As anyone who has bought a family home will attest, it's an emotional process that…
How will the Royal Commission impact borrowers?
Well, there’s no sugar-coating it – the news this week following the final Hayne report into the Royal Commission was a real blow to the finance industry. I have spent plenty of time over the last few days taking calls from brokers and talking to clients, to discuss what this really means, not just for the industry, but more importantly for consumers too.
To begin, consider this scenario…
Let’s say you are a bank customer with a $400,000 loan, and you wish to access a $30,000 top-up to do some renovations. The loan was initially arranged through a mortgage broker.
To do this today, you contact your broker, and they make all of the necessary arrangements. They travel to you to get documents signed. They liaise with the bank and give you regular updates. They obtain approval and arrange for funds to be deposited. And, they don’t charge you a cent.
Under the proposed changes, you as the borrower will pay your broker a fee for arranging this top-up loan. As the broker has to do a full application, and put in as much effort on your $30k top-up as they would on a brand new loan application, they would need to charge you a full fee… which could be thousand of dollars.
Alternatively, you could go directly to your bank for the top-up loan, where you will have to manage the whole process yourself, likely dealing with multiple people via an overseas call centre. To fulfil the legally mandated face-to-face interview, you will also need to find time to go into a bank for an ID check. They, too, are also going to charge you a fee for this service, which the Hayne report has suggested should reflect “the cost to the bank” of offering this service. The banks too will be charging you the same fee, so make no mistakes about it: either way, you as a consumer will end up paying for a service that you currently receive for free.
This is the reality of banking in Australia, if the recommendations around mortgage broking and commissions are passed through parliament. It will be a real shame for consumers who don’t fully understand the implications of how they will be impacted.
Perhaps people have Royal Commission fatigue; you can’t avoid hearing about it at the moment, and I understand it’s tiring. But if I can borrow your attention for just a few more moments, I want to share with you how the proposed recommendations for the mortgage industry could play out.
The report’s recommendations include removing trail commission entirely from July next year, and transforming from a bank-pays commission model to a borrower-pays model.
What does this mean for you as a borrower?
Initially? Not much. Borrowers won’t feel the impact of trail commissions evaporating.
But mortgage brokers absolutely will. The banks will too, as they will collectively save $1 billion per year. Trail commissions, far from being “money for nothing” as described in the Hayne report, are compensation for the work that we do as brokers over time to service our clients. This includes but is not limited to:
- Conducting financial health checks
- Checking in regularly with our clients to ensure their needs haven’t changed
- Contact clients when a fixed loan is due to end, to assess their needs going forward
- Educating our clients with articles, updates and latest news via regular newsletters and up-to-date websites
- Holding informational sessions and seminars to further educate borrowers
Keep in mind that the reason why the banks’ structured commission payments this way, with a lower upfront commission and an ongoing trail commission, was to incentivise brokers to service their clients. Previously, brokers received a higher upfront payment, and no trail – but banks decided this wasn’t in their best interests, as customers would refinance more regularly.
Let’s go back to our earlier example. With the benefit of an expert broker guiding the customer, a top up loan may be arranged, which drives more business to the bank and helps the borrower achieve their goal. Without a broker educating the borrower on their options, they might just opt for a full refinance. The bank loses the business; the customer pays more fees in refinancing the whole loan; it’s lose-lose.
Without trail commissions, many mortgage brokers will need to exit the industry, as continuing their business will become unaffordable and unsustainable. We cannot afford to pay our staff and business costs without trail commission so we will have to go.
As Mike Felton, CEO of the Mortgage & Finance Association of Australia (MFAA) explains, the second recommendation – to move to a fee-for-service model, where borrowers pay our commission instead of the banks – does not represent a good outcome for consumers.
“It will mean brokers and smaller lenders will no longer be able to compete on a level playing field with the big banks with major branch networks,” he said in a statement.
It does, however, mean a good outcome for the banks. They stand to profit to the tune of billions and billions of dollars.
In essence, it will mean that only those who can afford to pay an upfront fee of several thousand dollars, will be able to afford to pay for the services of a mortgage broker. Everyone else will have to navigate the mortgage market on their own, meaning they might end up with lenders or products that don’t suit their needs and don’t optimise their finances.
Lenders will reduce the number of products they have, lending will tighten, smaller lenders will struggle to compete with bigger banks (who have more branches to attract more customers), and consumers will ultimately find it more difficult to get a mortgage.
As Felton says, moving to a fee-for-service model “brings great risk that consumers simply desert the broker channel, decimating competition and access to credit… While the major lenders will be very happy about these recommendations, we fail to see how this is a good outcome for everyday Australians.”
Where to from here?
I’m hoping that common sense will prevail before it’s too late, but at this point, it looks like the industry is moving in a direction where commissions will be reduced, competition will be squeezed, and banks will be the ultimate winners.
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Louisa Sanghera is a Finance Broker for Residential Mortgages, Vehicle and Asset Finance, Commercial Lending and Budgeting and Cashflow Coaching with Zippy Financial.
She has gained more than 30 years in the Banking and Finance Industry, and since founding Zippy Financial, has become a multi award nominated expert in the field of finance featuring regularly in industry press and speaking at finance and investment seminars across the country.