Purchasing a house is one of the biggest and most important financial decisions you’ll ever make. It almost always involves obtaining a loan for a certain amount, which can be acquired directly from a home loan lender, or in over half the mortgages in Australia, through a specialised mortgage broker.
According to the Mortgage and Finance Association Australia (MFAA), mortgage brokers settled 55.7% of all home loans in 2017. At present, if you go through a mortgage broker to help you find the best interest rate, there are no regulations in place to say the mortgage broker has to act in your best interest. This means the mortgage broker could advocate a loan with a higher interest rate simply because they receive a higher commission from the bank. Even ASIC, Australia’s corporate regulator, reviewed mortgage broker remuneration and found loans obtained through mortgage brokers were on average larger, between one and four per cent, than loans offered directly from banks.
But with the Royal Commission’s final report now submitted, the way mortgage brokers are paid will change forever. Here’s why.
Current mortgage broker state of play
One of the major issues outlined in the Royal Commission investigation into Banking, Finance and Superannuation was the concern regarding mortgage broker remuneration arrangements with banks. Currently, all commissions paid to mortgage brokers by the banks are hidden, which, may be considered a conflict of interest. The report uncovered cases where brokers had pushed mortgage products or influenced customers to purchase home loans which gave them the highest commission. This conduct breaches obligations under the National Consumer Credit Protection (NCCP) Act to which mortgage brokers are bound.
The Royal Commissioner Kenneth Hayne, who handed down the report, has recommended changes which would see the commissions derived from a mortgage to be paid by the borrower and not the bank. This will make all fees transparent and completely overhaul the industry. At present, mortgage brokers receive both an upfront commission and a trail commission which is paid every month for the life of the loan. These new recommendations would mean all upfront fees are paid by the borrower and will completely abolish trail commissions.
What are the Royal Commission’s recommendations?
The Royal Commission’s final report recommended the following:
- The law should be amended to provide that, when acting in connection with home lending, mortgage brokers must act in the best interests of the intending borrower. The obligation should be a civil penalty provision.
- The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending.
- A Treasury-led (Federal Government) working group should be established to monitor and, if necessary, adjust the remuneration model where necessary
- Mortgage brokers should be subject to and regulated by the law that applies to entities providing financial product advice to retail clients.
How will the recommended changes to the mortgage broker industry affect home loans?
With over half of all mortgages in Australia coming from mortgage brokers, the Royal Commission’s recommendations are set to transform home loans in Australia. Let me explain.
At present, if you approach a mortgage broker and they successfully obtain you a loan, they get paid an upfront commission and a trail commission by the bank. The MFAA found that on average:
- A mortgage broker is paid approximately $76, 827 per year in upfront commissions, and
- A mortgage broker is paid approximately $56,579 per year in trial commissions
With this new recommended borrower-pay system, trial commissions will be eliminated and it might mean cheaper home loans in the long-run. For example, if you borrow $500,000 from a lender, their interest may be 5 per cent per year. Whereas if you borrow that $500,000 from a specialist mortgage broker with them offering you 4 per cent interest, you’ll end up saving $5000 a year in interest on the home loan. However, paying fees up front by way of commissions directly to mortgage brokers may be an issue for new borrowers who are already struggling to pay for the initial deposit and stamp duty.
Will the recommendations benefit a home loan borrower?
The Royal Commission’s job is to protect you and your rights and in this case, protect your best interest when searching for a home loan. These recommendations will:
- Demolish the conflict of interest between a mortgage broker, the bank and the borrower
- Remove trial commissions given to mortgage brokers to ensure you aren’t pushed into a higher home loan
- Make fees transparent
- Produce cheaper home loans in the long-run
We must acknowledge these recommendations however are just that, recommendations. Any changes still need to go through government legislation and may also need to be enforced by independent regulators such as ASIC and APRA. So it’s unlikely we will see these changes kick in until the 2019/20 financial year.
If you’re on the hunt for a home loan, Positive Solutions Finance offers a range of services designed to help you secure the right home loan for you. We pride ourselves with having an experienced team on hand to answer any questions you may have regarding home loans. Please call us today for a confidential chat on 1300 40 3328.