Are mortgage brokers acting in our best interest?


The banking royal commission calls for an end to mortgage broker commissions.

Incentivised to oversell


Along with a boatload of other overdue recommendations, the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry asks for a change in the way mortgage brokers make money.

Brokers work for commissions paid by the lenders, especially the big four banks (which control about 80% of the mortgage market). 

The more mortgages a broker lines up for the bank – and the bigger the loans – the more money the broker stands to make.

mortgage brokers hands holding money
Brokers work for commissions – the more mortgages they sell, the more they stand to make.

It's an incentive that can and has left borrowers with loans that were not the best fit for their circumstances (generally ones that were too big).

The broker hasn't necessarily broken any laws if this happens. All they're required to do is line up a loan that is "not unsuitable" for the borrower, not line up the best loan they can find.

A 'best interest duty' would mean that brokers have to act in the best interest of the borrower – not in their own best interest

The current system leaves a lot of wiggle room for brokers, which is why CHOICE thinks a 'best interest duty' would be a sensible thing to introduce.

If applied, it would mean that brokers have to act in the best interest of the borrower – not in their own best interest. 

Seems like a pretty good idea to us.

More than a few bad apples 

Brokers can provide a valuable service for aspiring homeowners, helping them navigate a complex market and find the lender that best suits their circumstances. And many do just that.

The problem is that many don't, as the evidence shows.

In 2017 ASIC released the results of a robust investigation into the mortgage broker industry that found brokers routinely push borrowers into loans that are bigger, riskier and take longer to pay off as the brokers do the banks' bidding and chase commissions.

In an earlier CHOICE shadow shop of mortgage brokers, the brokers fell short in a number of respects.

No more endless commissions 

Not all brokers are chasing commissions  – many would put the borrower's interests above their own despite any incentives on offer.

But enough have become unduly incentivised that the banking royal commission has called for a ban on trailing commissions. 

The end to such commissions will mean borrowers will pay less for their loans with no loss in service

With a trailing commission, the broker gets a piece of the action with every monthly mortgage payment over the life of the loan.

The end to such commissions will mean borrowers will pay less for their loans with no loss in service.

It's a move that's squarely in the interest of borrowers, not brokers.

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