. Probably wrong forum