Mortgage brokers and the 'best interest' duty
CHOICE is calling for an end to commissions for mortgage brokers and the introduction of a 'best interest' duty to ensure consumers get the best deal.Australians use mortgage brokers to guide them through what is often one of life’s most significant financial decisions – buying a home.
Getting a poor loan, even if a you can afford to pay it, can have significant financial consequences – it may mean you’ll pay tens of thousands or even hundreds of thousands of dollars more over the life of a mortgage.
"Not unsuitable" loans
Right now, a mortgage broker has a legal obligation to arrange a "not unsuitable" loan.Not a good loan. Not the best loan. Just “not unsuitable” – something you can afford to pay.
CHOICE believes that brokers must be held to a higher standard.
They should be legally required to act in the best interest of consumers and arrange the best quality loan for each person they see.
Unmet promises
Customers are regularly led to believe that a mortgage broker will look out for them.Advertising for mortgage broker services claim that brokers will find customers a good quality or even the best loan.
We conducted a brief review of online claims made by mortgage brokers. They included:
- “… help you find the perfect home loan”
- “Save your time and get specialist help to find the best home loan”
- “… experienced in getting our clients the best deal on the market”.
- In all of these claims, there’s an implication that brokers act for the customer and will help them get a good quality – or even the ‘perfect’ – loan based on their individual needs.
It’s no surprise then that consumers think brokers will act in their interests.
What’s needed is a tangible, legal obligation to make brokers live up to their promises
What’s needed is a tangible, legal obligation to make brokers live up to the promises they already make to their customers.
Broker or salesperson?
The banking royal commission has shown that lenders view mortgage brokers as salespeople for selling their own products.In order to be accredited, the Commonwealth Bank requires that a mortgage broker has to sell a certain number of CBA mortgages.
A ‘best interest’ duty will ensure that consumers have peace of mind that the mortgage they’re being sold is actually in their best interest, and not simply sold to them to maintain a broker’s accreditation.
Case study: Supporter stories
In January 2018, CHOICE surveyed more than 3000 campaign supporters who shared their experiences with the financial services industry.
One supporter shared her experience with a mortgage broker:
"The broker gave me a loan with [the] Commonwealth Bank and did not disclose that the Bank had an interest in Aussie Home Loans. It was frustrating to find out years later that perhaps there was a better deal out there for me.
"The broker also pushed me to borrow more. He offered for me to borrow more than double what I wanted to.
“I held my ground and only bought what I could comfortably afford but it would be easy to take their word for it and go for a higher loan without thinking about the consequences.”
The truth about mortgage brokers
ASIC undertook a review of mortgage brokers in 2017 and found that brokers aren't encouraging competition and don't get their clients better priced loans. Despite industry claims that mortgage brokers shop around and use a range of lenders, the report found that, on average, they send 80% of loans to only four preferred lenders.In 2015, CHOICE did a shadow shop of mortgage brokers. We sent five customers to three brokers each, to ask about getting a home loan.
We found:
- Risky borrowing suggestions: One broker advised a homeowner who wanted to refinance her home loan, but was in an unsecure employment situation, to use the equity in her home to invest in a new property or go on a holiday. Another broker advised a couple to borrow $1 million against their home when they only needed $600,000 to buy an investment property.
- Recommendations weren’t always based on quality: One broker pushed his own company’s product even while acknowledging that other lenders offered a cheaper loan.
- Poor disclosure: Only two of the fifteen brokers explained (without being prompted) that they received commissions and which lenders they deal with.
- Little discussion of long-term risk: No broker had a conversation about the customer’s capacity to pay should interest rates rise.
It's time to end conflicted remuneration
This year, the banking royal commission has investigated the mortgage broking industry, including the effect that commissions have on misconduct.The interim report concluded that, "what is plain, however is that value- and volume-based remuneration for intermediaries in the home loan industry has been an important contributor to misconduct and conduct falling short of community standards and expectations and poor customer outcomes."
Commissions in the mortgage broking industry need to be banned
What is also plain is the solution. Commissions in the mortgage broking industry need to be banned.
Mortgage brokers should charge a fixed ‘fee for service’ for any advice they give to consumers. The current commission structure creates a number of perverse effects, including encouraging borrowers to take a bigger loan than required, and minimising switching.
By banning conflicted remuneration and introducing a ‘best interests’ duty, customers will have peace of mind that the mortgage they’re being sold is truly in their best interest.
It will make brokers actually live up to their claims that they’ll find you “the perfect home loan”.
