Housing affordability Consumer organisation says borrowers receiving potentially bad advice and payments distorting housing marke
Abundant commissions, bonuses and “soft payments” to mortgage brokers mean borrowers are likely not getting the best deal, and it could be impacting the housing market, Choice has said.
The consumer organisation has called for mortgage broker commissions to be banned as part of a legislative and regulatory overhaul of the industry, in a submission to Treasury.
Mortgage brokers work directly with customers to recommend and arrange loans from providers, often receiving various commissions and payments for their work.
The brokers’ commissions totalled an estimated $2.4bn in 2015 but there are also soft payments including overseas holidays, Choice said. The environment is leaving consumers worse off, Choice’s head of campaigns and policy, Erin Turner, said.
“Right now they don’t have to arrange the best or even a good loan for their customers,” she said. “The way brokers are paid, it creates a lot of risk – risk that it’s likely they’ll recommend loan A over loan B, even if loan B is a better deal because loan A has higher payments behind it.”
The result is borrowers receiving potentially bad advice and being drawn to a larger, less appropriate loan, creating future risk for them and which also impacted the housing market.
“The housing sector is so important to Australia, we can sometimes lose sight at some of the drivers behind the frenzy,” Turner said. “Right now brokers are paid in a way that contributes to the heat of the housing market.”
Choice’s submission is among those given to Treasury and the government as they consider what action to take on the industry, following a report on mortgage broker remuneration released by the Australian Securities and Investment Commission (Asic) in March.
Asic found lenders paid brokers $1.42bn in commissions on $175bn in home loans in 2015 and $984m in trail commissions on an outstanding balance of $545bn in home loans.
More than 54% of home sales in 2015 went through a broker. Asic found that in 2015 broker customers tended to borrow more, spend more of their wage on a mortgage, have lower property values and have higher loan to value ratios.
Turner said Choice was calling for the end of trail commissions – regular payments made by banks to brokers over the life of a loan, averaging at $750 a year per loan – which it described as “money for jam”.
Other recommendations included disclosure requirements, a one-year phase out of financial and “soft dollar” bonuses and the replacement of upfront commissions with fixed fees for advice and either single payments or rates based on hours worked by the broker.
The submission also called for a legislative amendment requiring brokers act in the best interests of their client, as opposed to the current obligation to arrange a “not unsuitable” loan.
Financial advisers were in “a similar situation” before the federal government’s “future of financial advice” reforms in 2014, Turner said.
“Those arrangements have largely been stamped out but are running wild in the mortgage broker sector.”
Turner said there were reports of brokers working with property spruikers and real estate agents.
“For companies investing in mortgage broker services, they need to keep in mind the rules of the game should change,” Turner said.
Both Domain and realestate.com.au have entered into the business recently. Domain, which has been contacted for comment, partnered with Lendi to create Domain Loan Finder last month.
Around the same time, the News Corp-controlled REA Group acquired more than 80% of the No 3 mortgage broker, Smartline.
Two major brokers, Mortgage Choice and AFG, have agreed to some changes, Fairfax reported on Tuesday.
They told Treasury they were willing to give up some commissions and bonuses but defended upfront payments and trail commissions as core to brokers’ pay packets.