You may have heard about the Royal Commission in the media in the last few days but what does this all mean for you as a home loan borrower?
Well, one of the big recommendations that came out of it will fundamentally change the way that mortgage brokers are paid and could have massive ramifications for would-be homeowners.
The Royal Commission in a nutshell
Over the past few months, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (RC) has uncovered some pretty shocking examples of bank misconduct. That much is true.
Of the recommendations to improve our already robust lending system, the RC has suggested mortgage brokers adhere to the same ‘best interests duty’ as financial planners.
We wholeheartedly support this move, although we believe that the vast majority of brokers already act in the best interests of their clients.
However, the recommendations to change the payment model for mortgage brokers does not align with improving outcomes for you as a borrower. In fact, they could make things much worse.
To break it down:
- The government is proposing that you should pay an upfront fee to use a mortgage broker or when applying with a lender directly.
- There will be less competition and fewer choices for Australians seeking a home loan or when refinancing their current mortgage.
- This puts borrowers at a significant disadvantage and hands power to the major banks.
- The people most affected are those who need help the most including first home buyers, people with small deposits or those in difficult financial circumstances.
Do you want to keep choice and competition alive? Here is what you can do right now.
Please sign the petition at brokerbehindyou.com.au to stop these changes going ahead. If you would like to take further action, contact your local MP (information provided in the link above).
Do I have to pay to use a mortgage broker now?
If you’re looking to purchase a property, please know that our services are usually free and will remain that way for the foreseeable future.
We will also continue to provide the same high level of customer service you’ve come to expect from us – that will never change.
So how do brokers get paid?
Our brokers are paid an upfront commission and a trail or ongoing commission for the home loans we settle with a bank.
These commissions are paid by the lender only if your home loan settles. In other words, our services are free for borrowers and we are only paid when we get you approved.
The broker receives an upfront commission once your loan settles and you receive the funds for your mortgage.
Trail commission is what the broker receives every month as you keep your current home loan.
Usually, this trail is based on the remaining loan amount each year.
Learn more about how mortgage brokers are paid or please feel to call us on 1300 889 743 to speak with one of our senior mortgage brokers directly.
Trail commissions benefit you as a borrower
RC Commissioner Kenneth Hayne QC described trail commissions as “money for nothing”, evidence that there is significant misinformation about the ongoing service and specialised advice that we provide.
The added assumption that mortgage brokers encourage Australians to borrow to their limit in order to receive a larger commission is just untrue.
Trail creates an incentive for us to provide you with a home loan that will meet your needs over the long-term. Otherwise, we simply don’t get paid.
Trail commission also makes it feasible for us to continue providing ongoing service including:
- Monitoring your interest rate: To ensure you’re still getting a competitive interest rate, our brokers complete an annual mortgage review and either renegotiate your interest rate with your lender or refinance your home loan.
- Helping you to use your home loan features: Our brokers help you understand your repayment schedule and how to best use your home loan features including your offset account.
- Ordering a property valuation: We can organise a free property valuation in 12 months’ time so you can see how your home is performing and whether you’re in a position to access equity for investment.
- Guiding you through the construction loan process: For existing customers looking to build a property, we can help you manage the progress payments to ensure you avoid penalties and delays in the building process.
- Consolidating debt: This can reduce your overall liabilities and help you avoid financial stress.
These after settlement services simply aren’t provided by most lenders.
Many of them are happy for you to continue paying an uncompetitive interest rate over the life of your loan and certainly won’t provide guidance on how to access the wealth in your home.
Choice and competition will be removed from the market
We know that more than 60% of borrowers are choosing mortgage brokers over going to a lender directly but we are also aware that not many borrowers are willing to pay an upfront fee to apply for a home loan.
Like you, we don’t want to see this happen.
First home buyers will be the first to feel the sting
Applying an upfront fee will mainly affect borrowers who are first-time buyers and low-income earners who are already borrowing close to their maximum borrowing power.
Many good borrowers, although borrowing within their means, would not be able to afford an upfront fee of potentially $3,000-$5,000 (depending on the loan amount).
It has been argued that this can be added on top of the mortgage like Lenders Mortgage Insurance (LMI) but what if you only have a 5-10% deposit as most first home buyers do?
If you’re already borrowing at 95% of the property value, the bank may not allow you to do so because this would push your loan into high-risk territory.
So you will either need to come up with a larger deposit or hold off buying a property completely.
Borrowers will have no choice but to go with a major bank
Over time, we are likely to see more brokers forced to leave the industry because they can’t afford to operate under this payment structure.
This will, in turn, see smaller lenders suffer who compete with the major banks on interest rates and policies.
They rely on the broker network because they have very few physical branches around Australia or none at all.
Losing second-tier lenders will particularly hurt borrowers who live in regional areas because they will have no choice but to choose a major bank.
This domino effect will likely create a perfect storm for a major bank oligopoly.
Put simply, there will be nothing stopping banks from hiking your interest rate or tightening lending policies because there will be no competition in the market.
Let’s say your interest rate is 3.75% p.a. on a $400,000 home loan and your bank decides to increase your rate.
You want to refinance but you may be looking at $5,000 to apply with a new lender.
That means your current bank could increase your rate to 5.42% before it becomes feasible for you to switch your mortgage!
What can you do to keep home loans fair and affordable?
We are currently in the process of petitioning the Government to keep competition and choice high in the home loan space so you, as borrowers, can continue to benefit from:
- Low-interest rates.
- Flexible lending policies.
- Access to a wide range of lending options.
We will also continue to provide you with updates from the fallout of the Royal Commission and remain transparent with how we operate and how we are reimbursed for the services we provide.
If you want to join the fight and keep a level playing field, simply sign the petition at brokerbehindyou.com.au.