Is Your Mortgage Broker Worth 1%?
A good commercial mortgage broker brings more to the table than financial metrics can state — things like certainty, advocacy, expertise, negotiation, access through relationships, absorbing workload… but we’re not looking at that here. Here we’re going to look a the hard math of when your commercial mortgage broker’s fee is worth it’s weight financially, assuming you have another loan offer already. Let’s dive in.
We’re using IRR to determine whether it’s worth hiring a commercial loan broker is worth an upfront, 1% fee at loan closing. IRR takes into account your full return on a real estate investment over the holding period (typically the life of the loan). A higher IRR would indicate the savings over the life of the loan more than justify an upfront, 1% fee. Let’s dive in.
For these examples, we’re using a 10-year fixed rate loan scenario. The effect on IRR would be different for shorter-term loans. If these analyses are helpful we may revisit the topic later.
Saving a quarter point on rate
Let’s say you know a lender that offers a 4.5%, 10-year fixed commercial mortgage. A broker is able to source a lower rate for you at the same leverage point, but only by a quarter point, while charging a full point for their services:
In this case, it comes out almost dead even between going with your own lender, or using a broker to save a quarter point on Rate. You’ll certainly make extra cash flow over the life of the loan, but the 1% that you paid upfront to the loan broker had the same level of impact on your Leveraged IRR. That does mean that, all else equal, if a broker can save you more than a quarter point in this scenario, the fee is worth it financially.
Upping the leverage by 5%
Same deal, and this time the broker gets you the same rate, but higher leverage:
Upping the leverage point cut into your Monthly Cash Flow here, and reduced your net Sale Proceeds as well. However, your financial return is actually higher, because it took a lot less of your own cash to produce these returns. A 5% boost in LTV is well worth a 1% fee to the loan broker.
Extending the amortization by 5 years
Last tweak for this scenario is comparing a 20 year amortization vs a 25 year amortization. We recently took a deeper dive on amortization, showing that it was one of the most important numbers to look for on your term sheet. But is an extended amortization worth a 1% broker fee?
Worth it by a bit. You’d be paying down less loan balance, but more than making up for it by pocketing cash flow. It’s even more worth it if the broker can get you a 25 or 30 year amortization, when you can only get 20 years on your own.
Sorting it all out
A quality intermediary isn’t going to strictly find you a lower rate, or just a longer amortization, or only higher leverage. They will help ensure you find the best loan available on the market for the given investment. An intermediary typically as access to more sources of capital, and more leverage in those relationships, than a small to mid-market borrower.
Get the most out of your loan broker
Any loan broker that’s been in business for a while can source decent loan quotes. What else should you expect from your financial intermediary? We think you should demand honesty, transparency, and efficiency. Does your broker share information with you freely, or are you on a “need to know” basis? Does your broker know how to get the most out of modern technology to minimize your time to close?
At StackSource, we’re committed to these principles. Your capital advisor will help you make data-driven decisions about how to finance your commercial property investment — and sometimes, that means no fee.
Our expert Capital Advisors help you secure your ideal capital stack, resulting in a lower cost of capital for your investments in less time and with more transparency than a traditional commercial mortgage brokerage. Learn more at StackSource.com.