How the Banking Royal Commission recommendations will hurt You
The Banking Royal Commission handed down their recommendations and Vision provide the following commentary –
- How the recommendations hurt you
- When will you will pay a new fee
- How is this different to what happens now
- How are brokers paid now
- Why do lenders pay brokers upfronts and ongoing
- What Vision thinks
- CBA and what happened in the Netherlands
- Next steps
- How you can help
Do the Royal Commission recommendations hurt You?
YES. The main
recommendations that will hurt you are, when you arrange your next home loan or
investment loan, You will have to pay a fee between $2,500 to $5,000.
When arranging a home loan or investment loan You will be required to pay a Mortgage Advice Fee to either your Mortgage Broker OR the Bank if you go direct.
The recommendation also stops the banks paying us, mortgage brokers, for our ongoing services to You. We will need to charge for these services or simply not provide them.
When is the fee paid?
This detail has yet not been finalised. In the country from which the model recommendation is based upon, the Netherlands, the fee is broken into parts, some at the initial stage and some upon the successful implementation of the loan.
How does this vary from the system that is place now?
As it stands now, You the borrower do not pay either the Mortgage Broker or the Bank an upfront fee. The Banks / Lenders pay the Mortgage Broker for looking after You.
How is a Mortgage Broker’s Advice and Loan Processing currently paid for?
There are two payments types:
1. An upfront payment: Paid once all the work on the initial loan is done and after the customer’s loan has settled. An average home loan upfront payment is 0.6% of the loan amount. Based on the average home loan of $388,000 they receive $1,940 payment.
2. An Ongoing payment: Also known in the industry as trail. This is to assist the client with all loan queries, loan amendments, and ongoing financial advice for the life of their loan. The average payment is 0.2% of the outstanding loan balance. At peak debt this equates to $64 a month which reduces as the loan balance decreases.
The average Australian home loan for March 2018 was $388,100 according to the Australian Bureau of Statistics (ABS).
Why do Banks or Lender pay Mortgage Brokers?
Brokers constantly train to remain industry qualified with the same credit and product knowledge of the Banks and Lenders, as well as performing tasks that would have otherwise been performed by a Bank staff member.
Some tasks for Upfront Loan Arrangement :
- Pre-qualification meetings with clients
- Working with clients to collect
- Product and lender recommendation
- Prepare and provide appropriate documentation for the lender
- Submit loan application into banks system for credit approval
- Liaise and negotiate with credit officer of lender about loan approval conditions
- Arrange delivery and check all loan documentation is accurate i.e. interest rates, loan amount and the property used as security
- Project manage conveyancers, bank settlement agents to complete settlement
- Ensure bank accounts and scheduled repayments are correctly in place
- Check correct fees and loan disbursements amounts have been applied
Some tasks for Ongoing Service Payment (known as trail) :
- Annual review of loan and financial situation
- Negotiating with the existing lenders for better rates and loan discounts
- Arranging loan discharges when a property is sold, financial situation changes
- Switching to fix rates when applicable, to save clients money
- Security substitutions when a property is sold, new one is bought
- Restructuring loans when financial situations change
- Arranging small top ups of funds on loans
- Running future financial scenarios to help clients make smart choices
What Vision think of the recommendations that will impact You?
We have graves concerns on multiple levels:
1. It means an Upfront Fee paid by You
Currently you do not pay for your mortgage brokers advice, the bank pays it. The Banks benefit from mortgage brokers performing much of the work a mobile lender would have to do for the bank.
So adding a fee of between $2500 – $5000 is effectively taking what is now a running cost of the bank… and transferring it directly to You. We think this is unfair.
The argument Commissioner Hayne uses for this, is that if You pay the cost, it takes away any potential conflict of mortgage brokers being aligned to any particular lender.
The reality is, currently all lenders have a very similar payment structure for paying mortgage brokers; the $$ amounts only vary slightly. In Vision’s case, all our Mortgage Advisers are salaried employees which removes all perceived potential conflict.
The overall perspective regarding our industry, is that the current payment system has worked well in favour of You, the borrowers.
A KPMG study shows a decline in the banks ‘Net Interest Margin’ for the last two decades, which is a direct result of the steady increase of mortgage brokers in the lending industry. This means cheaper interest rates for You.
For further information from this KPMG report about the major Banks – click here
We believe the only possible way a change to a ‘customer pays model’ benefits customers is, if we can rely on the banks to pass on the saving to You in the form of lower interest rates.
Banks however have to and have proven they always will, put the interest of their shareholders first, so we’ll leave that question here for You to answer.
Our answer would involve the words “When, over, hell and freezes”.
2. You can’t avoid the Upfront Fee
Going direct to the bank will not help you.
The Commissioner’s recommendation “under the guise of making it fair for all competition”, means the bank will also have to charge you an advice fee. So even if you don’t use a mortgage broker, you will still have to pay the bank a $2500 – $5000 upfront advice fee, but for no real advice.
What we find perplexing, is that one of the issues that came out in the royal commission was banks charging fees for no advice, as this is obviously always a poor costumer outcome.
We feel legislating the recommendation that customers pay an upfront advice fee, is just a legal version of the same issue we are trying to stamp out.
3. The big risk of Ongoing Upfront Fees
You could be trapped in an expensive mortgage.
The customer situation we are most concerned about is…what happens if the bank you are currently with, raises your interest rate and you want to move to a better loan. You will have to pay another $2500 – $5000 advice fee.
But there is a further catch; if the new bank you move to then raises their interest rate before you have recouped enough savings to cover your payment of the extra advice fee, you will have wasted your time and money.
Given this is a probable scenario, most customers won’t see the potential lender move worthwhile and will not take that chance, thus rendering lender competition overwhelmingly stifled.
This has the biggest knock on effect, as the big banks know customers won’t move for this reason, so they’ll start to subtly increase the loan interest rates resulting in you having to pay more.
In summary, You will end up paying more ongoing interest as well being slugged with an upfront payment.
CBA is Australia’s biggest bank with the largest branch network and it is CBA’s CEO that recommended this model in the Royal Commission.
The Commissioner took the CEO’s advice against the advice of The Treasury, The Productivity Commission and ASIC; all of whom have previously investigated customer outcomes under the existing remuneration structure. See Treasury response to the Royal Commission Interim Report here below
As discussed earlier, the recommendation is based on the model used in The Netherlands. The Netherlands saw that commissions from lenders to mortgage brokers were completely banned in 2013, after slowly being phased out from 2008.
As a result, according to a 2017 report entitled Banking in the Netherlands, obtained by Loan Market Group, the total number of banks in the Netherlands decreased from 99 banks in 2007 to just 44 banks in 2017.
The Statista report found the size of the banking sector as a whole in the Netherlands decreased by almost half. The total number of bank offices in 2008 was approximately 3,400 and by 2016, there were less than 1,700. The report categorised the Dutch banking sector as “one of the most concentrated in Europe”.
Additionally, Moody’s Investment Services 2018 report, detailed how one of the biggest institutions in the Netherlands, ABN AMRO, have seen their ‘net interest margins’ steadily grow since 2010, correlating with the phasing out of mortgage brokers. The top five big banks in the Netherlands (including ING, Rabobank and ABN AMRO) now control 83.8% of the Netherland’s lending marketplace.
In comparison, in the Australian marketplace the ‘net interest margins’ of our major and regional banks have been on a steady decrease since brokers were introduced into the sector in the mid-1990s, according to the Reserve Bank of Australia.
Vision is at the front line of understanding these industry changes and we will always do everything possible to ensure we keep you to date with any changes to the credit environment.
We’ll keep you informed but if anytime you have any questions, about the industry or particularly how it could affect your situation, please feel free to contact us here.