Not charging for advice would be unsustainable, business owners suggest
A huge number of brokers could be lost to the mortgage industry if the sector was to go fee-free, it’s warned.
The age-old debate on the broker business model has recently come under fresh scrutiny following research from industry firm Boon Brokers.
Over a third of borrowers who responded to its study said they paid a fee based on a loan percentage, yet two thirds of consumers who were questioned also disagreed with this practice.
Furthermore, 76.1% did not believe it was right for brokers to charge a fee if they receive a procuration fee from a mortgage lender. The survey of borrowers, in major cities across the UK, found that the average mortgage broker fee is around £500.
Broker Serena Smith, from Mortgages with Serena, agrees with a view that a percentage charge is not fair – but she would favour a flat fee structure as the way forward.
“However, if the industry were to go fee-free it would see a huge loss of brokers, who would have to seek work elsewhere, and the fee-free brokerages unable to cope with the influx of work,” Smith (pictured left) told Mortgage Introducer. “I personally charge a fee so I do not need to take on a volume of work that isn't sustainable, and wouldn't receive the level of customer service I feel clients deserve and sits fairly with Consumer Duty.”
Smith explained that a procuration fee on a shared ownership property or any loan under £250,000, after paying fees, tax and insurance, doesn't even equate to the National Minimum Wage for processing a case.
“As a qualified and experienced broker, this is not a wage I'd accept,” she said. “As a one-man band I cannot run a profitable business without charging a broker fee, regardless of protection/insurance commission which I am paid.”
What did the latest broker fee study find?
The study’s author, Gerard Boon (pictured centre), managing director of Boon Brokers, recently told Mortgage Introducer the most surprising finding was that 36.6% of respondents paid a fee based on the percentage of the loan sum.
“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,” Boon said. “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.”
Boon’s firm does not charge clients for its services, but its MD appreciates that it is in a fortunate position to not have to do so, because it has streamlined its services and significantly reduced its operating costs.
“As a result, we can operate a highly profitable business whilst still not charging our clients a penny,” Boon said. “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.”
Boon considers that the act of charging broker fees can be highly confusing for mortgage clients, 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. “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.”
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It's up to clients to decide whether to proceed
Broker Michelle Lawson (pictured right), from Lawson Financial, agrees that it’s the choice of informed clients whether or not to proceed.
“The fee debate is a perpetual one and will always conclude that there is no right or wrong and will come down to every individual’s business model,” said Lawson. “Rather than brokers being at war with what is right and what is wrong, we should just respect each other’s judgement of running the business in a way that is fit, proper and just, while meeting our own personal goals and more importantly achieving the right outcome for the borrower.
“The job of a mortgage broker has become so much more involved now, with far more research, customer complexity, paperwork, chasing, time and knowledge required. By charging a fee I value my own knowledge and expertise and I charge this fee on offer. This means my clients are safe knowing that I will only be putting in an application that has the best chance of getting a mortgage offer as a result for them and to do this as quickly as possible.”
She continued: “Yes, we get paid by the lender, but these fee percentages remain unchanged in over 20 years although loan sizes have generally increased. There is also no guarantee that this will go on to completion as there could be legal issues that get in the way, meaning either the transaction failing completely or having to be done again. The counter for this is business levels have come down.
“Is it right for a broker to not charge a fee on a small mortgage and only earn £75 from the lender, is that truly commensurate for the work involved? I think we can all answer that question. We also get commission from protection policies etc, but there is additional work now also involved in these due to the range and complexity of products, chasing GP reports and underwriting etc.”
Lawson added: “I have seen some fee free brokers submit applications willy nilly – there is no real commitment from them to get the job done.”
