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Consumers worse off on home loans strategy, warn mortgage brokers

by Alexandra Cain | 04 Mar 2019
Mortgage brokers and consumers will both lose if Royal Commission recommendations that borrowers pay upfront fees on home loans go ahead, according to industry experts.  500 Consumers worse off on home loans strategy, warn mortgage brokers - FINSIA

Home owners could be facing an extra $6,000 on a loan of $500,000, according to one concerned analyst.

Mortgage Choice CEO Susan Mitchel said: “The introduction of a flat fee, which could cost thousands of dollars, will come at a huge cost to competition, reduce access to credit, be destructive to the broker channel and will simply entrench bank power.

“Adding more costs in the form of an upfront fee paid regardless of whether the customer goes to a broker, or directly to a lender, cannot possibly be a good outcome for borrowers,” she says. 

Mitchell says if the proposed changes to broker remuneration become legislation, the major banks will benefit by regaining home loan market share. The Mortgage and Finance Association’s most recent data shows 59.1 per cent of home loans originate through mortgage brokers.

“Smaller banks and credit unions, who rely on mortgage brokers as a distribution channel, would be at risk if the mortgage industry is decimated. This would have damaging implications for competition in the home lending landscape,” she says. 

The Productivity Commission Inquiry Report from June 2018 found distributing loans through brokers has, on average, increased smaller lenders’ market share by 1.55 per cent.

Boris Biskupic, a financial adviser with e-financial, has dire predictions if the royal commission’s recommendations about mortgage brokers are implemented.  

“If trail and upfront fees are banned, the entire mortgage brokering industry could be wiped out.” He says new brokers will go out of business immediately. “Brokers with loan books of $50 million or more have a chance of survival.” 

The consequences for consumers are also dire, says Biskupic. “It would be a step back in time to the days of fewer lenders, higher profit margins for lenders, which mean higher rates to consumers. Navigating lender policies will hurt time-poor consumers who wish to find an appropriate lender.”

Finance strategist Rebecca Mitchell from Awesome Lending Solutions has a dire prediction for the industry should the proposed changes go ahead. “Based on the average life of a loan being four to five years, this will see a decrease in profit of about 50 per cent.” She says up to 30 per cent of the brokers currently employed in the industry could leave it.

It’s bad news for consumers as well, by Rebecca Mitchell’s calculation. “If it truly becomes a fee-for-service, consumers will end up having to find an additional $6,000, based on a loan of $500,000, to get a broker to provide them with a full lending proposal. This typically incorporates two to three lenders, with the broker assisting in the selection of the most suitable product, as well as lodging the application and liaising with the lender.” 
 
Smartline broker Simon Bowler says while it’s business as usual for him so far, he’s currently working through different scenarios if pay structures change.

He agrees consumers will be the losers from reforms to mortgage broking. “In the real world, some people do not know how to get a home loan, [for instance] if they have a bad credit history. These people could lose out getting a home loan as they won’t have access to a mortgage broker who can show them options.”

Bowler believes fee-for-service will never work in this market. “Australians will never pay a fee if they don’t have to. The royal commission report suggests adding the fee to the loan. If the loan is increased by the broker fee, the consumer will pay interest on it over the loan term, which would be thousand of dollars. So the banks win as they get more interest. I thought the royal commission was to protect consumers not disadvantage them.”

He also notes mortgage brokers have to have diploma in finance as a minimum qualification, and bank staff require no accreditation to offer advice to mortgage customers.

Should these changes go ahead, Rebecca Mitchell believes there could be a period of consolidation in the sector. “I can see there may be some consolidation between financial planners and mortgage brokers, since the latter currently work within a fee-for-service model. The monthly service agreement used by many financial planners that we work with might allow consumers to defer the initial costs, much like a mobile phone contract where you can defer the initial cost of the phone.”
 
While there have been some signs of a softening in the Labor party’s ranks towards mortgage brokers, and the Coalition has yet to be clear in its intentions towards this recommendation, there’s a long way to go before the sector gets any comfort about its future.




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