Mortgage brokers across Australia may be forced to relinquish lucrative volume-based incentives amid concern from consumer advocates that commissions and other payments are distorting the loan advice given to home buyers.
The Australian Securities and Investments Commission is in the final stages of reviewing the remuneration of mortgage brokers and is expected to report its findings and recommendations to Financial Services Minister Kelly O’Dwyer by the end of the year.
The review was requested by the Coalition government as part of its response to the 2014 financial system inquiry chaired by David Murray.
Mortgage broking is one of the last bastions of volume-based commissions in the financial services industry, with brokers lapping up cash bonuses and luxury holidays for reaching sales targets set by lenders.
In 2014, The New Daily highlighted a raft of volume-based incentives that home loan brokers often receive for flogging lenders’ products to home buyers.
National Australia Bank gives cash discounts on some services it provides to mortgage brokers who are affiliated with networks it owns.
Westpac rewards brokers with bonus commissions for selling more of its home loans to borrowers.
AFG, one of the country’s largest players in mortgage broking, has rewarded its best-performing brokers with dinners at the Playboy Mansion, cruises through the Caribbean and exotic getaways to Barcelona.
These soft-dollar benefits are only available to people who sell the most AFG-branded home loans each year, even though AFG insists its brokers are impartial when making loan recommendations to borrowers.
Eighteen AFG brokers who sold the most house-branded mortgages in the year to the end of June were jetted to Prague in August for a week-long holiday by the company.
Why a crackdown looks imminent
There is a real chance that volume and other types of commissions paid to brokers will be abolished next year because there is evidence to suggest they are contributing to the growth of risky lending in Australia.
When mortgage brokers generate home loan business for the banks, they usually collect an upfront commission of around 0.7 per cent of the value of the loan.
For a $300,000 mortgage this generates a one-off payment from the lender of about $2100.
The broker also receives an ongoing commission (often called a trail payment) for each year it takes the borrower to pay off the loan.
The value of these trail commissions paid by lenders will vary, but brokers can receive as much as $600 a year on a $300,000 loan until the borrower extinguishes the debt.
But here’s the rub.
Brokers can maximise trail payments by recommending certain mortgage products – such as interest-only loans — that take borrowers longer to pay off.
Interest-only loans are popular among investment borrowers, but official data published by the Australian Prudential Regulation Authority indicates that owner-occupiers now account for a larger share of these types of mortgages.
The big worry for regulators is that the decline in loan demand from investment borrowers has incentivised brokers to recommend interest-only products to more first home buyers.
APRA and ASIC are trying to curb the growth of these types of mortgages because they fear more borrowers could struggle to meet loan repayments when their interest-only period expires in coming years.
Academics, such as Deakin University tax specialist Dr Adrian Raftery, are concerned that the growth of interest-only loans is chiefly due to brokers wanting to maximise their income from trail commissions.
“This is a disturbing trend,” Dr Raftery told The New Daily in October.
Tips for selecting and screening your broker:
- Don’t bother using a broker who is only authorised to originate loans for a handful of lenders
- Brokers authorised by at least 15 lenders are better positioned to find a competitive mortgage deal for you
- Ask your broker whether he or she is affiliated with a mortgage services network (known in the industry as an aggregation platform). Be aware that some of the big lenders actually own these platforms and might offer additional incentives to brokers for recommending their products to you
- If a broker recommends an interest-only mortgage that is hard to understand you should seek a second opinion from an independent financial adviser
- Remember that mortgage brokers are only legally required to recommend a loan that is suitable for your circumstances. There’s a big difference between that requirement and the best deal available in the market