It is common practice to use a broker to secure a commercial loan, but while borrowers believe this makes the application process quicker, more efficient and cost effective, the opposite is in fact true, says Princeton Mortgage Fund.
The majority of brokers provide very little service to borrowers while charging them fees that cost hundreds of thousands of dollars. Borrowers can avoid high brokerage fees by applying directly to lenders.
The typical extent of a broker’s remit is to introduce a borrower to a lender. A reasonable fee for an introduction is 0.25 per cent of the loan amount, however, the standard brokerage fee is 2 per cent or higher.
Is the intermediary worth the financial hit? Here are several reasons you should think carefully before engaging a broker:
1. Brokers can use smoke and mirror tactics to convince lenders that their candidates are strong while providing little substance or hiding the negative aspects of their applications
2. Brokers often fail to provide lenders with meaningful analysis of the documentation they solicit from borrowers
3. Lenders do 95 per cent of the administrative work required to deliver a loan
4. Lenders regularly request to contact borrowers directly for more detailed assessments of their applications, leaving brokers as mere observers of the process
5. Lenders manage financed projects over 12-18 months to ensure they are delivered on time and within budget and are responsible for troubleshooting along the way.
It may help to look at a true Princeton Mortgage Fund example of a high (2.2 per cent) versus a low (0.25 per cent) brokerage fee.
A broker introduced a borrower to Princeton for a construction loan. The brokerage fee for the $7 million loan was agreed at 2.2 per cent. The application was successful, and the borrower paid the broker $154,000 on the first loan drawdown. If the fee for the introduction $7 million loan example was 0.25 per cent instead, then the borrower would have only paid out $17,500 to the broker.
Considering the mortgage interest paid by the borrower (rounded to $625,000) and the lender’s loan establishment fee of 2.2 per cent ($154,000), the total financing costs were $993,000 for the 2.2 per cent fee, rather than $796,500 for a 0.25 per cent fee. In the higher case, the brokerage fee as a percentage of the total financing costs was 15.5 per cent; in the lower case, it would have been 2.2 per cent.
Princeton Mortgage Fund’s chief executive George Gadallah says that brokers rarely influence the application process or the financial outcome of a loan application.
“Brokers can make themselves seem invaluable in securing commercial loans when they contribute very little,” Gadallah said.
“Speaking directly with a lender like Princeton puts the borrower at the front of the process and gets the job done more efficiently—without the excessive fees.”
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