With interest rates rising, borrowers will be reviewing their home loans. Lucinda Schmidt provides a list of questions you need to ask your mortgage broker.

After two interest rate rises in a month, home owners are scrutinising their mortgages more closely and asking questions. Have they got the best possible deal? Could a mortgage broker help them find a better one?

A few years ago, using a broker to source a home loan was confined mainly to borrowers who had been rejected by mainstream lenders. Now it is common, with most estimates suggesting that one in three home loans is sourced through a broker.

The broker acts as a go-between, doing the legwork and filling in all the paperwork to submit the application to a panel of lenders. It is convenient, and most brokers do not charge the borrower for their services.

There is no such thing as a free lunch, however. The brokers' services are not really free - they charge a commission to the lender once the loan is signed up.

The national broking franchise Mortgage Choice, for example, charges lenders an average lump sum of 0.685 per cent of the amount borrowed, plus an annual "trailing" commission of 0.3 per cent of the outstanding amount, for the life of the loan.

This type of two-tiered commission structure is typical for the industry. Less typical, however, is full and early disclosure by the broker to the borrower of the commissions payable.

Warren O'Rourke, the national manager of corporate affairs for Mortgage Choice, says its 360 brokers must disclose to borrowers the commission that is paid by the lender, and the percentage of that commission Mortgage Choice rebates to its franchisees.

He says the franchisee remuneration is calculated as a percentage of the amount borrowed, regardless of the actual commission that is paid by the lender to Mortgage Choice.

Where the picture is a little murkier is for payments - often tens of thousands of dollars - made by banks and other lenders for "sponsorships", seminars and the like.

O'Rourke says that for several years, various lenders have paid sponsorship money to Mortgage Choice for lender workshops, product development and other types of training.

In July, Mortgage Choice began approaching the 27 lenders on its panel to join a "structured program" of sponsorship. The lenders are divided into three categories, based on the size of Mortgage Choice's loan book with them, and invited to contribute a set amount.

"We want to offer structured, transparent access to Mortgage Choice for all lenders, so it doesn't appear that we are favouring one lender over another," O'Rourke says.

So far, more than 90 per cent of the lender panel have committed to the program. O'Rourke says this income from lenders is not disclosed to borrowers because it does not affect the amount of remuneration that the broker receives.

Disclosure of commissions, including "soft-dollar" commissions and other incentives including holidays and cash, has been a bugbear for consumer groups, which are concerned about the relatively unregulated mortgage broking industry.

A report prepared by the Consumer Credit Legal Centre (NSW) in March identified commission-based remuneration and inadequate disclosure of fees and commissions as two of several problems that needed to be addressed.

Catherine Wolthuizen, the finance policy officer for the Australian Consumers Association, says there is no doubt the emergence of mortgage brokers has fostered greater competition in the home loan market and that they are more convenient.

She is concerned, however, at the assumption that brokers are sourcing the best deals in the market, when they are recommending products from a limited number of lenders, and the commissions that are built in to the products can add to the expense for borrowers.

She also notes that mortgage brokers are not subject to the same disclosure requirements as other parts of the financial services industry, such as financial planners and stockbrokers, especially in relation to soft-dollar commissions.

"If brokers are so confident that these type of payments do not affect their advice, why not just disclose them?" she asks.

Phil Naylor, the chief executive of the Mortgage Industry Association of Australia, says that the association's code of practice requires members to disclose commissions, but this does not cover sponsorship money.

"The focus is really on what influences the person who is actually writing the loan."

The debate over what should and should not be disclosed may well be resolved by the end of next year, with new Australia-wide regulation of the mortgage broking industry.

Karen Cox, the co-ordinator of the Consumer Credit Legal Centre (NSW), says a national working party is looking at the issue. In addition, legislation will come into force in NSW early next year to increase the level of commission disclosure.

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