Can a mortgage broker charge a cancellation fee?

You normally don’t pay a fee for the services of a mortgage broker. However, if the broker does the work for you and you decide not to apply for a home loan, the broker may sometimes charge a cancellation fee. There are also other fees a broker may charge in certain circumstances. 

How are mortgage brokers paid?

Most mortgage brokers don’t charge upfront fees to customers for their services (though a few do). Instead, most mortgage brokers in Australia are paid commissions by banks and other mortgage lenders when they successfully refer a customer to them. The exact commission amount can vary with different lenders, but it will often be based on a percentage of the loan amount.

As well as these upfront commissions, brokers may be paid trail commissions over time. These smaller commissions may be paid to the broker for every month one of their referrals remains a customer.

How do mortgage broker cancellation fees work?

Not all mortgage brokers in Australia charge cancellation fees, though some do. These fees are intended to help cover the broker’s costs for organising a mortgage pre-approval or approval that the customer chooses not to go through with.

Mortgage brokers can do a lot of work on your behalf, including:

• Comparing home loan offers
• Calculating your repayments,
• Organising paperwork
• Negotiating with the lender on your behalf
• Collecting and checking identification documents and more

If your mortgage broker does all this work to get you a pre-approved home loan, and you instead choose to go directly to another bank, switch to a different broker, or abandon the application altogether, the lender won’t pay the broker a commission, leaving the broker with nothing to show for the work they’ve done.

Depending on the exact circumstances, the broker may choose to charge a cancellation fee to the customer, which may be a pre-set sum (such as $1,000 for example), or equal to the upfront commission they would have otherwise received.

How do mortgage broker clawback fees work?

If a borrower successfully applies for a mortgage with a bank or lender, then exits the loan not long afterwards (such as if they sell the property or refinance with another lender to access lower fees or cashback), the lender may charge the broker a clawback fee. This is intended to “claw back” some of the upfront commission the bank paid the broker for a loan that didn’t work out.

Clawback fees typically only apply if the borrower exits the loan within two years of commencing a home loan. The cost of clawback fees can vary, but generally the earlier a borrower exits the loan, the more they may cost the broker. 

In the past, brokers who were charged clawback fees by banks could in turn choose to pass these fees on to the customer who broke off the mortgage. However, following the introduction of the Best Interests Duty legislation in January 2021, mortgage brokers can no longer pass on clawback fees to clients.

Can you dispute cancellation fees?

When you first engage a broker’s services, they should be upfront and transparent about how they’re paid, and the structure of any fees that may apply. Consider checking any agreements signed with your broker regarding fees.

But if a cancellation fee was never mentioned previously, you may be able to dispute the charge. Consider contacting a legal professional, keeping in mind that your exact circumstances may vary. 

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