Borrowers may have to pay an upfront fee when their home loan is arranged, in a move applauded by consumer advocates but which mortgage brokers say would devastate their industry.
The new fee, one of the most contentious changes recommended by the final report of the Hayne royal commission, would kill off one of the key methods brokers are currently paid — an arrangement commissioner Kenneth Hayne rubbished as “money for nothing”.
Currently, most brokers are paid an upfront commission by the bank that finances the loan. The banks then also pay an ongoing fee, called a trail commission, over the life of the loan.
Under the commissioner’s recommendations, both commissions would both be gone within three years.
Instead, a customer would pay an upfront fee for the arrangement of the loan — whether through a broker or directly with a bank — which will likely be loaded into the total sum of the mortgage. There would be no ongoing fees.
Brokers ‘thrown under the bus’ by royal commission
Sydney mortgage broker Terri Unwin cannot understand why the royal commission has targeted her industry for change, when so much of the evidence at the inquiry was about bad behaviour from Australia’s big four banks: the Commonwealth Bank, Westpac, ANZ and NAB.
“We were completely blindsided by the fact that, yes we write 59 per cent of the business, but we represent less than 1 per cent of the complaints about banking and finance,” she said.
“To be thrown under the bus, it came completely out of the blue.”
Each year more than half a million Australians use a mortgage broker to guide them through the process of arranging a home loan.
The big four banks rely on the services of brokers to different extents. Some, such as the Commonwealth Bank through its ownership of Aussie Home Loans, are in the market of providing loans and helping customers find loans with their rivals — although CBA is in the process of divesting Aussie.
“The banks have been rewarded for their bad behaviour,” Ms Unwin added.
“If they don’t have to pay mortgage brokers anymore, that’s close to a billion dollars in savings to the banks over the next five years.”
Some analysts estimate it may be much larger than that, with fund manager and AFR columnist Christopher Joye putting the savings at closer to $2.6 billion per annum.
Commissioner Hayne was scathing of current arrangements for paying brokers.
“The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending,” he argued.
“Changes in brokers’ remuneration should be made over a period of two or three years, by first prohibiting lenders from paying trail commission to mortgage brokers in respect of new loans, then prohibiting lenders from paying other commissions to mortgage brokers.”
Trail commissions were singled out for special condemnation.
“The chief value of trail commissions to the recipient, to put it bluntly, is that they are money for nothing. Why should a broker, whose work is complete when the loan is arranged, continue to benefit from the loan for years to come?”
Under the new plan, borrowers would pay a fee of around $2,000 when they secure a mortgage, no matter if it is through a broker or directly with a bank.
Brokers fight back with ad campaign
The industry is not accepting the changes. The peak industry body for more than 13,000 finance brokers, the Mortgage & Finance Association of Australia (MFAA), has launched a campaign aimed at convincing the Federal Government to delay or diminish the changes.
A video advertisement shows a family walking down an increasingly dark corridor, with doors closing ahead of them, forced into the arms of a demonic-looking banker.
In a statement, MFAA chief executive Mike Felton said a ban on commissions would crush the broking industry, drive up the cost of borrowing and represented a “massive win” for Australia’s dominant big four banks.
“The royal commission was set up to protect them from big bank power but has simply entrenched it further,” he wrote.
“How mortgage brokers can be front and centre of the recommendations is inexplicable to me.”
Home owner Melina Stanford has used a mortgage broker to put a roof over her family’s head in the Illawarra region multiple times, and points to the convenience of the service provided.
With small children and a husband who frequently works away from home, Mrs Stanford uses a broker to navigate the complicated system of home loan approvals.
“I personally don’t really have the time,” she said.
“I wouldn’t have got to where I am today without having (my broker). You build that relationship with a mortgage broker and they’re there through the whole process.”
But she believes the proposed changes — and a substantial up-front fee — would likely change the minds of people weighing up whether to use a broker.
“The banks are starting to tighten up with everything,” she said.
“I would still probably use a mortgage broker, given the personal service I’ve received in the past, but I think it’ll have a huge impact on the population as to whether they use banks or mortgage brokers.”
Brokers aren’t a ‘force for competition’
However, consumer group Choice’s director of campaigns Erin Turner argues the proposed changes will benefit consumers.
“We know that mortgage brokers will claim to be a force for competition, but that doesn’t play out — and this isn’t just the royal commission’s finding, that’s (regulator) ASIC and the Productivity Commission’s,” she said.
“We know that mortgage brokers typically send 80 per cent of loans to just four lenders and if a mortgage broker has a business relationship — if they’re owned by a big institution — they’re more likely to send loans back to that parent company.”
“This isn’t the force for competition that we need, it’s why we need to shake it up.”
The Commission also recommends the imposition of a “best interests” obligation — that brokers will need to always consider what is best for customers.
On that front, Ms Turner said that for good brokers nothing will change.
“But for brokers who are claiming to do the right thing, while actually recommending a loan that isn’t the best deal or recommending that someone borrow more than they can afford, this is the reform that we need.”
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