If there's one word that sums up the problems at the heart of our financial system, it's remuneration. Far too often, the advice we receive is based on what will result in the highest commission for an adviser or broker, rather than what's best for us.
This problem has been recognised in financial advice, with laws that now ban most forms of sales commissions, and in life insurance, with reforms that wind back the commissions paid to brokers. Even the major banks have now come to the party, commissioning their own review of sales commissions – although we're yet to see whether that will lead to any change.
But one sector that has largely escaped attention until now is mortgage brokers.
Australians clearly feel they need the help of mortgage brokers. In 2015, 54% of home loans were organised through a broker. This reflects the fact that mortgages are complex products that are difficult to compare.
People look to brokers as a source of trusted, specialist advice. An ASIC report released earlier this year found that 86% of people believe that brokers put the interests of their customers first. It's a shame the law does not require that.
The ASIC report indicated that people who take out loans through brokers are exposed to more risk than those who borrow directly from a financial institution. They borrow significantly more, have higher loan to valuation ratios, take out more interest-only loans and spend more of their wages on mortgage repayments.
All of these risks are the direct result of commissions, which create incentives for brokers to encourage you to borrow as much as possible – because the more you borrow, the more they earn.
We found direct evidence of this risk in 2015 when we sent consumers out to mystery shop mortgage brokers. One couple who wanted to buy a $600,000 investment property were advised to instead take out a $1 million loan secured against their home. Another consumer with insecure income who was seeking to refinance was encouraged to borrow double the amount she wanted and to use the funds to invest in shares or take a holiday.
At a time when there's increasing concern about whether we are in a housing bubble, the last thing we need is for people to be overexposed to a drop in property prices through excessive debt.
There is a simple fix to this: ban mortgage broker commissions and replace them with fixed fees for advice. Brokers of course argue that this means consumers will pay more – but the evidence shows that many consumers are paying now for the impact of poor advice. They just have no way of knowing this.
Alan Kirkland, CHOICE CEO