Understanding Clawback Fee
Joe’s mortgage broker arranged a 25-year home loan for him with X bank at a rate of 3.91 per cent per annum. However, six months down the line, another mortgage broker presented a better deal to Joe, reducing his rate to 3.75 per cent per annum, leading to significant savings each month. Taking the reduced rate and the refinancing costs into account, Joe decided that refinancing to the new deal was worthwhile and made the switch.
However, shortly after refinancing, Joe received an invoice from his previous mortgage broker for $3,200 as clawback fee to be paid to the lender.
Joe was befuddled! He had not even heard of the term before!
Have you, or someone you know, been in this situation before?
Just like Joe, many homeowners are confused about clawback fee, a barely talked about term in the mortgage industry.
Do you really need to pay your mortgage broker?
Mortgage brokers generally do not charge their clients anything. They earn money from the commissions they receive from various lenders, the size of which depends upon the amount of the loan, LVR, and the overall quality of the loans they write. There are two kinds of commissions paid to brokers:
- Upfront Commission – Your broker receives this once your loan settles and you receive the funds for your mortgage.
- Trail Commission – Your broker receives this every month for the life of your loan. Usually, this is set at 0.15 per cent per annum basis the outstanding loan amount each year.
Note that brokers do not work for any particular lender. They are paid for the introduction of a new loan and they receive a smaller trailing commission for the life of your loan for their ongoing support and annual follow-up. Brokers do not receive any commission if you default on your mortgage. This is good, as this payment model urges brokers to work harder and suggest home loans in line with your financial position, so that the mortgage you obtain, suits your requirements.
In short, banks pay the broker for the quality of the business they bring. And, if a broker has done his or her job well, there is little chance of you reeling under mortgage stress or falling into arrears on your loan.
Broker services are free for homebuyers, except in certain exceptional situations such as:
- Commercial or business loans
- Complex situations such as bad credit loans
- Loans prepaid or refinanced within two years of settlement (also known as clawback fees)
What is Clawback?
Clawback is a fee charged by the banks to mortgage brokers for home loans that are prepaid or refinanced within two years of settlement. The amount of fees varies from lender to lender; however, most banks charge the full amount of the upfront commission paid to the broker if the loan is prepaid in the first year. In the second year, the clawback fee may be reduced to 50 per cent of the upfront commission.
But how does this bother you, you might wonder?
Well, just as it happened in Joe’s case at the beginning of the article, your broker may pass this clawback fee to you. However, your broker is required to make this clear to you at the outset. A specific clause to this effect must also be included in your contract in addition to verbal communication.
If the provision was not made clear to you, you could dispute the clawback fee!
Note that some lenders do not charge any clawback fee, or may reduce the amount to half, or lesser, of the brokerage paid. Therefore, it is essential to speak to your mortgage broker about clawback fees to avoid any nasty surprises in the future.
In general, on an average-sized loan of $400,000, clawback fee in the first year amounts to $3,000 or more. However, refinancing your mortgage to a lower rate can have significant advantages, even in the face of a hefty clawback fee. We suggest that you consult your mortgage broker and crunch the numbers to weigh the applicable clawback fee vis-à-vis your savings when you refinance, to make an informed decision. To know more, speak to an expert or fill up this contact form so that we can put a mortgage broker in touch with you.
By Vidhu Bajaj,
HashChing Content Writer