The banking royal commission is now over, with several recommendations made to help increase honesty and transparency throughout the financial sector. Perhaps the most contentious recommendation from the final report is related to mortgage brokers, who may need to forego their traditional commission-based business model for a user-pays service. With this pervasive industry used by more than 50% of new mortgage customers or half a million Australians each year, the introduction of upfront fees for the arrangement of loans will have a dramatic effect on the financial landscape.
Under their current business model, mortgage brokers are paid an upfront commission by the bank when they finance a loan. The broker is also paid and ongoing commission which is paid on the basis that the broker provides ongoing customer care and account management over the life of the loan. The upfront commission is worth about 0.6 percent of the loan value, with the trail commission worth about 0.15 percent over the length of the loan. That's about $3,600 upfront and about $900 per year on an average loan of say $600,000.
Home loan consumers had a lot to benefit from this arrangement, at least at first glance. By working with a mortgage broker, people could get access to a range of potential lenders and home loan products with no out-of-pocket expenses. The danger, of course, is that some brokers could push people into loans they couldn't afford in order to maximise their commissions. This could all change if the new recommendations are made law, with all existing broker incentives taken away and customers left with an upfront fee for the arrangement of the home loan.
According to Commissioner Hayne, current arrangements for paying brokers are inconsistent with the financial landscape and lead to a wide range of problems: "The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending," he said, before adding, "Changes in brokers' remuneration should be made over a period of two or three years, by first prohibiting lenders from paying trail commission to mortgage brokers in respect of new loans, then prohibiting lenders from paying other commissions to mortgage brokers."
As you can imagine, lots of people think this is a bad idea, with resistance coming from both mortgage brokers and mortgage customers. According to Sydney mortgage broker Terri Unwin, brokers have been singled out by the commission while bankers are likely to benefit from the new deal: "The banks have been rewarded for their bad behaviour... If they don't have to pay mortgage brokers any more, that's close to a billion dollars in savings to the banks over the next five years." It's easy to sympathise with this point of view, with Australia's big banks seemingly untouchable despite evidence of multiple wrongdoings uncovered in the royal commission.
The Mortgage & Finance Association of Australia (MFAA) is fighting back against the recommendations through an advertising campaign. According to MFAA chief executive Mike Felton, individual borrowers are likely to be the biggest losers if these changes go ahead: "The royal commission was set up to protect them from big bank power but has simply entrenched it further... How mortgage brokers can be front and centre of the recommendations is inexplicable to me." If the changes do go ahead, it will become important to support brokers as they make the difficult transition to a fee-for-service model.
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