Home loan interest rates could go up if mortgage broker commissions are axed

11 February 2019
Banning mortgage broker commissions could lead to less competition and higher home loan interest rates for borrowers, industry groups have warned.
Source: LeonidKos (Shutterstock)

The banking royal commission’s final report has recommended banning upfront and ongoing commissions (known as trailing commissions) lenders currently pay mortgage brokers.

The report has also proposed that the customer should pay upfront mortgage broker fees rather than the lender in an attempt to remove potential conflicts of interests.

Mortgage broker groups and small lenders, which largely rely on mortgage brokers to sell their products, have begun lobbying against those two proposals with Mortgage & Finance Association of Australia (MFAA) launching the ‘Don’t Kill Competition’ campaign.

They argue that the proposals, if implemented would drive many mortgage brokers out of business, resulting in less competition and higher interest rates for borrowers.

Deloitte says the average broker currently earns around $86,000 a year.

Canstar Group Executive of Financial Services Steve Mickenbecker says many consumers would be reluctant to pay upfront mortgage broker fees.

“I think this will result in significantly fewer mortgage brokers,” Mr Mickenbecker said.

“There are a whole lot of smaller lenders who are virtually reliant on the broker channel – not the big four which have huge in-house distribution.

“And it’s the little guys that tend to be the price leaders.”

Canstar’s database shows smaller lenders such as TicToc, Homestar and Newcastle Permanent are among those offering the lowest interest rates (below 4%) for variable owner-occupier principal & interest home loans.

Mr Mickenbecker said there was a strong possibility that fewer mortgage brokers would reduce competition and lead to higher interest rates for borrowers.

“Do you think the big four banks will drive interest rates lower than what they currently are if there is less competition?”

MFAA released recent data which showed nearly 60% of home loans in the last quarter were made through a mortgage broker.

The Finance Brokers Association of Australia’s Managing Director Peter White said removing commissions would hand even more power to the big banks and eliminate competition.

“If a user-pays model was implemented, we know that most borrowers wouldn’t pay, and banks would make more money and standards would drop further,” he said.

Non-bank lender Resimac, which has 12,000 mortgage broker partners across Australia and New Zealand, has thrown its weight behind the ‘Don’t Kill Competition’ campaign.

Resimac Chief Executive Scott McWilliam said there were alternative measures to banning commissions, including introducing a carefully managed upfront commission structure as proposed by the Combined Industry Forum’s package put together by a number of lenders, brokerages and aggregators.

The forum’s proposals centres around six principles:

  • The standard commission model will avoid financial incentives that encourage consumers to borrow more than they need
  • Volume-based and campaign-based commissions paid by lenders and aggregators are recognised as potential conflicts of interest
  • Non-monetary benefits will only be given based on a balanced scorecard and good customer outcomes, with benefits capped
  • Ownership models and commercial relationships will be made clear on all market materials
  • To increase transparency, regulator ASIC and consumers will be given clearer information on where loans are written and commissions paid
  • The industry will introduce an improved governance framework that monitors and identifies risks

“This approach achieves better customer outcomes and improved standards of conduct, while continuing to promote competition in the Australian mortgage market,” Mr McWilliam said.



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