01.Mortgage brokers: in whose interest?
Australia’s largest housing lender, the Commonwealth Bank of Australia (CBA) now requires mortgage brokers to submit a minimum of four loan applications and settle a minimum of three every six months, or risk having to be reaccredited with CBA in order to write its home loan products in future. This kind of pressure presents an obvious conflict of interest that concerns CHOICE.
Mortgage brokers need to remain accredited with lenders not only to provide consumers with a selection of products, but also to service existing clients. If an existing client wanted to topup their mortgage, a non-accredited broker would be forced to give away the deal, either to the bank or an accredited broker, and lose the trailing commission. Brokers receive a commission from the lender, usually about 0.6% upfront and about 0.2% per year over the life of the loan (trailing commission).
According to Michael Lee from the mortgage research group KeyFacts (www.keyfacts.com.au), sales targets have always existed for mortgage brokers but were not distributed on an individual basis, which made life easier for smaller brokers affiliated to one of the larger groups, such as Mortgage Choice, Aussie Home Loans or Australian Finance Group, who usually meet their targets.
In June, Refund Home Loans Chairman, Wayne Ormond, lodged a complaint with the Australian Competition & Consumer Commission (ACCC), alleging the CBA had abused its market power. “The CBA partly owns Aussie Home Loans and solely owns BankWest … but the ACCC does not believe it has significant market power,” he said.
CBA wrote a quarter of the new housing loans in August 2009, according to the Australian Mortgage Industry Report, jointly published by Fujitsu Consulting and JP Morgan. This brings the total market share of all banks to 90%.
Of the other Big Four, Westpac requires current brokers to settle one loan with them every six months in order to maintain their accreditation, and new brokers to submit one loan within their first three months. The National Australia Bank’s “star” rating system assesses brokers’ suitability for full accreditation based on application quality, portfolio performance and education/professional development, while ANZ has no volume targets for brokers to maintain their accreditation.
Please note: this information was current as of October 2009 but is still a useful guide to today's market.
Avoid the commission traps
CHOICE’s home loan shadow shop found brokers don’t always have the best loans on offer. Online loans and some credit unions offer good deals, but as they don’t pay commissions they’re not offered by brokers. Always do your own research and never rely solely on the advice of your broker.
Questions to ask
- Check which lenders are on your broker’s list and ask whether any are usually preferred — and why.
- Find out how and what brokers will be paid for arranging your loan, including ongoing trail commissions. Commissions must now be disclosed by brokers in NSW and Victoria, so make sure you get a written Finance Broking Contract.
- Ask about rebates — some brokers refund part of their commission.
- Ask the broker to explain different mortgage options and precisely why any recommended loan matches your financial needs.
- Check the broker’s credentials and whether they’re a member of the Mortgage & Finance Association of Australia (MFAA). MFAA members are required to be members of the Credit Ombudsman Service for consumer complaints, as well as being subject to the MFAA's Code of Practice and Disciplinary Rules.
- Find out if the broker has professional indemnity insurance (the MFAA requires this of its members).
- Check whether the broker has a complaints process and is part of an external dispute resolution scheme, such as the ASIC-approved Credit Ombudsman or Banking and Financial Services Ombudsman schemes.