In the light of the royal commission, there’s been a lot of misinformation bandied about when it comes to mortgage brokers. Many media types, keen to just be able to get stuck into anyone they felt was topical, have been repeating some ill-informed myths about mortgage brokers, of which a few of the following down below are my favourites.
Because I hate mis-information, particularly when it promotes speculation as to the credibility of your profession, I’m going to break some of these myths down for you.
Myth 1: There is an inherent conflict of interest because brokers are paid by the bank.
This myth implies that the commissions paid to brokers are opaque and subversive, and that the conflict of interest arises due to commissions not being disclosed. It all sounds very sneaky in a way. Like mortgage brokers are paid by a banker in a late night carpark with cash inside a brown paper bag. The reality though, is far less exciting.
Look, I can totally imagine feeling peeved if you weren’t told what your broker stood to gain from getting you a home loan. That’s why it’s been legislated since 2009 that all commissions that a broker receives from a bank must be disclosed to the client. Your broker will give you a document called a “credit proposal disclosure document” which outlines exactly how much they will get in upfront and trailing commissions for a given loan size. Your broker is also obligated to inform you if they’re paying out any referral fees if you’ve been introduced to them by a third party.
The other facet to this myth is that because a bank pays you, you have their best interests in mind rather than your own. That might be true in the instance that we only had one bank we could choose from all a broker did was work to funnel everyone through to that one bank…..but the point of being a broker is providing choice to people. When all lenders pay virtually the same commission (and most brokers are accredited with about 30 lenders or so), you have no incentive to work on the banks behalf.
Add to this the fact that usually between 40-60% of new clients of established broking business are referrals from existing clients, and it’s pretty clear that the easiest way to build your business is to do the right thing by your client and have them do some word of mouth advertising for you. Even if you had an awful, sociopathic broker with no moral compass, they would be financially incentivised to put the client’s needs first in order to create referrals from that client.
Myth 2: Brokers don’t act in your best interest, only their own.
Ahhhhh yes. This is one that banks like to trot out every now and then.
Do me a favour. Walk into a few banks and ask about home loans. Let me know when they direct you down the road to another bank that has a better deal for you instead of recommending one of their own products.
If you’re still reading this and not on your way to a bank you’ll realise how ridiculous the above premise is. The other thing that highlights this hypocrisy from banks is this: A broker doesn’t benefit from you getting charged a higher interest rate. None. Their trailing commissions remain the same, regardless of whether your interest rate goes up or down. Banks on the other hand, are incentivised to have you paying as much as possible without you leaving, as their earnings are directly related to the interest rate you pay.
So that covers the trailing commission, but don’t some lenders pay more than others in terms of upfront commission? The answer is yes, but honestly, I don’t think it’s too much of an issue for these reasons:
· During our preliminary assessment, we need to show that we’ve given people at least 3 suitable options. Clients choose from there based on the pros and cons of each loan, and their own goals and needs. The client makes the decision, and it’s got absolutely nothing to do with the commissions that brokers earn.
· Given how much lending has tightened, it is extremely difficult to get a loan approved, even under the right circumstances. Putting a loan somewhere it doesn’t belong is simply more likely to result in a decline anyway.
· The difference between these commissions is marginal, at best. I don’t even know what commission each lender pays until I’m disclosing everything I stand to benefit from the deal contained with my credit proposal disclosure document anyway. A very simple fix here is just to have all lenders pay the exact same amount of upfront and trail, rather than the tiny variances that exist at the moment.
Myth 3: Brokers do nothing for their trailing commissions.
Brokers currently get roughly 0.7% of the total loan size in terms of upfront commissions, and in general will get about 0.001% of that loan amount (net) per month in trailing commissions. That means for a loan of $500,000, a broker will receive $3500 upfront, and around $50/month in ongoing trailing commissions. So what do brokers do to justify the trail? Before I get to that, let’s look at how brokers used to be paid.
A long while ago (before I entered the game), brokers were actually paid closer to 1.1% upfront of the total loan size and no trail, which results in an upfront fee of $5,500 using our above example. However the banks came to the conclusion (rightfully so, in my opinion) that you would have better outcomes for the customer by paying this out to the broker over several years. Hence “deferred upfront commission” was introduced, which is now ubiquitously known as trail, and is the remainder of what used to be paid upfront anyway. So brokers used to be paid these amounts anyway, it was just paid upfront.
The question still remains though, what do brokers do to earn their trailing commission? Well, even if we discount the above (the fact that it’s just upfront commission paid out over a longer period), most banks see it as something of a service fee, and this is pretty easy for even the biggest broker bashers to understand.
When I write a home loan for someone, I tell them that from settlement onwards, I’m always available to talk. If they’ve got any issues, they come to me first and I’ll do what I can to help them out. I’ve lost count of the number of hours I’ve spent helping existing clients with different scenarios or options they wanted to explore. But I’m fine with
This is one of my favourites. Who set the commission amounts that brokers are paid? Banks did. Why would they do that? As with everything banks do, it’s because they figured out it’s a great way to make a profit. Let’s say brokers disappear overnight, what do you think banks will have to do to stand out in the current market with over 30 lenders? They’d have to advertise, set up branches, recruit branch staff, and gear up for when the applications come through. Once the loan is settled, they need to have the customer service to be able to look after that client too and answer all their ongoing questions. All of this is a very costly exercise, and banks very quickly surmised in their cost benefit analyses that it’s cheaper to acquire loans through brokers than it is through having a larger online and physical branch presence.
Take ING and Macquarie for instance. Both are very supportive of the broker channel, have always had some of the cheapest rates available, and 95% of their home loans are written through the broker channel. Surely banks like this must be bleeding out due to paying broker commissions? They made $348 million and $2.56 billion in profit respectively last year, and are both in the top 10 lenders for home loan market share in Australia.
I’m sure they’ll be ok.
Myth 5: Brokers do dodgy stuff to make loan sizes bigger.
So I’ll level with you for a moment here, this used to be a concern of mine too. Let’s say you wanted to buy a $500,000 house and you had half of that for a deposit, I could have technically gotten you a larger loan in some circumstances, and as commissions were tied to loan size, I would have received more. So what’s to stop me from doing that now?
They’re called “utilisation clawbacks”, and essentially, they stop brokers encouraging borrowers to borrow more than they needed to. Using the above example, if I was an unscrupulous broker, and I recommended you borrow $400,000 instead of the $250,000 you need, the bank would pay me the initial commissions on the $400,000, but then when they saw that you’d put the remaining $150,000 into your offset account, they would actually take back the difference in commissions. Just like I’d originally written a loan for only $250,000.
The difference when you go through a bank is that they don’t have a broker to clawback commissions from, so they’re still actually incentivized to get you a larger loan. Larger loan = more interest payable = larger bank profits.
Despite there being a few issues with this system that actually negatively impact brokers even when they’re doing the right thing (you can ask me for examples if you like), I’m all for utilisation clawbacks believing they’re another element that can show that we work in the best interest of clients. Another side note with this is that under responsible lending rules, is it really a good outcome for someone to commit every last dollar they have to a property purchase? If they can afford it, it’s always best to keep a rainy day fund.
So next time you hear someone say something negative about the broking industry, don’t just take it at face value. Think about it critically, and if you’re unsure and you still really want to believe it, you can me ask me what I think instead.