Mortgage brokers are putting customers in more debt with riskier loans, due to a conflict of interest brought about by juicy commission payments, reveals a report conducted by the industry regulator.
The independent investigation into mortgage broker remuneration was
conducted by the Australian Securities and Investment Commission (ASIC),
after a CHOICE shadow shop found brokers failed to act in the best interest
The 243-page report – which analysed four years of data from lenders,
aggregators, brokers and other industry stakeholders – recommends to
financial services minister Kelly O'Dwyer that the industry moves away from
conflicting commission payments.
Commissions create "a clear conflict of interest"
Brokers are paid commissions to put the needs of banks first, the report
found, in spite of 86% of people believing brokers have an obligation to
prioritise the interests of customers.
"Brokers typically do not earn a salary...therefore, most brokers' entire
income is derived from commissions," reveals the report.
But the commissions paid for each mortgage sold are substantial. The
average $500,000 mortgage issued in 2015 returned an upfront commission
payment of $3100. Additionally, brokers are paid an ongoing 'trail
commission' of about $75 a month, earning an average $900 payment after the
first year of the loan.
Our shadow shop found only two of 15
brokers will disclose they are being paid a commission.
Select banks will pay grossly higher commissions, leading to a bias towards
their products, even though the loan isn't in the best interest of the
customer. The difference in upfront commission payments can be as high as
The relationship between Commonwealth Bank and Aussie Home Loans was used
as an example to illustrate a bias to one loan provider. One in five
mortgages are sold by Commonwealth Bank, but the number of its loans sold
by mortgage broker Aussie Home Loans was closer to two in five.
The Commonwealth Bank is a majority owner of Aussie Home Loans with an 80%
Not all commissions are monetary. Best-selling brokers will be offered
exclusive memberships to 'broker clubs'. The benefits include free trips
overseas to 'conferences'. One [aggregator] spent $1 million on a cruise
to the Caribbean for its brokers, at a per head price of $13,000.
Increasing your debt and rewarding riskier loans
The report debunked a popular myth surrounding mortgage brokers. Mortgage
brokers offer loans with "the same interest rate as going direct to the
A broker selling a loan with a lower interest rate could have his
commission docked, while brokers could be paid higher commissions for
selling riskier loans.
One bank went a step further by paying aggregators – the business
reselling a bank's loan and working with individual brokers – larger
commissions for selling loans with an increased risk.
In fact, the loans sold by mortgage brokers tended to default more often
than those issued by banks. ASIC found loans arranged by brokers were 25%
more likely to go into arrears.
The loans being sold by mortgage brokers also tend to place their
customers into more debt. Brokers are incentivised to sell interest-only
loans, because it makes it possible for people to borrow more money. The
report reveals the average mortgage broker borrows $451,000, which is $31,000 more
than the average loan issued by a bank lender.
The financial services minister has called for comment on the report's
findings by the end of June, with the aim of reforming the worst conflicts across the home lending sector.