As hundreds of thousands of Aussies desperately look to cut mortgage payments with a cheaper refinance, there are lenders seeking to – essentially – bias brokers to snare your business.
When a broker places a client with a new home loan, the lender pays the broker both an upfront and ongoing commission based on the value of that loan.
But far from these commissions being standardised, some lenders set them such that they could ‘buy’ your business.
As one broker (who rebates all commissions to clients) confirmed on the condition of anonymity: “The range available puts consumers at risk of being stitched up by a broker.”
Which lenders are buying your business?
Internal commission schedules obtained by Yahoo Finance show that three of the lenders paying the most in a bid to secure a broker’s recommendation for your next mortgage are Bankwest, NAB and Suncorp. But they are not the only ones.
Now, the most recent ASIC review of broker commissions – and whether these potentially influence which products are recommended – found upfront commissions usually vary between 0.5 per cent and 0.8 per cent. Ongoing or trail commissions then range from 0.1 per cent to 0.35 per cent of the ongoing loan amount annually.
NAB is the highest paying of the Big 4. The upfront and ongoing commissions are, respectively, a flat 0.65 per cent and 0.15 for the first two years, before starting to ramp up until 0.35 per cent by year six.
The difference between NAB’s 0.65 per cent upfront versus a lower average of 0.5 per cent might not sound like much but if you have a $400,000 loan, the higher upfront payment will net the broker $2600 – or $600 more.
Of course, on Sydney- and Melbourne-level mortgages, the dollar differential will be much higher.
But the real issue with NAB is that dramatically increasing trail commission. It’s appealing for brokers to get paid big, year-in-year-out, for (potentially) doing no extra work.
As another industry insider said to Yahoo Finance: “I’ve not heard a single broker be able to satisfactorily justify what they do for their client that they should be paid every month for potentially 30 years or more if they manage to hold on to the clients home-loan management.”
But NAB is by no means alone. Suncorp’s commission levels are virtually identical (0.65 per cent upfront and initially 0.15 per cent annually), although the ongoing commission pushes up a little later: from the fourth year, to a lower 0.25 per cent.
Other large lenders also paying 0.65 per cent upfront for your business include the Bank of Sydney, Bank of Queensland, Citibank, Heritage Bank, Macquarie, ME Bank and St George.
But of the big brands, Bankwest comes top of the pops for, well, popping on payments to come top. It pays 0.7 per cent upfront and then 0.15 per cent for the first three years, also increasing after that – to a lesser-again 0.2 per cent.
So rather than a commission of $2000 on establishment of a $400,000 loan, as a 0.5 per cent-paying lender offers, it rewards a broker with $2800…an $800 premium.
Incidentally, lenders may set different commissions for different brokerage firms, complicating the matter further. For instance, a separate commission schedule sighted by Yahoo Finance lists ING as paying a whopping 0.725 per cent upfront, where a loan represents less than 60 per cent of a property’s value.
So how can you trust a broker’s recommendation?
Most worrying is that none of the above lenders have the cheapest interest rates in the market.
So not only will a broker earn more if they funnel a customer into one of these products, a customer will pay more.
But it should be noted that on July 1 there was a long-overdue requirement introduced that Australia’s estimated 19,000 mortgage brokers act in clients’ ‘best interests’. This was one of the strongest measures suggested by 2018’s Royal Commission into banking and finance, which heaped criticism on some elements of the mortgage broking industry.
Commissioner Kenneth Hayne’s other big broker recommendation was to ban commissions entirely – but fierce lobbying saw that recommendation ignored. The same happened when payments to financial advisors were overhauled in 2013; while commissions and kickbacks were banned for advisors, they continued apace for mortgage brokers.
The argument is always that Australians would not fork out themselves for mortgage advice – bearing in mind it is the lenders that currently dip into their pockets – and the industry would therefore collapse.
But with ABS figures showing a 30 per cent spike in the number of Australians refinancing in the month COVID restrictions hit, and Canstar analysis of the data revealing a total of $53.7 billion in loan refinances since then, the industry is instead booming.
And don’t miss that commissions are paid on the value of what you borrow.
ASIC’s mortgage remuneration report concluded: "These factors may result in brokers structuring loan applications or recommending particular products based on the ability to earn a higher commission."
Until the government fixes the insane situation where commissions can vary, and are therefore variably appealing to a broker, always sanity check their home-loan choice.
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