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More than half of all Australians taking out a mortgage are doing so with the help of a mortgage broker.

The Australian mortgage broking sector.

The federal government has asked the regulator (ASIC) to examine the mortgage broking sector and we thought you might like to know a few facts about the industry.

In the past 20 years the Australian population has grown by 25 per cent.  Over the same period, the number of lending institutions active in the market has more than halved.  The consolidation of the mortgage sector around the large banks has resulted in a situation where products from these organisations now account for up to 84 per cent of Australia’s mortgage volume.  The presence of the mortgage broking industry is one of the few factors inhibiting the further entrenchment of the vertically-integrated banking sector. Many of Australia’s smaller lenders rely on mortgage brokers to act as a distribution network for their products. Many do not have large branch networks. Without a broker based distribution network these lenders would be at a major disadvantage to the large banks and this would result in a significant reduction in competition in the mortgage sector, to the detriment of consumers. Every mortgage customer would pay for reduced competition throughout the life of their loan.

The mortgage broking industry provides customers with access to a range of lenders and through their choices Australian borrowers are indicating a high level of comfort with the current broking model. A mortgage broker does the legwork for their customers to find a home loan that suits their individual circumstances. Once a customer has made a decision the mortgage broker takes care of the paperwork, manages the application process and then assists the customer through to settlement.

This is why we have launched the “My broker, My choice” website – to help spread the word about the sector and to ask you to show your support of the industry. Below are some of the positive reasons why the mortgage broking industry is important to all Australians.

Driving competition

A viable mortgage broking sector is crucial to retain competitive pressure in the mortgage market.

  • Mortgage brokers provide a variable cost base to lenders which is an advantage to the economy.
  • Many of Australia’s smaller lenders rely on mortgage brokers to act as a distribution network for their products.
  • Corralling mortgage customers into bank branch networks would have an extremely detrimental impact on Australia’s non-major lenders. The loss of the broker based distribution network would put these lenders at a major disadvantage to the large banks. The resources required to establish a physical branch network to compete with the large banks creates an almost impassable barrier to entry.
  • The bargaining power of a broker in the mortgage equation is not to be underestimated. A consumer walking directly into the branch of a lender has limited negotiating power.
  • Any undermining of the mortgage broking model would result in a significant reduction in competition in the mortgage sector, to the detriment of consumers. Every mortgage customer would pay for reduced competition throughout the life of their loan.

housingrates-90s

A recent Blue Paper by Morgan Stanley Research reinforced the positive impact the broking sector has had on pricing.

“…Disruption from mortgage brokers has had a material impact on the structure of the mortgage market and the margins that major banks earn on their home loan portfolios. Brokers were able to offer lower interest rates, address customer perceptions that the major banks did not provide choice, and access alternative sources of funding to grow their business…The impact on home loans was significant and immediate, with margins falling ~200bp within two years.”

Better outcomes for consumers

Mortgage brokers:

  • Do not handle the money involved in the loan transaction.
  • Do not have access to their client’s funds.
  • Are subject to more checks than loans originating from the lender’s own branch network.
  • Disclose commission and fee payments they may receive.
  • Are required to follow strict processes to ensure that the loan they suggest is not unsuitable for the customer’s needs. They generally also face a 100 per cent ‘claw back’ of their commission over the first 12 months, and 50 per cent over 18 months, of a settled loan’s life the consumer is dissatisfied and chooses to refinance.
  • Drive competition as a result of dealing with a panel of lenders.

What influences mortgage brokers?

The drivers of broker behaviour are features policy, pricing and service – the right policy for the borrower’s individual circumstances, at the right price, with the lender that can provide the best service to meet the needs of their customer.

It is our view that the following factors are of most importance when a mortgage broker is helping a customer to choose a home loan:

Possible drivers Influence
The product that has the right features to meet the customer’s individual needs
The lender that can assess, approve and settle the finance arrangements within the right timeframe
The interest rate
Discounts offered to the customer

A mortgage broker who is not aligned with a particular lender is in the unique position of being able to provide consumers with a wide range of options across a variety of lenders, providing true choice.

Who pays?

For many Australians, obtaining a mortgage is the largest financial decision they will make in their life.  It is a tall order to expect a consumer with a job, family and other commitments to be able to research a variety of options across a pool of lenders and products to find a product that suits their individual circumstances.

Despite this, there is no evidence that a majority of consumers would be willing to pay mortgage brokers a fee for service.  Removing the commission payment option would be likely to destroy the mortgage broking industry resulting in a return to salaried brokers employed by individual lenders.

With the current commission model the lender generally pays when a loan is arranged. Why change this to make the customer pay when the lender, who is making significant profit from each home loan, is currently paying?

If mortgage brokers were to charge a fee for service it is likely that potential customers would seek to avoid this payment by engaging directly with a lender at a branch, where no fee would be applicable.

Real choice would be lost which is not in the interests of the consumer.

REGULATION

The mortgage broking sector is highly regulated, and justifiably so. All broker-introduced mortgages are placed under tough scrutiny, and brokers are heavily regulated by ASIC and the National Consumer Credit Protection (NCCP) Act.

The following infographic shows the layers of regulation within the mortgage broking industry and consumer protections in place.

Mortgage brokers provide a distribution network right across the country, often in areas where there are no bank branches.

Australian-Broker-Distribution---AFG

Economic consequences

If regulatory changes result in an erosion of the broker distribution network the result will be a significant reduction in lender competition, to the detriment of all Australians buying homes. Every mortgage customer would pay for reduced competition throughout the life of their loan.

Furthermore, the mortgage broking sector itself would be severely impacted by the changes.  With more than 14,000 brokers across the country, and a further estimated 30,000+ jobs tied to the industry, the consequences should not be underestimated.

My broker My choice