Mortgage Brokerage?

[BenJacobs]

Hi guys,

I'm looking to start / acquire a mortgage brokerage, and am receiving a lot of conflicting information about the income streams from this type of business. I'm trying to figure out:

(1) How much do banks pay a brokerage for the mortgage? As a % or as a fixed fee?
(2) How much do brokers charge the clients for arranging the mortgage? Is this instead of, or as well as, the commission earned from the bank?
(3) What other income streams can be produced from this type of business, besides the arranging of mortgages themselves?

Would massively appreciate any input you can give, it will all help.

Thanks so much,
Ben

 

[Mark T Jones]

Hopefully @tony84 will be along with a concise answer

In the meantime, The FCA site should be of some help

 

[BenJacobs]

Thanks Mark! Hopefully Tony will be along with an answer.

Really appreciate your help.
Ben

 

[singersongwriter]

Hi Ben,

I can step in temporarily as it's something I've had an interest in previously, though my words are mere hearsay as it was a few years ago. That said, I guess the 'prime, full status' applications haven't changed.

Commission rates vary between lenders with the lowest generally being around 0.3% of the loan amount and the maximum (probably no longer available) of 1% (subprime mortgages).

A broker would typically charge a fee equal to what he or she believes his or her worth would be. I personally believe a fee of around £600 is acceptable but that is just my opinion. I worked in brokerages before setting up myself, where the fee was around £1,300.

I always believe too that it's nice to be upfront from the outset and fully advise the client (a mandatory requirement in any event) how much and from where the proceeds will come from.

A good offer might be to confirm your fixed price of £XXX with a full refund of the lender's commission back to the client. This really is the only true way of being independent.

Other income streams -

Insurance commission, these are mega on life and critical illness policies but they have a clawback period of around 2 years. Some brokers like to take the commission on the drip, I always took it upfront You can sell protection products, as well as home insurance etc.

Solicitors referral fees, unless things have changed the solicitor could pay you £200 as a referral fee. This area is very cut throat and you'll quickly find out who's good and who is not!

I can't think of any more worthy income streams at the moment unless you sell any website generated enquiries to a lead source. (Something I used to do successfully as I earned more from that than selling the mortgage over the phone).

Hopefully tony84 will clarify any mistakes I may have made.

Andy

 

[Thermodynamic Man]

Oh this takes me back..lol

I was an independent mortgage broker in the days just before CeMap was introduced. This had a big impact on the deals we did then as not only did we have to show what brokerage fee we were charging for the deal but also the proc fee from the lender. Now in some cases we had a proc fee from one lender which was pretty good, great in fact, average of £1000 per deal. Obviously once the client saw this they got a but peeved and a couple called us greedy. Well perhaps we were but the client did not take into account that we would do more than one visit. The first to fact find and the second to show the offers available....and sometimes this work involved quite a few hours of calls and chasing.
This was still a specialist service and I am sorry but I make no apologies for charging as I did. In some cases the client had tried every avenue to get a loan and failed...so I think I deserved a good finders and admin fee for doing my work and getting them that offer

Regarding other products. Well basically I found myself a good IFA. to partner up with. I would then refer him to do all the policies that had an investment element and I would just do the term and other standard insurance. He would also in turn recommend me to any of his clients looking for a mortgage.
I have to say it worked well...damned CeMap

 

[BenJacobs]

Thanks so much Andy, this is such great information and I really appreciate it!

Commission rates are between 0.3% - 1%? That's a big difference! Do you know why the difference in the payouts? Also, at 0.3%, I imagine that a brokerage would have to be writing a LOT of mortgages to be profitable, on a property worth £160,000 for example, that's just £480... how could they be profitable on figures so low... especially with the amount of work that now goes into having a mortgage approved?!

I would guess that most brokerages are increasing the amount that they charge the customer to increase profitability... are they allowed to take a commission from the bank, as well as a commission from the customer? If the amount charged is £600 - £1,300 per customer then I can see this working well. Is there a minimum / maximum that can be charged, is that regulated? Or is it purely as you say, how much they think is their worth? £1,300 plus the £480 from the bank, somewhere close to £2,000 per customer I can see working well. Are these the typical numbers that a brokerage would work to?

Other income streams sound very viable, and I'm guessing could really bolster the profit margins in a brokerage, such as insurance... especially life and critical illness (which I believe most/all mortgage companies now require?) - do you have any figures to put around this, such as how much the payouts are, how the commission structure works, etc.?

It's such an interesting business! Lots of moving parts and makes it a very interesting proposition and business! I'm thinking the easiest way to be

Insurance commission, these are mega on life and critical illness policies but they have a clawback period of around 2 years. Some brokers like to take the commission on the drip, I always took it upfront You can sell protection products, as well as home insurance etc.

 

[singersongwriter]

Hi Ben,

The difference in commission rates was generally down to the level of risk, with the higher risk customers generating the larger the fee (lenders would create a book of lending, and sell it on). Lenders such as Nationwide and Woolwich would only ever lend to very credit worthy people with the lowest risk, so they were the least paying lenders, but they usually always had the very best products. The Woolwich offset Tracker mortgages spring to mind, I still have friends who are able to borrow large amounts of cash for virtually nothing, such was the competition 10 or so years ago.

I wrote many c£60k remortgages for the likes of Nationwide, without charging a brokers fee, that hurt but I used to work the referrals aggressively. My average fee, without charging any broker fees, was £600 (North Manchester area). This could be easily doubled on insurance sales. I don't believe this model would work now, you need to be working for a minimum set fee. The reason I quite was because I was directly authorised by the then FSA which had specific laborious reporting requirements, plus a large portion of my client base was subprime, so from around October 2007 until I quit in May 2008 I hardly wrote any business which used up much of my reserves.

Regarding profitability, I would say to keep an eye on your overheads. I owned commercial premises and had staff. I also had glossy printing and banners. In all, I think my overheads were about £5k per month when I quit, as opposed to virtually £0 overheads working from home alone. It was definitely the difference between sink or swim for me back then.

I don't know the rules nowadays, but I guess the broker can charge a fee and also keep the commission, providing the information is reflected in the KFI. Again I don't see any reason why the fees charged should or would be capped. £2,000 income per client would be pretty awesome, I was writing up around 15 mortgages per month in 2007.

Life & Critical Illness commissions were equal to around 2 years of premiums, so a £100/month comprehensive policy would pay quite substantial. But remember, these are clawed back from future commissions should the client cancels it (things may be totally different these days). Buildings & Contents weren't much, I can't remember exactly but probably around 10% of the premium).

It probably would be an okay time to get into it. If I was considering it, I would do it working from home under a Network with the full support and without the reporting requirements. You could hire a desk in a business centre, this was something I once did and that cost about £15 per week (Council run).

Good Luck with whatever you decide.

 

[Mark T Jones]

Note to the OP - the above relates to an entirely more relaxed era (where legislation is concerned)

Residential mortgage broking now comes under the FCA - I believe that your commission will be by customer fee only - as will insurance fees, but you really need to speak with someone currently operating to clarify this

 

[BenJacobs]

Hi Mark,

Is that right? The banks won't pay a commission any more for writing the mortgage? That can't be right...? So gone are the days of 2 x streams of income, (1) from the bank for writing the mortgage, and (2) from the client for arranging the mortgage for them?

Is there anybody you could recommend I could speak with about that?

Thank you
Ben

 

[BenJacobs]

Andy - you've been a massive help and given me a lot to thnk about and to digest. Thanks so much for your help. It's really been useful in starting conversations with brokers and asking the right questions and getting to the bottom of it all.

Thanks again.
Ben

 

[Mark T Jones]

Hi Mark,

Is that right? The banks won't pay a commission any more for writing the mortgage? That can't be right...? So gone are the days of 2 x streams of income, (1) from the bank for writing the mortgage, and (2) from the client for arranging the mortgage for them?

Is there anybody you could recommend I could speak with about that?

Thank you
Ben

Like I say, not my area of expertise, but this sheds a little more light https://www.fca.org.uk/consumers/mortgage-advice. Seems it's more about disclosure than source

 

[tony84]

Hi,

Sorry, I have only just seen this thread.

Its a very difficult question to answer, some brokers work for commission only and are happy doing the job for £300 a case, they do that on the basis that they see more people and write more insurance. Personally I think thats a poor business practice. You get paid for each job, not do one job in the hope it leads to another.

Commission rates are typically between 0.3% of the mortgage to around 0.4% of the mortgage balance. I work on the basis that I get 0.35% from every lender, some are more, some are less but at the end of the year it wont be a million miles out from .35%. There is one lender who pays 1% but realistically your never going to use them more than a handful of times a year. I specialise in bad credit and I rarely use them.

Fees vary, I know brokers who work fee free through to brokers who charge around a £2,500. I tend to charge between £500 and £999 depending on the complexity of the case. I have some existing clients from when I was starting up where I charge less and I honour whatever we agreed when we first spoke wherever possible. My first 4 mortgages were fee free, when I seen how much I got paid after the blood sweat and tears it just was not worth it, I would genuinely rather go and work in McDonalds, there is a lot of stress and ridiculous amounts of admin and compliance. People do not realise just what is involved. To give an example, I have recently taken someone on who thought I lead a cushy life, they have on a couple of occassions debated giving up and going back to another less stressful job.

Icneom streams, insurance is the big one. As a general idea, whatever the premium is, multiply it by 20 and thats the commission you get. HOWEVER, it is paid upfront but if the policy gets cancelled you have to pay the amount applicable back. You can also earn from solicitors refferals, I dont personally as I want to give every incentiv epossible for my clients to use my solicitors as I know they get the job done.

To give you an honest opinion of the job, I love it. I especially love helping people who have had bad credit (as that usually ties in with a hard time) and you can see the delight they have in moving on with their life in their new home. The same goes for first time buyers, they are usually over the moon - as cheesy as it sounds, that is the best part of the job. But there is a lot of stress dealing with peoples anxiety especially if its not as smooth as you would like on every case.

Im not sure if you plan on going directly authorised or through a network. If you go through a network costs vary but tend to be about 10-15% of turnover from mortgage and insurance related business. If you plan on going Directly authorised, I would say around 1% of turnover for insurance, £300 a month compliance costs, £2-3k FCA fees. You then have software etc.

Its a cracking job, but it isnt like it was in the old days where people would pay you anything and applications would fly through. MMR and the EU credit directive made this job a whole lot harder.