Wellington mortgage broker Andrew Perry spells out how consumers would be hurt if Aussie banks weren't allowed to pay brokers commission 

Wellington mortgage broker Andrew Perry spells out how consumers would be hurt if Aussie banks weren't allowed to pay brokers commission 

By Andrew Perry*

Aussie bank shareholders had a huge day on Tuesday, the day after the final report from the Hayne Royal Commission into the finance industry was released. By the time the bell rang to stop trading their shares were worth over A$19 billion more than they were at breakfast time.

Not bad for a day’s work. Mortgage Choice, on the other hand, the biggest publicly listed mortgage brokerage in Australia, lost over 25% of its market value.

The main function of mortgage brokers in the market is to drive increased competition and advice to consumers. Bank policies are all very different, with varying deposit requirements (particularly for first home buyers) and affordability calculators. The impact of increased competition isn’t something that is obvious, though a report from KPMG last week indicated mortgage brokers have sliced the net interest margins of the big banks by up to 20% over the past decade.

An Australian Productivity Commission report calculated the value of the broker channel for challenger banks entering the Australian market. It concluded:

“For smaller lenders and those without widespread branch networks, brokers enable diversification and growth in their loan portfolio. For example, non-bank lenders and foreign banks operating in Australia rely on brokers for over 90% of their loan book. We calculated that, on average, each smaller lender would have needed to open 118 new branches to generate the equivalent market share achieved through use of brokers.”

Mortgage brokers over the Tasman receive both an upfront commission on loan settlement and an ongoing trail commission payment each month based on the loan amount. It’s a bit different over here with trail commissions only recently being reintroduced by some lenders and some of the biggest banks operating an upfront only model.

There had been talk in the months leading up to the Hayne report’s release that trail commissions would go, this was recommended by the Productivity Commission back in June. But it was still a shock to the industry (and the market) when the announcement came on Monday that the Australian Government had agreed to a deadline of July 2020 for banks to stop any new trail on mortgages.

In my view I wouldn’t mind giving up a bit of upfront commission in order to have more security over my future income and ensure I have a sustainable business. Having to write a couple of loans a month just to cover business expenses isn’t the easiest gig, and it makes it tough to stay connected to your existing customer base with refixes and making sure that the loan is still working for them if you need to be focused on sales in order to survive.

Reading the recent conduct and culture reports from the Financial Markets Authority and Reserve Bank of New Zealand into banking and life insurance, which emphasised ensuring customer outcomes were front of mind rather than new sales, it’s easy to see which model is more compatible with their proposals.

Worse was to come though from the Hayne report in the form of an existential threat to the industry with the recommendation that banks be banned from paying commissions to mortgage brokers at all. This would be replaced by a fee for service model where the customer would pay the broker directly in the same way they would a lawyer.

First home buyers can’t afford to pay a fee for service on top of a deposit, so they wouldn’t have access to independent advice under this scenario. The vast majority of borrowers would struggle to see value in paying a $2000 fee. It would decimate the industry and ensure that mortgage advice disappeared for all but the wealthy (property flippers) and desperate (who don’t qualify for bank loans).

Hayne’s suggestion that competition could be preserved by forcing banks to charge all borrowers’ loan origination fees, as is the case in the Netherlands, is hard to fathom as a solution. Capitalising an additional fee that doesn’t currently exist onto a loan isn’t going to make consumers better off.

Some commentators like Simplicity founder, Sam Stubbs, have suggested that the death of independent advice would be a good thing, that first home buyers in their late-20s spending over half a million dollars on a home would much rather deal with a robot than a person. The reality is an experienced lender, whether at a bank or through a mortgage broker, provides valuable knowledge and support for a transaction that will be the single biggest purchase anyone makes in their lives.


*Andrew Perry is a Wellington-based mortgage broker and Registered Financial Adviser at Your Home Loan.

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33 Comments

" Sam Stubbs, (has) suggested that the death of independent advice would be a good thing, that first home buyers in their late-20s spending over half a million dollars on a home would much rather deal with a robot than a person. "
I reckon Sam is right!
When was the last time we all wrote out a cheque? Or toddled into the bank to withdraw cash? etc etc. Sure a minority still do, but most of us do 'everything' On-Line, and so getting a mortgage will be.
Go online to 1,2, 20 lenders mortgage page and put in the same stats. and see who come back with the best offer. There's you 'independent' advice in one hit.

Bank Trivago?

Indeed we do almost everything online now. What you're missing is the fact that nearly every single new borrower is not up to speed on a variety of things they now face. They don't know how to structure their deal, go through the purchasing process, even how to negotiate. Then getting the best rates by going around 5 lenders will only lower your credit rating for every unnecessary credit check performed by each lender. Independent advice is everything for most borrowers.

Why is going around to 5 lenders going to lower your credit rating? How can it! Only a financially backed transaction can lower a credit rating - default of some kind.
If you're suggesting that an enquiry(s) triggers a credit event of some kind, I'd like to hear about it.
As the poster above alludes to - this isn't Trivago, where you have to "get in now before your credit rating falls!"

Credit checks have changed in the past few years. Previously you were assessed on the lack of defaults, collections or bankruptcies. They still looked closely at how many credit applications had been made previously, and if you had numerous within the last year or so then that affected their decision on an ad hoc basis.

Now you have a points system. Every default etc lowers your points significantly. But now, every separate credit check performed also lowers your points as well. So yes, to answer your question you don't shop your deal around anymore, as your credit rating is being affected. A good broker should only go to 2 lender's max to protect their clients future borrowing potential.

All of the above along with the other points I've made in response to other posts simply confirms to me no one realises the knowledge held by brokers, the things clients don't know and won't need to as they are dealt with by brokers. Believe me in the current environment, there are more fish hooks to come.

"every separate credit check performed also lowers your points as well. So...you don't shop your deal around anymore"

Half the commentators on here would be eagerly sort out as a customer should their financial credential be put in front of 1 or 5 of them. If by doing so, their credit rating is going to suffer as a result all Hell will break loose. I'll be checking with Baycorp using this article as reference.

Just realised that Jim Boult doesn't work at Baycorp any longer! Time flies... but I'd be surprised if they and any other local credit agency act differently to those in The States:

"Looking for a mortgage, auto or student loan may cause multiple lenders to request your credit report, even though you are only looking for one loan. To compensate for this, FICO Scores ignore mortgage, auto, and student loan inquiries made in the 30 days prior to scoring. So, if you find a loan within 30 days, the inquiries won't affect your scores while you're rate shopping."

The evidence is that brokers spur competition so your point is moot, consumers do not, on average, undertake the type of due diligence in rate shopping that you imply.

Yeah nah. We are very different to the US. Look forward to you confirming what I’ve just told you!

By the way, Baycorp is only a collection agency. Veda do the credit checks now...

Mr Perry has a smoke and mirror argument here which misses the fundamental point.
Ultimately, it is - and has been- the customer and not the bank that is paying his commission and trail fee.

The evidence is that brokers caused margin compression not expansion so you would need something better than that to back up your claim.

On the other side, I am happy to pay mortgage brokers $500-$1000 for their service if they can provide the service independently of the bank's commission.
Having used brokers a few times, they are pretty much concentrate on who can give them the most commission instead of who can provide me with a best deal.

Quite simply you're dealing with the wrong broker then.

@Mao Thats obviously incorrect or else all brokers would be sending clients to the same bank...

I look forward to the whole system being turned around, someone setup a website where you can enter your loan requirements and prospective lenders can tender for provision of the loan. Imagine not having to traipse around filling in forms for each lender or being led by the nose into the brokers cash cow killing machine. Maybe it already exists?

Indeed those sites do already exist. I worked for one when I was employed as a broker in Sydney which ANZ recently bought a stake in (the other big 4 banks already have stakes in other digital broking models). If models like that are just going to be bought by the big banks though, how does that increase competition? And if these proposals make it illegal for banks to pay commissions to these sites, how can they remain viable?

So who makes the money then and is incentivised to provide such a service? What you've just described is exactly what a decent broker does! And what the heck is the broker cash cow killing machine? Have you been screwed over by one perchance and are a little bitter?

JMGR , the games over. I'll send you a bag of nuts to share with Bolton.

Ha! Love it, have you seen the petition in Aussie? 47,000 and counting - They ain't going quietly!

https://www.change.org/p/federal-treasurer-josh-frydenberg-save-the-mort...

Nope, only dealt with one, had left a job at westpac to be a broker selling westpac product but no bad experience. Just saying though those mercs and beamers don't drive themselves to their leased parking down town, like a tradie that turns up in a shiny 70k suv to overprice your job, transparent much?

Love it, left westpac to end up selling their product. That’s the problem right there, wrong broker. I find the newbie brokers from banks are biased to their old employers for a while simply because of old loyalties and because they know those systems so well.

As for shiny cars, I wouldn’t deal with any self employed person who didn’t obviously show they were successful. Tends to define that they know their stuff. And you’re not paying their commission so why would you care?

The banks paying the broker's fee is a blatant conflict of interest that doesn't make sense. I don't see the value of a mortgage broker. If I'm too lazy to take time to shop around with banks for one of my biggest financial decisions, then too bad for me if I don't get a good deal.

Brokers are simply a third channel of new business for lenders. One where they don't have to pay for their own infrastructure to obtain that business. Staff, office space, vehicles, phones, laptops, all are costs not incurred when mortgages are sourced via brokers. Long as the commission is pretty much the same then no conflict. If you're an experienced borrower having gone through the process multiple times and have the spare time to waste, then go for it on your own. But if it costs you absolutely zero to use a broker who handles all the daily crap that comes with every deal then you'd be stupid not to use a reputable broker.

JMGR

The essential question is who does the mortgage broker work for - who is the mortgage broker an agent for?

1) the lender?
2) the borrower?

To whom does the mortgage broker owe a fiduciary interest (if any?)

What is the disciplinary process for a mortgage broker if there is a complaint against the mortgage broker?

@Yvil brokers are stated in the report to be almost of a new banks start up clients and to have reduced bank margins by 20 basis points.

Yes, such predictable response from brokers. It is the borrower who ends up paying either way but is the broker genuinely always acting in the borrowers best interests if they're getting paid a bigger commission from one bank compared to another? If mortgage brokers are genuinely provide value for the borrower then the borrower should be prepared to pay the commission.

See my reply to Yvil above. Commissions paid are very even, especially amongst the big 4. Even the lower upfront plus trail model even out with only upfront payments, but that takes about 3 years to reach parity. So no broker worth their while would bother to stop and work out which one pays them more personally. And why would you pay for a service you already get for free?

provided all fees are disclosed up front and they are transparent (including any trail commissions) then imho Brokers should stay. I'm more concerned about the vertical alignment within each bank. This is the area that Hayne has been found wanting.

Doesn't it all come down to the customer?

A customer (in this case a borrower) has to believe that they are getting value for the fee paid for the service that they are getting.

This comment says it all - "The vast majority of borrowers would struggle to see value in paying a $2000 fee".

Surely then, it is up to mortgage brokers to show the value to borrowers that they are getting and it is worthwhile for them to pay for this service.

Perhaps borrowers might be willing to pay $50-$200 for this service. That revenue model (being paid directly by borrowers without any commissions from banks) might be uneconomical for many mortgage brokers.

Changes in revenue models can alter the viability of existing businesses. A significant loss in revenues and profitability will be a threat to the mortgage broker's existing business model and future livelihood and they will obviously fight hard to prevent this and for their own economic survival.

If there is a move to user pays (i.e the borrower pays the mortgage broker), then there will be increased competition - the competition will be fierce between mortgage brokers.

Brokers save banks money so banks pay for that service, why would a borrower pay a broker to then save the bank money?

The essential question is who does the mortgage broker work for - who is the mortgage broker an agent for?

1) the lender?
2) the borrower?

To whom does the mortgage broker owe a fiduciary interest (if any?)

Good question. It’s Simple. To the borrower only. Brokers consider themselves to be clients of the banks, the banks must impress brokers with the deals they offer to borrowers or they miss out.

Don’t see a fiduciary responsibility as it’s purely a middle man relationship, all documentation etc is only between borrowers and lenders.