Fee-free vs fee-charging brokers: which is better?

Neither model is automatically better. A fee-free broker is paid by the lender through a procuration fee, commonly around 0.35 percent of the loan though it varies. A fee-charging broker takes that same lender payment and adds a client fee, typically anywhere from a modest amount up to around 500 pounds for a straightforward case and more for complex ones. What matters is the access, the effort and the outcome you get, not which label the firm uses in its advertising.

Fee-free does not mean nobody is paid. When your mortgage completes, the lender pays the broker a procuration fee. The rate varies by lender and by whether the broker deals with the lender directly or through a network or club, but a commonly quoted figure is around 0.35 percent of the loan amount. On a 250,000 pound mortgage, that is roughly 875 pounds.

Two consequences follow. First, the broker is only paid if the case completes, so a fee-free broker carries all the risk of a case falling through. Second, the payment scales with loan size, which means large loans are more attractive to service for free than small ones.

That is why the fee-free model is common among brokers handling mainstream purchases and remortgages of decent size, and much rarer among specialist advisers dealing with adverse credit, complex self-employment or small loans on low-value property.

A fee-charging broker receives the same lender procuration fee and adds a client fee on top. Firms structure that fee differently. Some charge a flat amount on completion. Some charge a smaller commitment fee up front and the balance on offer. Some charge a percentage of the loan, which is more common in specialist, complex and larger-loan work.

The stated reason for the fee is usually time and risk. A case involving five years of tax calculations, a limited company director taking dividends irregularly, or a credit file with a recent default takes many more hours than a clean employed application, and it has a higher chance of never completing. The client fee compensates for that.

Some firms also refuse to work on a fee-free basis on principle, arguing that being paid by you rather than only by the lender removes any incentive to steer you.

It is worth being precise here, because the marketing on both sides overstates the risk.

Procuration fees do vary between lenders, so in theory a broker paid more by one lender has a nudge towards that lender. In practice the differences between mainstream lenders are usually small, and the FCA requires the recommendation to be suitable for you. Steering a client to a worse product for a marginally higher procuration fee is both a regulatory problem and a bad commercial strategy for a firm that lives on referrals.

The more realistic incentive issue in the fee-free model is not lender bias, it is case selection. A broker paid only on completion has a rational reason to prioritise straightforward cases that will complete quickly and to spend less time on a difficult one. If your case is unusual, being someone's low-priority free case is a genuine risk.

In the fee-charging model, the incentive issue is different. Once you have paid a fee up front, you are more likely to stay with that adviser even if progress is slow, simply because you do not want to write off what you have already spent.

• Fee-free risk: your case may be deprioritised if it is small or difficult.
• Fee-charging risk: sunk cost keeps you with an adviser who is not performing.
• Both models: ask what happens if the case does not complete.

There are situations where a client fee buys something real.

You are self-employed with one or two years of accounts, or your latest year is your best year and you need a lender that will use it. You are a contractor paid on a day rate. You have a default or a missed payment in the last three years. You are buying a flat above a shop, a former local authority block, or a property with cladding issues. You need a lender that will consider a complex income mix such as salary plus bonus plus rental income. You are buying through a limited company. You are on a tight exchange deadline and need someone who will chase the lender daily.

In these cases the work involved is not comparable to a clean employed remortgage, and a good specialist earns their fee by finding the one lender in the market whose criteria fit your circumstances.

If you are employed with two or more years in the same role, have a clean credit file, are buying a standard house or a modern flat with a normal lease, and have a deposit that is either savings or a documented gift, your case is one of the most common in the market. A competent fee-free broker will place it comfortably.

The same is often true of straightforward remortgages and product transfers where you are staying with the same lender or moving to a mainstream one with no change in circumstances.

Compare the whole cost over the fixed period, not the broker fee in isolation.

Take a 300,000 pound repayment mortgage over 25 years on a five year fix.

Broker A charges no client fee and recommends a product with a 999 pound arrangement fee. Broker B charges 495 pounds and recommends a product with no arrangement fee but a slightly different rate.

To compare, add three things for each option: the broker fee, the lender product fee, and the total interest over the fixed period. Your adviser can produce this from the ESIS illustration for each product, which sets out the payments and the total amount payable. A difference of 0.1 percentage points on 300,000 pounds is roughly 300 pounds a year in interest early in the term, which over five years dwarfs a 495 pound broker fee.

That is the whole point. The broker fee is usually the smallest number in the comparison. Choosing an adviser purely on their fee, when the product they secure moves thousands of pounds, is optimising the wrong variable.

• If my application is declined or the purchase falls through, do I get anything back?
• Is your fee payable on application, on offer or on completion?
• Does your fee change if the case turns out to be more complex than it first looked?
• Does the lender procuration fee you receive vary across the lenders you would consider for me?
• If I later want a product transfer with my existing lender rather than a new mortgage, do you charge for that?

Get the answers in writing. Firms must disclose their fees before you commit, and any reasonable adviser will put them in an email without being pushed.

Fee-free is not a discount and fee-charging is not a rip-off. They are two ways of funding the same regulated work. Match the model to your case. Straightforward and mainstream, fee-free is usually all you need. Complex, time-sensitive or borderline on criteria, paying for specialist attention is often the cheaper decision once you account for the product you end up with.

Whichever model suits you, the MortgageMatch directory shows FCA-authorised firms so you can compare fee structures before you make contact.