Mortgage brokers are having a difficult time of it lately, with explosive revelations at the banking royal commission that they cost borrowers and limit their choices of funding.
Brokers, who write half of all new home loans in Australia (55.7 per cent in September 2017, according to CoreLogic), act as intermediaries – or middle men – between lenders and home-buyers.
But they have come under fire for encouraging borrowers to take out bigger loans than necessary, or encouraging loans from banks with which they have special deals.
“The current legal obligation is to provide a ‘not unsuitable loan’, which has to be affordable, but is not any indication of the quality of the loan. It’s not a good loan, not a best loan,” Erin Turner, the campaign and communications director for consumer advocate Choice, said.
“They make big promises … but that’s not necessarily what’s being delivered.”
Brokers’ earnings escalate with the size of loans, meaning they have a financial incentive to offer loans that might not be in clients’ best interests, Ms Turner said.
In a submission to the royal commission, Choice said the “conflicted incentives structures” of mortgage brokers and other intermediaries created unacceptable risks for consumers.
Other advocates have also raised concerns, calling for increased transparency around commissions, and for brokers to be legally obliged to act in the best interests of their clients.
Following the disclosures at the royal commission, the Commonwealth Bank – the nation’s biggest home lender – announced in June that it would change the way it rewards mortgage brokers to emphasise “value rather than volumes”.
In August, the Productivity Commission recommended an overhaul of the way mortgage brokers work, calling for a ban on trailing commissions.
It wanted industry-wide changes to protect consumers and deal with conflict-of-interest concerns. They included a “best interest” duty for mortgage brokers who work for aggregators owned by banks and other lenders, as well as a recommendation that brokers be obliged to disclose payment arrangements and any owner relationships with lenders.
However, in its final report into Competition in the Australian Financial System, the commission said brokers were necessary to create competitive tension between banks.
What if all of this puts you off using a broker? No problem, according to Steve Mickenbecker, a financial executive at home loan comparison site Canstar.
Most people should be able to harness the power of the internet to find a good home loan deal, he said.
“It’s not rocket science at all,” he said. “It’s a bit unknown to some people, but it’s not as tricky as it looks.”
The exceptions might be people with damaged credit histories or complex home requirements, Mr Mickenbecker said.
According to a report by Deloitte Access Economics, commissioned by the Mortgage Broking Industry Group, the average mortgage broker had access to products from 34 lenders and used an average of 10 lenders in 2016-2017.
Even those who are determined to use a broker would find it worthwhile to do their own online research, Mr Mickenbecker said.
“At least do other research to make sure it’s the right deal,” he said. “Second-guess it and take care of your own interests, because it’s more important to you than anyone else.”
And never pay too much.
“If you’re a first-home buyer don’t pay too much, don’t pay [an interest rate] over 4 per cent, because you can get a lot lower than that,” Mr Mickenbecker said. “That one decision will say you over $100,000 on the life of the loan.”
Key home loan decisions
- Fixed or variable? This is a major decision. Repayment rates for variable loans fluctuate based on the lender’s variable mortgage rate. A fixed rate is locked in for a period of time, say three years, and some providers won’t allow extra repayments during that time. “Fixed is a reasonable call at the moment [because interest rates are low] – you fix because you say ‘I can afford repayments at the interest rate, I can’t afford them at a higher rate’,” Mr Mickenbecker said. “It takes the risk out of it and you achieve some certainty.”
- Extra repayment flexibility. A home loan that allows you to make extra repayments is critical, Mr Mickenbecker said. An average home loan is paid off in 25-30 years, but the sooner you can pay it off, the more you’ll save.
- Offset versus redraw. Offset accounts generally apply only to variable home loans, and work by deducting (or “offsetting”) a savings balance against the amount owing on the mortgage. This means the amount of interest is reduced. A redraw facility allows borrowers to earn interest on extra repayments, which can be withdrawn if needed. However, Mr Mickenbecker said not all redraw and offset accounts were equal. Some providers charge after a certain number of redraws, and offset account holders should ensure the account is “100 per cent offset” and their money is earning the full rate of interest.
More information on the features of a good home loan, and how to find one, can be found on the government’s Money Smart website.