$2.4 billion question: are mortgage brokers overpaid?
Upfront fees, trailing commissions and other perks add to mortgage costs
Are mortgage brokers overpaid? It's a valid question and one that was asked by the investment bank UBS in its report into the mortgage broking industry in May 2017. On a $500,000 loan a broker would on average receive an upfront commission of $2700 from the lender (this doesn't include the aggregator's cut).
Typically a broker would also receive a trailing commission of 0.14% from the lender over the life of the loan. This would be $700 in the first year and decline each year as the loan is paid down.
Too much? Maybe but I could also ask the same question about real estate agents. Commissions on a $500,000 property can be $10,000 to $15,000. Not bad given properties in a hot market can sell in less than 31 days.
I personally don't care what mortgage brokers get paid. After all, it's not coming out of my pocket. This may sound naive and probably is, as somewhere down the line somebody is paying.
According to UBS, commissions paid to brokers exceeded $2.4 billion in 2015, adding 0.16%pa to the cost of every mortgage.
Would consumers see savings on their home loans if commissions were cut? I highly doubt it. Would I pay a broker $2700 to secure me the best home loan? Probably not, as it now sounds a little too steep.
But here's the real problem: it's not how much they get paid but how. Both the ASIC and Sedgwick reviews into mortgage brokers found some serious conflicts of interest and are now calling for broad changes.
As well as upfront and trailing commissions (which ASIC says could encourage brokers to place consumers in larger loans), aggregators (they act between brokers and lenders by providing technology and administrative support) can also receive bonus commissions from lenders which can be passed onto brokers.
It's hard to believe that volume-based commissions and campaign-based commissions still exist today, along with soft-dollar benefits. As Choice's financial policy adviser, Erin Turner, says: "Some things are so clear that they have to go and soft-dollar commissions are one of them."
ASIC also found broker-originated mortgages were larger, had lower property values and higher loan-to-valuation (LVR) ratios, were more likely to be interest only and, despite broker claims that they negotiated better rates, were the same rates as consumers would get if they went direct.
Mortgage Choice CEO John Flavell says there are some very good reasons why broker-originated loans differ from direct lender loans. "This trend can be attributed to the types of customers that the broker channel attracts," he says.
Flavell, whose brokers are paid the same rate of commission regardless of which product a customer chooses, says people using brokers tend to be first home buyers (who often don't have a big deposit and require a loan with a higher LVR) and investors (who require an interest-only loan).
"Australians are savvy. They understand that a mortgage broker is in the perfect position to find them the right home loan for their needs, especially if their financial situation is slightly unusual," he says.
There's no denying the value that brokers add in this market but as ASIC reported: "Remuneration and ownership structures can, however, inhibit the consumer and competition benefits that can be achieved by brokers."
Rice Warner believes consumers' interests would be best served by reclassifying mortgages as financial products in terms of the Corporations Act. This, it says, would address the issues relating to remuneration.
It also suggests outlawing commissions and instead allowing brokers to charge an establishment fee. Trailing commissions "make no sense."
I tend to agree on the trailing commissions - what other industry gets paid each year on the assumption that you will use their services again? As for brokers charging an upfront fee, I'm in two minds.
The UBS report may have compared broker advice to "simple" financial advice, which costs between $200 and $700, but when you're going for a home loan (unlike seeking financial advice) you're already paying out a heap of money, so I'd hate an upfront free to prevent homeowners from seeking third-party help. If it was to be the answer, then consumers should not be faced with a lender establishment fee in addition to a broker establishment fee.
Here's to some sound solutions for all homeowners.
ASIC's six proposals to improve consumer outcomes and competition:
1. Change the standard commissions model (upfront and ongoing trailing commissions). 2. Get rid of bonus commissions and bonus payments. 3. Get rid of soft-dollar benefits. 4. Clearer disclosures of ownershipstructures. 5. A new public reporting regime. 6. Governance and oversight.