After two interest rate cuts this year already, the home lending market and its place in the Australian economy is firmly under the microscope. Buying a home is an emotional proposition, with the "Australian dream" still considered by many a rite of passage.
Unfortunately, whenever such a strong cultural and emotional influence pervades a market, it is ripe for exploitation.
Central to the debate on home ownership is the growing role that mortgage broking plays in our housing market. With the broking sector arranging half of all home loans, problems in this sector have the potential to shape or shake Australia's economy.
People go to mortgage brokers for trusted, professional advice but the broking industry is failing to live up to this expectation
People go to mortgage brokers for trusted, professional advice but the broking industry is failing to live up to this expectation.
When we seek help from a trained professional we rightly expect that they will consider our circumstances and advise us of our best course of action. When you go to the doctor, you expect a thorough examination, a diagnosis and a treatment plan that's right for you. While buying a home isn't a matter of life and death, it is one of the riskiest financial decisions we will make.
That is why it may come as a surprise to learn that mortgage brokers are not required to help you to decide what's best for you. They legally are allowed to recommend a loan that isn't your best option, one that may earn them a higher commission or line the pockets of one of the big banks that own major mortgage broking businesses. It's the equivalent of a doctor recommending an unnecessary and risky surgery because the local hospital pays them a kickback. We would rightly be outraged if that was the case, so why is it allowed when we seek advice on a home loan?
It remains the industry's worst kept secret that the mortgage broking industry has been captured by the big banks
It remains the industry's worst kept secret that the mortgage broking industry has been captured by the big banks. The competitive forces that the broking industry first brought to the home lending market years ago have almost entirely dried up.
Take Aussie Home Loans. It burst onto the scene in the early 1990s, revolutionising the lending market and offering real price competition for hopeful homeowners. But since then, it has been acquired by the Commonwealth Bank, dulling any competitive power. Now Aussie Home Loans directs two in five loans straight back to the Commonwealth Bank.
Josh Frydenberg has an opportunity this year to fix this broken system by legislating a duty for brokers to act in their customers' best interests
Treasurer Josh Frydenberg has an opportunity this year to fix this broken system by legislating a duty for brokers to act in their customers' best interests. Borrowers already expect that brokers are acting in their best interests. Brokers advertise they will find customers a "good" or the "best" loan. But the law requires only that brokers offer a loan that is "not unsuitable" – a feeble test at best.
Requiring brokers to work in our best interests was a prominent recommendation of the banking royal commission. Commissioner Kenneth Hayne said this simply would reflect what borrowers already expected.
But since the release of the royal commission report, the broking lobby has been pushing back publicly on this reform, calling for exceptions and clarifications that will distort the duty into a simple box-ticking exercise.
In an attempt to deflect government oversight, the industry has proposed a "customer first duty" but this would fail to address the core issue: the quality of loans brokers recommend. There would still be no obligation to find the "best" or even a "good" loan as many brokers promise.
The last thing we need is people borrowing more than they can afford at uncompetitive interest rates
With the economy in a precarious state and the government seeking to stimulate the housing market, the last thing we need is people borrowing more than they can afford at uncompetitive interest rates. The best way to protect against this is by acting fast on the royal commission's recommendation, to ensure that brokers genuinely represent the interests of their customers, not the banks.
Similar reforms to financial advice rewarded good financial advisors and drove the worst out of the industry. For good mortgage brokers, this will mean they have a level playing field – they'll compete based on the quality of their service and Australians will secure better deals. We'll see fewer instances of irresponsible lending and fewer households stretched beyond their means.
Brokers who seek to do the best by customers have nothing to fear from this reform. The only people who have anything to lose are the banks that profit from loans organised by the broking businesses that they pay or own.
Disclaimer: This article originally appeared in The Australian