posted in: Investment Advice
The Royal Commission – who really wins?
– Originally published by Orium Finance, one of our mortgage broking partners. Reposted with permission.
It’s 4.21 pm on a sweltering Monday afternoon in Sydney. Sitting at your desk, in this instant, you find out that a royal commission has declared that you and 20,000 other mortgage brokers have been earning “money for nothing”.
Given the morning you’ve had, this doesn’t seem right.
You’d spent that morning negotiating with a bank that wasn’t happy about one of your clients — the bank’s customer — going on maternity leave. The mortgage was written two years ago, but you’re still working as the client’s mortgage broker because you have an ongoing relationship. Yes, that relationship is funded by an ongoing commission, but after going toe to toe with the bank on the client’s behalf for an hour, “money for nothing” stings.
You’re not totally surprised, though. Even some of your friends have said your whole job is about as complicated as using Webjet. Surely, they say, mortgage brokers just plug a few financial details into some website. Then, just like a family looking up flights to Bali on Webjet, up pops the answer on the screen: Westpac at 3.89%. Thank you; that’ll be $6,000 for the service, please.
No, mortgage broking is nothing like typing a few dates into a website.
Our economy is built on rewarding businesses for taking risks. For instance, a husband and wife spend $200,000 opening a café. They sell long blacks and lattes for $3.50, although the coffee costs them only a few cents. The extra amount charged doesn’t just cover their bills; it covers the huge risk they took in opening the business. They’re not on a salary, and they could lose everything.
Whether your mortgage broker works from a CBD office, their home or a car, they’ve taken on the expense and risk of running a shopfront for all the lenders who haven’t had to do so themselves (which, these days, includes many of the banks, depending on where you live.)
It’s only because mortgage brokers pay to provide a shopfront that non-bank lenders have been able to chip away at the stranglehold the big four banks have over Australia’s $1.7 trillion mortgage market.
These are the lenders without branches that you’d probably never access without a broker — Resimac, Macquarie Bank, ING or ME Bank…..the list goes on.
Right now, non-bank lenders have captured 20% of the market. It’s not a large share, but it’s significant enough to pressure the banks to keep rates down and provide flexible solutions to the end client.
If you want to run a marathon, you need to get in shape first. You might want to pay a personal trainer to help. With the banks clamping down to the level of asking about your Uber Eats and Netflix expenses, procuring a mortgage increasingly involves getting financially fit over the 12 months or so before you apply. We help our clients to accomplish that goal, but we don’t charge them for it.
That work is performed with no guarantee of ever being paid. The client may never get a loan or might go with another broker. The mortgage broker takes that risk, but we only hear from the royal commission about the money brokers are paid after a loan is approved, not the upfront work and risk they take on.
It’s work that involves skill and knowledge; it’s work that for many clients is essential if they’re ever going to obtain a mortgage. But clients won’t pay for it. They’ve said so — 96% of homebuyers have told the Mortgage & Finance Association of Australia (MFAA) that they won’t pay for a mortgage broker’s advice.
That leaves plenty of Australians who will be in trouble when they need financing to buy their home. Even if they’re willing to pay for advice, they might not be able to afford it, which brings me to my next point:
Some commentators have suggested that a mortgage is such a big deal that consumers should think about putting a day or so into shopping around for themselves. That would be fine if the only challenge was getting the lowest rate — and if you know how to negotiate with a bank.
But there are significant risks of making a mistake in your mortgage application. Your credit rating is on the line and not in the way you probably think.
It isn’t just missing a loan payment or forgetting to pay your Optus bill one month that leads to a bad credit rating. You can get a bad credit rating from finance you didn’t even receive. That’s right; a bank won’t just politely turn you down for a credit card or a mortgage and forget about you. They will take the trouble to add the rejection or even just an application to your credit report for all the other lenders to see.
Get a couple of rejections or even enquiries on your credit report, and the next lender might not even look at you. Could that happen to you?
The only people who find it (relatively) easy to get a mortgage are those who fit into a neat box. They’re pay as you go (PAYG) employees; they’re earning a strong income against the amount they want to borrow; they can demonstrate that they’re saving already; their expenses are minimal; they’ve got no kids or credit cards; and they’ve got a big deposit ready to go.
The rest need an expert in navigating the policies of all the different lenders. That doesn’t mean fudging your application — that’s fraud.
It means knowing what each lender’s red flags are. Some care more than others about maternity leave or whether you’re still on probation at work. Others won’t touch self-employed people until they’ve been in business for two or three years.
So, when you’ve got a self-employed husband with a wife who is on maternity leave, you’re looking at serious time researching and speaking to lenders. Because if you get this wrong, not only does your client not obtain this mortgage, it becomes harder for them to obtain any mortgage.
And who has better odds of success: the borrower — who might do this a couple of times in a lifetime — or a mortgage broker?
Hiding while ongoing fees come in doesn’t constitute good practice in any business. We speak to our clients every year because banks don’t offer their existing clients their best rates unless you get onto them, which we do.
Renegotiating the rates for our clients with their existing lender saves our clients hundreds of thousands of dollars and earns us no extra fees. It’s something we do because we see the ongoing commission on the original loan as payment for ongoing service.
We also help existing clients who want to borrow an extra $30,000 to put an extension on their house or to buy a car. Those applications can require more work than obtaining the original loan. The lender might want to see the builder’s plans. The client’s circumstances will invariably have changed — another child, a different job…
There’s no lucrative commission to be gained for a mortgage broker in fulfilling these requests. We do it because you’re our client and, yes, because we’re paid the commission on your main loan. We couldn’t do it without the ongoing payment. That’s not because we don’t care but because, like anyone, we need to be paid for what we do.
You have a treatable tumour. A surgeon recommends cutting it out. Your oncologist favours using radiation. Which one of them is acting in your best interests?
Mortgage broking isn’t life and death, but there’s still much more to acting in the client’s best interests than finding the lowest interest rate.
One lender might have a lower rate but a lender with a “slightly higher” rate might have better features for your needs. Alternatively, perhaps I know you want to have children and the lender with a “slightly higher” rate is going to give us less trouble when one of you takes parental leave. Perhaps I know the lender with the “better” rate is going to put you through the wringer or that their backend processing will drive you mad. The lender with the “slightly higher” rate, on the other hand, has an Australian call centre and processes everything quickly — features I know you value.
What if one lender processes applications quickly but has a slightly higher rate? That processing time could be the difference between acquiring your dream home and losing out to a bidder who had their financing in place before you.
Am I acting in your best interests only if I recommend the lender with the lower rate?
Which way is up from here for mortgage brokers and their clients?
Yes, mortgage brokers should be held to a best interests test — exactly like lawyers, doctors and financial planners. But the test for brokers will need to be just as nuanced as it is for other advisers because rate is only one variable.
Standardised commissions are one obvious way to remove any suspicion that a broker might be chasing bigger commissions rather than better results for the client. (Commissions are already pretty standard among lenders, so setting fixed commissions wouldn’t make much difference to the industry at all, but it would make clients feel more secure.)
Yes, mortgage brokers should be educated and professional. We favour an apprenticeship because broking is something best learned on the job under the supervision of an experienced broker.
Yes, no one should get “money for nothing”. Financial planners are obliged to confirm ongoing fee arrangements with their clients. Mortgage brokers can do the same.
And finally, a no:
No, banks should not get it all their own way. They need someone to hold them to account. Decimating the mortgage broking industry isn’t going to save anyone any money, including the banks. The banks will have to restock themselves with 9 to 5, branch-based mortgage sellers. If you’ve had any occasion to go into a branch recently, let alone deal with a bank call centre, you already know what that will do to service and choice.
If you’re looking for a broker with a long track record of acting in their clients’ best interests and of offering ongoing service and transparency, or if you’re just looking for a broker who will be able to tell you exactly what they’ll be doing for you at no expense to you because the lender pays, please give me a call.
Luke is an experienced mortgage broker who has previously worked for a major bank during his time at NAB – but saw the light and progressed into mortgage broking. He is passionate about assisting clients with their financing needs and would be more than happy to discuss your borrowing objectives on a no obligation basis.