The Final report of the Banking Royal Commission into the Misconduct in the Banking, Superannuation, and Financial Services Industry was released on the 4th February 2019.
One of the recommendations in particular has been receiving a lot of media attention and has been the subject of some heated debates. This is because, if implemented, it has the potential to severely disrupt the home loan market in Australia – and not in a good way.
The report has recommended that mortgage brokers charge you and I a fee, instead of the bank. While in theory that sounds like a good idea, it actually isn’t for a number of reasons.
Before I go into the specifics of what this change could mean for your future dreams of owning a home or being debt free, let me take a step back and explain what mortgage brokers do and how they are currently paid.
What does a mortgage broker do?
Contrary to popular opinion, a broker doesn’t just look up the lowest rate for you. Let’s face it, with today’s technology anyone of us can easily go online to a comparison site and do the research ourselves. While rate shopping is a part of the brokers service, it is actually just a small part of it.
Here are just a few of the things brokers do:
They take care of all the paperwork – As anyone who has recently refinanced or applied for a home loan can tell you – these days it’s easier to get married than get a mortgage!
They negotiate your rate and help you navigate through the endless options available.
They help protect your credit score – not all banks are built the same. There can be significant differences in how much each bank is willing to lend to you, and whether they are willing to lend to you at all. Mortgage brokers have intimate knowledge of lender policy, and are therefore able to point you in the right direction, reducing your chances of getting declined and eroding your credit score.
They help you structure your loans Should you have an offset account? Should you have one loan for your home, car and credit card debt or split it up? Should all your properties be listed on the same loan contract or not? Interest only? Fixed? Variable? Bridging loan? Parental guarantee? A mortgage broker can explain the ins and outs of all your options and help you make an informed decision.
They save you time and help you maintain your sanity –In my experience, property settlements rarely go smoothly. Missing or incorrect paperwork, delayed approvals, low valuations, there are any number of things that can get in your way of completing that purchase. A broker is there to hold your hand through this process, keep their finger on the pulse, and help push things through for you as quickly as possible.
Who pays the broker at the moment?
Currently the broker’s fee is paid by the bank. While there are some differences in the fees banks pay, the vast majority of banks pay the same or almost the same amount to the broker, and this amount is disclosed to you upfront.
Here’s the important bit
There has been some concern that brokers may have a conflict of interest, because they are paid by the banks. In order to manage this, the Royal Commission has recommended that you, not the bank, pays for the broker’s services. While on the face of it, this might sound like a good idea, the reality is that this would have disastrous effects on the Australian public.
I’m glad you asked.
For starters, research has found that the vast majority of us would not be willing to pay a broker a fee and would instead apply for the loan ourselves. This would result in the likely end of the mortgage broker industry.
I know what you’re thinking. That’s sad for those brokers Tash, but – so what?
Well. At the moment about 90% of the home loan market is made up of smaller lenders who do not have branches and rely on the broker channel for their business. If the brokers go out of business, then so will these lenders.
Less lenders means less competition, and less competition means rising interest rates (after all, if there’s no chance of you taking your business elsewhere, what incentive is there for your bank to remain competitive? None).
But wait, there’s more.
In order to prevent small lenders going out of business and keep the market competitive, the government has proposed the introduction of a $5,000* application fee which would be payable by everyone wanting to get a home loan, regardless of whether you go to the bank directly or use a broker.
If you just spat out your coffee, you’re not alone.
Not only will this make it even harder for first home buyers to enter the property market, it will also prevent many home owners from refinancing in order to access a more competitive rate (because you will have to pay this fee each time you obtain a new loan!). As a result, your ability to negotiate a lower rate with your bank and become debt free sooner will go out the proverbial window.
At this point you may be wondering – how did an investigation into the misconduct of the big banks end up playing right into their hands and delivering them more profit at our expense?
Well, that’s a story for another day.
But before you throw your future plans away and throw your hands up in frustration, I do have some good news for you.
It’s not too late!
What I have laid out above is still in the idea stages, which means that you have the power to make a difference and have your voice heard, but only if you act now.
Regardless of whether or not you currently use or ever plan to use a broker, I strongly encourage you to sign the Mortgage & Finance Association of Australia (MFAA) petition to help keep competition alive. It takes 5 seconds and you can do it here.
I know what I would do with a spare $5k – and it wouldn’t be to give it to the banks!
*The fee is currently estimated to be between $2,500-$5,000.
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