Concerns Aussie Households Will Be Shortchanged By Mortgage Broker Changes
Mortgage brokers claim customers will pay more for their home loans if the government enacts a controversial change -- as they will be forced to pay a fee for the service that the big financial institutions used to bankroll.
One of Kenneth Hayne's key recommendations was that brokers should be bound by the same laws as financial advisers, and "conflicted remuneration" (payments from banks to brokers) banned outright.
The Coalition and Labor are now at odds at how best to respond to these banking royal commission recommendations -- should they win office.
Hayne's report found commissions paid to brokers from banks sometimes contributed to misconduct and promoted risky borrowing.
It found some brokers were encouraging people to borrow more money, so the broker would receive extra commission from banks.
Brokers act as mediator between borrowers and banks. Image: Getty Images.
The commission concluded so-called “trailing” annual payments from lenders should be outlawed as soon as possible and upfront commissions (from banks to brokers) outlawed after two or three years.
Ridding the industry of commissions would dramatically change the business model of the mortgage broker sector.
What's The Current Deal With Brokers?
The role of a mortgage broker is to make the process easier and more speedy, by acting as a mediator between the bank and the people wanting to borrow money.
Brokers provide information on borrowing, and guidance on decision making.
"We are critical to the health of Australia’s mortgage lending market. Mortgage brokers now originate 59.1 percent of all mortgages in Australia and this number is growing," Principle Broker from Zippy Financial Group Louisa Sanghera told 10 daily.
Currently, the broker then gets a commission from the respective bank for every loan they secure.
According to Mark Humphery-Jenner, Associate Professor of Finance at UNSW, a commission for a broker on a $500,000 loan is typically around $3000. Commissions can also be paid in part as a 'trailing' commission, which is paid to brokers every year a loan is active.
Brokers can also receive 'soft commissions' like trips to conferences and gift vouchers. Image: Getty Images.
The Banking Royal Commission Recommended THESE Changes For Brokers
The commission's final report recommended brokers act in the best interests of people wanting to borrow money for a loan. In return, the borrower -- not the bank -- would pay the broker's fee.
The purpose of borrowers paying brokers is to eliminate conflicts of interest, like a broker organising a larger loan for their client than needed (in order to get more commission).
Brokers say the suggested changes would lead to borrowers baulking at the fees, and would go to banks instead. This would increase banks’ costs, which could be passed on through additional borrowing fees.
Brokers say this could also put then out of business and also lead to less competition for borrowers.
"I feel will result in customers deserting mortgage brokers and forcing thousands of brokers to leave the industry," Sanghera told 10 daily.
"We act as a shopfront for smaller and regional lenders, therefore eliminating the mortgage broker channel would reduce competition in the home lending market restricting access to credit for regional and rural borrowers, as well as those with complex financial situations."
"They are feeling frustrated because … the customers they work so hard to serve won’t be better off," Scott Kay, director of integrity at Plus Accounting, told 10 daily.
"They [customers] will likely go back to the bigger banks and there will be potentially less competition so consumers will be in a worse position."
The new recommendations have caused uncertainty in the industry. Image: Getty Images.
Choice chief executive officer Susan Mitchell told 10 daily that consultation with the mortgage industry is vital -- and called on treasurer Josh Frydenberg to include the industry in the conversation.
“It is understandable that the Australian public want to see significant change in banking practices following the evidence given at the Banking Royal Commission hearings," Mitchell said in a statement obtained by 10 daily.
"But the mortgage broker channel, which is both successful and popular with borrowers, is bearing the brunt."
ELECTION PROMISES FROM THE COALITION AND LABOR
If elected a Coalition government pledges to implement all of the commission's 77 recommendations.
Labor had initially said the same thing, until it was lobbied by mortgage brokers.
On Friday, Labor said it would ban 'trailing' commissions from lenders to brokers from July 2020. It would also implement flat, upfront commission for brokers -- around 1.1 percent of the loan. But banks, not customers would continue to pay the commission.
This means it would take on 76 of the 77 recommendations.
In a press statement released on Friday afternoon, Frydenberg said "Labor simply can't be trusted" given its back flip on broker commission.
"All of this comes after Labor said before they had even seen the Final Report 'if the royal commission recommends it, it shall be done'."
"We have been consulting with mortgage brokers and small banks and credit unions, as well as the financial services industry about how to achieve the objective the commission set out. We have a different way of achieving that objective," shadow treasurer Chris Bowen said on Friday.
"We want remuneration taken out of mortgage broking, but we accept commissions will play a role to take the financial pressure off customers."
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