Commission and Mortgage Fees

The following information needs to be considered in relation to the money ‘possibly’ earned by a broker arranging a mortgage. Underpinning all advice is the requirement to be ‘transparent’ in how the broker will be paid.

Disclosure is always regarded as “best practice” in treating customer fairly.  It needs to be fair, effective and never misleading; customers need to see all “upfront fees” and service levels available to them.

The Costs

These are two separate costs. Fees are paid, normally by the applicant and commission is normally received by the advisor for the mortgage transaction. 

This is a complex area for mortgage applicants to understand, however, under the Mortgage Code of Business (MCOB) rules 4.4 it clearly states that all fees associated with a mortgage must be disclosed clearly in the Initial Disclosure Document (IDD) and once a mortgage is selected in the Key Facts Illustration (KFI). The total amount and when it is payable must be included.

Commission

The payment position may become more complex. A fee may be charged by the mortgage advisor to the applicant but he may also receive commission from a lender, valuer, solicitor or another party to the transaction.

In the past, commission overrides were also paid; these were often not disclosed but could influence the mortgage advisor on where they placed business and which third party was recommended to assist in the transaction. Commission received from lenders or mortgage packagers was often called a”procuration fee” this could be a percentage of the loan or a fixed amount. Solicitors paid as much as £200.00 as a referral fee, this was deducted from the total amount paid by the applicant and should be disclosed.  This practice did not always ensure the applicant had best service and advice.

Fees

These are related to the mortgage transaction, sometimes payable with the application or at completion to the mortgage advisor, lender or both. Fees can also be payable to secure specific products, to guarantee ‘fixed rates’ for example. If a sub-prime mortgage was sold, the mortgage advisor may have charged a fee for administering the application and arranging the valuation and legal services, this is referred to an “upfront fee”, the lender may also charge a fee, this can sometimes be added to the loan, the true cost of this must be shown in the KFI.

The following websites will give you more of the legal jargon: -

• http://www.tcfinfo.co.uk/site/104/page.aspx
• http://www.fsa.gov.uk/smallfirms/your_firm_type/mortgage/disclosure/index.shtml