Do Mortgage Brokers provide value?
The Royal Commission into Misconduct into the Banking, Superannuation and Financial Services Industry highlighted that in the most part banks are very good at making loan products and charging interest rates and fees, but very poor at providing services and advice. In fact they often charge for advice but provide no service.
In the final report the lawyers that were charged with conducting the Royal Commission posed a number of recommendations that questioned the ethics and value provided by mortgage brokers. Initially both sides of politics were very supportive, but in the weeks and months since, they have together moved away from the lawyers recommendations and have taken steps to both defend and promote mortgage brokers and their role to assist borrowers access loans.
If you have not used a mortgage broker before and have always trusted your local branch manager to offer you the best interest rates and maximum borrowing power you should consider the following findings in the Deloitte Access Economics Report in July 2018:
- 55.7% of residential loans were settled by mortgage brokers in the September quarter 2017
- 3 out of 10 loans arranged in rural areas are arranged by mortgage brokers
- 9 out of 10 customers are satisfied with the service provided
- Mortgage brokers have reduced the net interest margin that banks charge clients by 3% over the past 30 years
- On average they have 34 lenders on their panels to offer clients convenient comparison and choice.
The role of a mortgage broker is to be an intermediary between clients and banks, matching perspective borrowers with lenders. Because of this, both consumers and smaller lenders have had greater access to each other and greater competition among all lenders to secure borrowers. Ultimately a better outcome for borrowers.
What is a Mortgage Brokers consumer value proposition?
The most obvious is being able to arrange loans for clients who otherwise don’t have the time or are not able to access the right lender for them. The tightening of credit markets over the past 6 months has meant that borrowers regardless of wealth need more assistance in preparing themselves and their records for a loan application. This is a role unique to mortgage brokers.
The role of a mortgage broker includes the following:
- Initial consultation
- Preliminary assessment
- Verification of information
- Borrowing capacity assessment
- Product recommendation
- Application lodgement
- Manage settlement process, and
- Post settlement support
For many borrowers they are very happy with these, however some clients do need more post settlement support and for the top tier mortgage brokers like Cashel House, they provide this. Including (but not limited to) ongoing record keeping, negotiation of borrowing variations, assistance with insurance and other financial advice, and communication with the lenders (something that has become more difficult with the reduction in branches and greater online focus).
Potential implications of adopting the Royal Commission recommendations
The Royal Commission proposed a number of recommendations that effect the Mortgage Broker industry, these include:
- Move from lender pays system to a client pays system. There is a few countries in the world where this exists, however it exists only where the banks offer wholesale lending rates to brokers so they can continue to offer competition and choice. The Royal Commission omitted to consider this point, or consider whether the banking system in Australia has the infrastructure able to achieve this
- Move to remove trailing payments to mortgage brokers for ongoing services
- Move to make Mortgage Brokers more educated and more accountable in giving advice rather than just choice.
While we can appreciate that the lawyers at the Royal Commission are trying to remove conflicts of interest we don’t agree in how it should be done. We agree that full disclosure of all fees should be made to clients and for us and all mortgage brokers we do this via our disclosure documents now. For clients of our family office we disclose all fees in an annual statement that include both financial advice and credit assistance fees. While this is not required of us we believe it is healthy and best practice in maintaining open and honest communication with our clients and the ongoing services we provide.
We absolutely agree that the obligations on mortgage brokers should be lifted to provide advice, rather than assistance. As we have our own Australian financial services license and our own Australian credit license we have always adhered to the stricter standard of each license, and in our case this is the Australian financial services license which provides for high levels of education (our firm averages a Bachelor degree or higher, where as the financial and mortgage brokering industry averages a diploma) and also a higher standard of best interest duties to clients.
While the news of recent has been very critical of all participants in the financial services industry. We remain passionate and focused on delivering the best outcomes for our clients, both at the start of the relationship and throughout it.
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