Mortgage broker myths debunked in ASIC investigation

Report finds you'll get no better interest rates than through a bank , but you'll borrow more and be exposed to more risk.

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 of customers.

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 $3400.

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% stake.

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 lender".

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.