Are mortgage brokers charging clients fairly?

Brokers who bill clients based on a percentage of their loan sum are not treating them fairly according to a brokerage that’s uncovered how the industry charges.

Over a third of respondents to a study of borrowers by Boon Brokers paid a fee based on a loan percentage, a practice that over two thirds of consumers who were questioned disagreed with.

Furthermore, 76.1% did not believe it was right for brokers to charge a fee if they receive commission from a mortgage lender.

The survey of borrowers in major cities across the UK found that the average mortgage broker fee is around £500. It further suggests that since the introduction of Consumer Duty – the FCA’s focus on ensuring fair outcomes for clients - there has been a relative increase in regulated mortgages sold by fee-free brokers.

Gerard Boon (pictured), managing director of Boon Brokers, welcomed this as positive news for the industry, suggesting it implies that many brokers have had to remove their fees to comply with the new regulation.

“The most surprising statistic from the survey was that 36.6% of respondents paid a fee based on the percentage of the loan sum,” Boon told Mortgage Introducer. “As brokers must now justify their fee to ensure fair outcomes for consumers, it is difficult to understand how such a charging model is fair for consumers.

“Given that the loan sum is not correlated with a broker’s efforts in processing a case, charging on this basis seems unjust. Therefore, it is unsurprising that 67% of respondents disagree with the practice of mortgage brokers charging a fee based on the percentage of the loan sum.”

How confusing are broker fees for clients?

The act of charging broker fees can be highly confusing for mortgage clients, in Boon’s view, especially when they understand that brokers receive commission from the mortgage lender upon completion of the case.

“If the broker is receiving a high commission sum from the lender, I can understand why a mortgage client would query their need to charge a broker fee,” he said.

Boon Brokers does not charge clients for its services. Its average revenue per case sits between £1,500 and £2,000 after factoring in all revenue streams. But its MD appreciates that it is in a fortunate position to not have to charge.

“We have made investments to streamline our services and significantly reduce our operating costs,” he explained. “As a result, we can operate a highly profitable business whilst still not charging our clients a penny. We appreciate that many mortgage brokers are not in this position and need to charge a client fee to sustain their business. This is especially true for regional brokers that have a low average mortgage commission from the lender.

“Also, many mortgage brokers charge client fees because they are offering a face-to-face service, which generally cannot be offered by fee-free brokers. If they are charging for this offering, a broker fee seems justified.

“However, I believe it is important that brokers retain their freedom to charge broker fees at their discretion. If consumers believe that this fee is justified, they should be allowed to pay it. Although, in my opinion, the regulator has a responsibility to ensure that all clients are aware that fee-free alternative brokers exist with the same product access as fee-charging brokers. This will ensure that clients make an informed decision when selecting a broker.”

Read more: How successful is Consumer Duty, one year on?

Are clients aware of their fee options when seeking mortgage advice?

Many borrowers were unaware that a fee-free option was available, Boon shared.

“Generally speaking, brokers are well remunerated without their broker fee,” he said. “Brokers have the ability to generate revenue from mortgage/insurance commission and affiliations with third-parties. When compared to solicitors, who typically charge a legal fee of between £1,000 and £1,500, brokers should be able to function without charging a broker fee.”

Mortgage brokers have charged broker fees for decades and the practice is unlikely to stop anytime soon, Boon concluded. “We do not advocate for broker fees to be banned by the regulator,” he said.