3 reasons you should avoid a mortgage broker

Let me say at the outset that this isn’t a bash at the mortgage broking industry.

However unfortunately the Banking Royal Commission has exposed inappropriate conduct, and outright fraud, among some members of the industry.

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The association that represents finance brokers has defended the industry.

FBAA executive director Peter White says finance brokers ensure loans are not unsuitable for their clients and they provide expertise, experience and service as well as offering a wide choice.

Independent financial analyst, Martin North, supports that view. He says a recent survey he commissioned shows consumers want the service Mr White’s promoting.

“Once you start getting into the mortgage application forms, and all the documentation, the idea of having somebody local to you who can actually help you through that process and essentially do some of the heavy lifting is quite attractive for many consumers,” Mr North says.

OK, so there might be a few bad apples, or even systemic problems, but they do offer a professional service and take a lot of the hassle out of a home loan application.

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The problem is that you can also easily make a solid case to apply for a home loan directly with a bank, avoiding a broker.

Here are three reasons you might want to by-pass a broker.

1. Price

Back in 1995, Aussie Home Loans founder, John Symond, told Australians he would “save” them from the predatory behaviour of the big four banks.

He promised to give consumers a better deal. Fast forward to 2018 and that idea doesn’t necessarily stack up anymore.

A draft report recently released by the Productivity Commission shows “Mortgage brokers do not consistently get lower home loan interest rates for consumers than would be available to the consumer by going directly to the provider.”

Martin North goes further:

He says even a simple online search reveals a key reason for choosing a broker — that they could get you a cheaper home loan rate than dealing directly with the bank — was simply not always true.

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“What’s interesting is that if you look at the loans interest rates, the best loan interest rates are when you go direct, [including] some of the smaller banks, and customer-owned banks, who are actually offering the better rates at the moment,” Mr North says.

“So there’s a bit of a fallacy about that they’re cheaper.”

Mortgage brokers will swear to you until they’re blue in the face that they can do better than the banks. It’s their business model. While some may be able to do that, I think you can safely say now though that it’s not a blanket statement the industry can cling to.

2. Conflict of interest

The Banking Royal Commission has also uncovered conflicts of interest for mortgage brokers.

The most obvious of which is that their commissions are based on the size of the loans they provide to the banks, so they’re incentivised to put large-sized loan applications together.

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The other is that banks benefit from the volume of loans provided to them by mortgage brokers. The Royal Commission heard evidence that the Commonwealth Bank sacked mortgage brokers who weren’t meeting certain volume targets. The CBA denied that was the reason they were fired, but the question remains: are mortgage brokers encouraged to prioritise the quantity of loans applications over the quality of loan applications?

Home loan applicants can now see how much pressure their broker could potentially be under by the banks with whom they’re distributing loans… and may, I repeat, may not have their exclusive interests at heart.

3. New technology

The final reason you might want to by-pass a broker is that you could… potentially… do it yourself.

Technology’s always evolving and it’s my understanding that in the not-too-distant future, computer programmes will exist that allow you to submit a mortgage application directly to a bank, online, with little fuss.

Of course the same regulations will apply in that the bank will have to rubber stamp the loan, but if the process of applying for the loan can be streamlined online, there’s no need for a broker.

Now having applied for a home loan myself, I actually can’t see this happening anytime soon. The process is too cumbersome to effectively streamline. However, there is a heck of a lot of money to be made in developing this sort of software, so I’m sure it’s in the pipeline. At the very least, a different type of mortgage broker may emerge – something akin to a discount stockbroker? Who knows?! It may create a legal mine field.

Bank reality check

One independent mortgage broker I spoke to during the week told the Banking Royal Commission will “get ugly” for brokers. Well, it has, but, like anything else, it may provide a shake-out of the industry that’s both good for customers, and their loan managers – I guess that’s the point of the whole process. Bring it on.

@DavidTaylorABC