Splitting a loan with the help of a broker allows one to get the best of both worlds
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Anyone who still has doubts or misconceptions about the mortgage broking industry after the government decided to retain the current broker remuneration for at least three years, let Connective’s response to the commission’s final report clear it out for you.
In their response, the mortgage aggregator explains why they believe many recommendations the commission made in relation to the mortgage broking industry is “fundamentally flawed”, busting myths to get the facts straight.
Myth 1: Trail commissions are a fee for no service
Reality: The remuneration model is a deferred payment to the broker and a sharing of the loan’s risk and revenues. Historically, the upfront commission mortgage brokers receive from lenders were much higher than they are today, with no subsequent trail payments. To reduce their upfront costs, lenders adopted a lower upfront commission model with ongoing trail during the entire loan’s life
Trail commissions provide recognition and incentive for brokers so they can offer additional support and services to customers. This ensures customers of receiving the most appropriate product for their specific need. Removing trail will only further diminish competition in the home lending industry and increase the banks’ profit.
“If I have a million-dollar loan and a broker takes my interest rate down from 5% to 4%, he or she saves me $10,000 a year on an interest only loan, and if the broker gets $1,500 or 0.15% trail, I don’t care,” Peter Switzer articulated in the Switzer Report released last 5. February.
Myth 2: Mortgage brokers act on behalf of lenders, not borrowers
Reality: Majority of mortgage brokers are small businesses who generally rely on references and word-of-mouth to survive. Quality of service and integrity are critical to brokers.
Since upfront and trail commission rates are largely similar across the home loan industry, brokers won’t benefit from acting on behalf of a lender instead of their customers. Volume-based payments, soft dollar benefits and other lender-provided incentives which can potentially influence brokers were prohibited in 31 December 2017.
More choice for consumers means greater pressure on interest rates. This results in positive outcome for all consumers, regardless whether they use a broker or go directly to a lender. According to Connective, 96% of Australians were satisfied with their brokers compared to only 67% who deal directly with lenders.
Myth 3: Mortgage brokers are excessively remunerated for relatively simple work
Reality: Most people don’t see the time brokers dedicate in helping customers file a successful application on time, or in educating customers to make good decisions.
Apart from dealing rates, flexibility and convenience, brokers solve and manage the ever-increasing complexity of Australia’s home lending market. Their ongoing service is helping customers move through the complexity.
Brokers also assist customers with post-settlement matters, much of which don’t draw in additional revenue for the broker and, in certain circumstances, even result in a revenue deduction.
Myth 4: Shrinking – or killing – the mortgage broking industry won’t kill competition in the home lending market
Reality: Choice, convenience and healthy competition top the benefits brokers provide borrowers based on commentaries that came out since the Royal Commission released its final recommendation. There were also predictions that the recommendation, if implemented, could significantly shrink and even diminish the mortgage broking industry; thus, adversely affecting competition.
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