WHAT A MORTGAGE BROKER DOES
Many people probably aren’t sure as to what a Mortgage Broker actually does, so below is an outline of what most, if not all, Mortgage Brokers do.
The Client Interaction
In essence we assist clients in finding a suitable lender that will loan them the funds they require to fulfil their goals and objectives. In an ever-changing lending policy environment, we help people navigate the myriad of obstacles that preclude them from having all the available options. That is, we work hard to provide them a solution from a selection available based on their scenario. We ask them many questions to fully understand their existing situation (legal requirement under the Corporations Act) before we can give advice.
We often see clients in the evenings or on weekends when it’s most suitable to them. We usually drive to their homes sometimes up to an hour away. Despite being separated from our own families at these times, we show our clients great enthusiasm when assisting them with their dreams and aspirations. We usually have robust conversations that can initially take a good 1 to 2 hours, at the same time completing all the necessary questionnaires and client profiles to get as much information as possible about them.
We also usually ask for a heap of verification documents such as payslips, PAYG summaries, employment contracts, existing liability statements, bank transaction account and credit card history, superannuation statements and details of existing insurances that the lender will also require.
Some of the things we discuss are their plans for the purchase property (i.e. convert to investment in the future, whether to hold it or look to sell at some point and if so what’s the timeline), future plans for other large expenses such as a motor vehicle, holiday, future school education costs as this may impact on ability to make repayments. We discuss their general knowledge of and feelings about the following options: -
· Fixed rate vs variable
· Interest only vs principle and interest
· Redraw option
· Full and partial offset accounts
· Access to branch networks
· Access to ATM networks
· Lender package benefits
· Extra repayment options
· Early repayment options and penalties
· Rate lock
· Internet banking
· Interim securities
· Family pledge/guarantees
· Debt consolidation to minimize interest repayments
· Bridging Finance
· ….as well as a range of other factors
We then go back and complete a diary note of the conversation as soon as possible and in as much detail as possible so as that we have a good understanding of their situation which is critical in determining the final product selection for them.
We now go away and research and investigate the options available to them.
Lender Research
Each lender’s policy is different and so we need to navigate our way through our lenders policies to find solutions to the following scenarios: -
· The casually employed or those employed on temporary contract
· Newly self-employed
· Low income self-employed using add-backs
· Lo Doc lending
· Low deposit using FHOG and/or rental statement as evidence of 5% genuine savings
· No deposit using family pledge/family guarantee
· Servicing by using a combination of employment income/Centrelink/Child Support
· Use of overtime, bonuses and/or allowances for servicing
· Servicing by fully maintained motor vehicle add-back where possible
· Complex lending where companies and trusts are involved
· Security limitations based on postcode/location, property type (vacant land, rural vs urban, duplexes, strata/community/group title vs freehold, 99-year leases), property size (less than/ greater than 10ha with/without sealed roads and electricity supply), hobby farms vs commercial/Agri-lending etc.
· Non-conforming options for the credit impaired
· Construction lending usually encompassing two parts – the vacant land purchase and then the build process. We also help out to fund construction after it has already commenced
· First home buyer’s assistance.
· SMSF lending.
Our Obligations
Under Law, we also need to fulfil our other mandatory lending obligations and keep a record on file of the following: -
1. Provide clients with an up-to-date copy of our Credit Guide containing important information about our services, our obligations under law and their rights as consumers.
2. Anti-money laundering/counter-terrorism financing identification collection requirements.
3. If borrower is a company or a trust, we need to conduct a search to determine directors/trustees/beneficial owners.
4. Conduct a full living expense assessment from their transaction account/credit card statements averaged over the past 3 months, and sort spending into around ten categories in line with the lender’s requirements.
5. Researching from a panel of lenders to develop a shortlist of options. This is achieved by calling the lenders policy and scenario lines, speaking to and emailing the lender’s business development managers, and by analyzing and researching downloaded copies or online versions of lender’s policy manuals.
6. Conduct a Funding Position calculation showing all the expenses associated with the purchase (i.e. stamp/transfer duty, registration fees, solicitor’s costs and other general expenses).
7. Conduct a Borrowing Capacity calculation showing the approximate upper limit of borrowing.
8. Conduct a number of servicing calculations with different lenders to ensure we only recommend lenders that it will work with.
9. Prepare a Product Comparison comparing different loan products.
10. Produce a Preliminary Assessment – a summary of everything and the basis for decisioning (and forward to client if requested).
11. Create a Credit Proposal Disclosure (after the loan product is chosen)
With the exception of point 11 above, once we have all the above on file we then communicate back to the client what our recommendations are and demonstrate this with a comprehensive document that compares products side-by-side and provides a comparison of the savings from one lender to another over any given period up to 30 years, taking into consideration all of the fees and interest costs over that period. It also contains detailed information about the loan product features which should align with the client’s objectives stated in the previous questionnaires/client profile which we can further detail to our clients the benefits of these features in how they relate to the client’s stated objectives.
At that point, a lender and products are chosen – usually decided by the client but with our guidance and taking into consideration all factors including the lender’s service level time frames to pick up and assess the application against the time frame allowed to settlement. We then conduct a final servicing assessment based on the lender’s servicing calculator to make sure it would not fail servicing and create the required Credit Proposal Disclosure document mentioned in point 12 above, which outlines all the details of the loan chosen, the upfront fees payable and interest rates, the monthly repayment & the commission payable to the broker in dollars. The client needs to sign this document and we must provide them with a signed copy and a record of that date it was provided. We then need to create a new diary note with the details of the discussion and the reasons that led to the clients choosing that particular lender and how the choice aligns to their stated objectives (i.e. articulate why the chosen lender/loan product is “not unsuitable” under the National Consumer Credit Protection Act).
Finally, we can then commence putting together the loan application by entering the data into an online platform, a process which usually takes around 3 – 4 hours including uploading and appending supporting documentation to the application, as well as importing emails into our CRM system, for our own compliance records. Before populating the application, we need to make numerous file notes for the assessor assessing the application, so that he/she can understand aspects of the application that may be unclear or ambiguous. We also may need to order an upfront valuation via the lender’s portal.
We then need to get the loan application signed & collect any last items required to support the application. Once we have everything, we can then upload the signed application and the remaining documents and proceed to lodge the application to the lender.
Post-Approval
Once approved, we liaise with the lender regarding the issuing of loan documents and then meet up with our clients a final time to get everything signed and witnessed. But our job is not finished there. We need to facilitate any further requests from the lender/ assessor (and there are usually a few) with the applicants and liaise with the solicitors/conveyancers (or the outgoing lender in the case of refinances) every step of the way up until settlement. We are usually the main point of contact in coordinating whatever is necessary to ensure a smooth and timely settlement.
Where there is an accountant or financial planner referrer involved, we bring him/her up to date with everything along the journey as well to ensure we are following any specific requirements on their side from an accounting/tax perspective.
HOW WE GET PAID
Brokers are paid in two ways: Up-front and Trail commissions
Upfront Commission
I would estimate that 98% to 99% of Mortgage Brokers do not charge an up-front fee for their service. The overwhelming majority rely on the lender to pay the up-front commission which is generally between 0.6% to 0.66% of the loan amount (plus GST). This means the consumer gets a free service. So, on a $500,000 loan the upfront would be between $3,000 and $3,300 (+ GST). In the Royal Commission it was recommended that this fee should be paid by the borrower and not the lender. It was also suggested that the lenders charge the same fee so as to try and make it a ‘level playing field’.
Trail Commission
Now let me start by saying that Trail commission is a deferred payment of upfront commission. In the late 1990s lenders initially paid brokers a larger percentage of upfront commission. There was no trail commission. This was later split into two payments with a lower upfront commission being paid and an ongoing monthly payment based on the current balance of the loan (Typically 0.15% + GST) There were two main reasons for this: -
1. To spread their cost of acquiring the business over a period of time and
2. To stop brokers from churning loans every 12 - 24 months to obtain a new upfront commission
It is worthy to note that whilst we receive trail for the life of a loan (reducing over time as the balance reduces) doesn’t mean that we get paid trail on a loan for 30 years. The average lifespan of a home loan is around 3-7 years before the loan is either refinanced or the property sold, and the debt extinguished.
If we assume a loan balance of $500,000.00; the trail commission on this loan is $62.50 p.m. + GST before we pay a split to the Aggregator. Also note that this is not the brokers personal income. It is the businesses turnover.
There are several functions performed by a broker that we are not paid for directly by anybody. These functions include but are not limited to the following: -
1. Call clients after a month to ensure that the first payment has gone through successfully and ensure that there are no issues. Deal with any issues that arise.
2. Contact clients after 12 months to ensure they are happy and there are still no issues. Deal with any issues that arise.
3. Contact clients at fixed rate/interest only expiry to explore changes in their circumstances and arrange restructure/re-fixing/refinance of existing facilities.
4. Regularly email clients with property/debt/market ideas, concepts, strategies and tips to help them manage their affairs better.
5. Regularly email clients to educate them on regulatory/market changes which may or may not affect them. Contact those that are personally affected and explain how the changes affect them.
6. Periodically reprice loan accounts and advise clients of new discounts applied to their loans.
7. Help with Initial set up of repayment account, set up of redraw, internet banking/offset account linkages etc.
8. Full or partial security releases and swaps due to sale, divorce or release of guarantor.
9. Loan restructure or refinance due to sale, divorce, marriage or restructure of finances for tax reasons.
10. Co-ordinate signed invoices and lender paperwork for progressive draw-downs for construction loans as required at every stage of the construction process.
Except for refinancing to another lender, we do not get paid extra from the lender to perform the above functions. That is what the trail is designed to cover. It also ensures that we put the clients best interest front and centre, to keep the trail coming in and to discourage refinancing (“churning”) to another lender at the first opportunity. To the contrary, removing the trail and/or going to a fee-paying model would have a dramatic effect on the churn rate, with brokers able to justify such a change reasonably easily despite a “best interest duty” requirement being imposed on the industry.
There this is also a sting in the tail for Brokers, with what is known as a Clawback. This occurs whereby if a loan is repaid (or refinanced) within two years, the Lender will effectively “claw back”, or reclaim the commission in full or part, from the Broker depending on the age of the loan (usually 100% in the first 12 months reducing to 50% in the second year).
A client could receive an inheritance, a redundancy payment, receive an insurance payout, wins the Lottery or decides to sell and move on, and decides to payout the existing loan in full… all of which is beyond our control. As a result, the Broker who has usually put in around 20 - 30 hours of work, plus travel costs, phone calls, used broker support staff have worked to get the loan done, has now had his income taken back by the lender without any consultation as to the reasons….it is simply deducted from our monthly commission payment.
Benefits of Trail
· It allows us to keep our business going in good and bad times so we can continue to service our clients.
· Pays for things such as ASIC fees (which are higher if you are a corporate credit rep employing staff), aggregator licensing/credit rep fees per credit rep, membership of complaints ombudsman service, membership of a professional association (MFAA or FBAA) and professional indemnity insurance premiums all of which are a requirement of being a Credit Representative.
· Also pays for our business running expenses, such as motor vehicles, laptops, printers/scanners, mobile phones and internet services, as well as other office expenses and subscriptions to our aggregator software, Outlook email client, Adobe Professional, RP Data, Statements.com.au or similar, Equifax or other credit-reporting agencies. All of which assist us to collate and verify information to make it easier for clients and lenders.
· It pays for the cost of staffing or back office support/outsourcing of administration functions if applicable and our ever-increasing compliance costs.
· Keep us hungry to service our clients (to retain the trail for longer)
· Makes it a bit easier to absorb the cost associated with losses from lender upfront commission clawbacks up to 2 years after the loan settles, or loss of time in attempting to get a loan approved that has been declined, or where the client has changed their mind or had issues with the property being purchased and therefore the application is withdrawn for reasons beyond our control.
· Collectively, it covers the cost of all the points 1 – 10 above without which we would be working at a loss as the costs would be borne by us personally.
It smooths out the peaks and troughs, without which it becomes untenable. Without trail, we are unable to sustain our businesses.
Self-Regulation
Over the last few years, the industry has done a lot of work in removing some of the perceived conflicts as follows: -
1. Volume-based bonuses have gone. This was where putting more loans with a particular lender might offer some extra benefits to a broker – not always financial.
2. Soft Dollar Bonuses, from Lenders (Entertainment/Gifts/Travel) have gone too.
3. Commissions payments are now based on the Net Debt a person has, not the entire loan amount. This means if a larger amount is borrowed than needed and the extra money just sits in the loan, or an offset account, it reduces the amount of debt the lender calculates the payments on. No more over-inflated loans.
The Effect of Competition
Our competition includes all the banks and their direct channels as well as our peers – the many other mortgage broking firms who are keen to pick up a new client dissatisfied with their existing broker. We cannot afford to sit on our hands and allow our trail base to be eroded away by our competition because we failed to service our clients efficiently. Strong competition, an effective code of ethics and a mandatory requirement for professional development (25 – 30 hour points per annum) all of this driven by the regulators via our professional associations, aggregators and lenders is what helps maintain the integrity of the industry and keeps brokers focused on giving the best service possible and on track to operate in the best interest of our clients at all times. The statistics speak for themselves: -
· 59.1% of borrowers now using a mortgage broker
· 96.5% satisfaction rate
· 0.5% of ombudsman complaints which is minimal
· 80% of consumers happy with the existing remuneration model
· $2.6b contribution to the economy each year
Mortgage Brokers are small business owners. We are entrepreneurs. We like to innovate and embrace technology that will assist us to do our job better. We pride ourselves on our ability to find solutions to match our client’s needs in all circumstances. We take a chance every time we take on a new client/scenario. We are very outcome driven as that is the only way we can get paid.
We don’t work for free but believe in a fair payment for a fair outcome. That’s what we have now (although some would argue we don’t get paid enough for what we do and for the risks we take). Anything less than what we receive now is a travesty of justice.
The Effect of No Competition
Remove or adjust any part of a broker’s commission and the rest is history. The industry will most certainly become destabilized and retract. New entrants to the industry will need to accept a lower level of income, thereby leading to higher volumes to compensate, and lower service levels as a result. Generally, Australians are not willing to pay a ‘fee for service’ from mortgage brokers. This model has failed dismally in the Netherlands and as a result there are less than half as many lenders that there was around 10 years ago. It will make it more difficult for first home buyers to enter the market in what has become an increasingly difficult market as the current options disappear.
The banks only have their own products available and don’t understand the broader lending marketplace. They are not solution-oriented like brokers. This is to the detriment of the client and the property market. If their bank cannot assist and there are no brokers to service them then it just doesn’t happen. Economic downturn will be the inevitable result of this. It’s not just the effect of 27,000 people employed and self-employed in the broker industry. The flow-on effects to the real estate industry, to solicitors and conveyancers, to outsource administration businesses and to the property market in general are catastrophic. Then there’s the smaller lenders, the aggregators, the industry bodies and third party bank channel employees that are also affected.
On the other hand, the Big 4 banks will be the big winners. As brokers start to disappear, they will get the lion share of all home loan enquiries back through the front door. They will be able to charge a fee equivalent to the cost of providing the service to the clients – most likely in the thousands. All the second and third-tier lenders that have traditionally been supplied with business via the broker channel will also start to suffer as their lifeblood is cut off. They will start to disappear – either shutting up shop or consolidating and the big banks will be there all cashed up with the cheque book ready to pick up the pieces. More power to the big banks. What happens next? Well with less competition around the big banks have the power to ratchet up their interest rates like never before and borrowers will be the biggest losers with no other available options but to accept it. So, the big 4 banks once again continue to make the multi-billion dollar profits in a government-created downward market while the general community is hemorrhaging. For the banks that’s what they call a win/win scenario. For consumers it’s bad news all round. The old adage “if it ain’t broke don’t fix it” does come to mind when talking about commission payments. The government must leave Mortgage Broking the way it is. It serves the industry, the general community and the broader economy well.
Brokers are also consumers. We too have home loans, so these changes affect us the most.
Summary
1. If we don't have competition in the home loan market then clients get less choice, and big banks get back Oligopoly market power and home loan rates go up.
2. Since Mortgage Brokers started in the 1990's, the margin the banks make on a home loan has gone down from roughly 4% pa to 2% pa due to competition. (i.e. the bank income they make from home loans basically halved!! – that means in the past 20 years home loan rates went down compared to what they would have been, due to competition caused by mortgage broking disruption).
3. If the Banking Royal Commission recommendations regarding brokers are implemented “as is” it could kill the mortgage broking industry because the amount of income received by a broker wouldn't be fair or viable for us to continue running a business.
4. A broker helping a customer is NOT a 3-hour tick and flick exercise. It's at least one week’s worth of full-time work to help each settled loan customer. And the overall income for that is approx 1.25% per settlement. So say on an average $400,000 loan that comes to about $5,000 income (before costs) to the broker. And that's only for the 25% of deals that actually settle - 75% of people making finance enquiries get free advice, meetings etc. And there is a LOT of work at the startup and ongoing just to be qualified and ready to provide advice.
5. Mortgage Brokers don’t earn unreasonable income for how hard they work. Official figures say it’s about $85,000 after costs. The reality is that most of us earn a lot less than that. It’s certainly less than a banker doing a similar role at a single bank offering a single product gets.
6. For the same loan above, the bank earns (net interest margin) about 2% pa, or $8,000pa, or $32,000 income before costs over the expected average loan life of 4 years (and share $5,000 to the broker). The bank’s income is hence $27,000, and with the RC recommendations that the bank keeps the lot, and in addition receives an extra fee/payment (eg. $2,500 to write the deal) on top to make it a “fair playing field” with brokers. This results in a massive windfall for the Big 4 banks, none of which will end up in the pockets of consumers.
7. In the late 1990’s it suited the banks (and the brokers) for about half that commission of $5000 to be paid “upfront” which equates to $2,500 and the other half to be a ‘deferred upfront’ (known as “trail”). It’s the trail that is the issue here – there was talk in the RC of “brokers doing nothing for trail” but the truth is, it is and was (only ever) a deferred upfront for all the reasons previously mentioned.
8. There have been lots of other reports conducted into the broking industry (Productivity Commission and ASIC just to name a couple), and “ceasing trail” is generally NOT a recommendation once it’s understood.
9. The actual core issue the Commissioner had with broker commissions is that it is “Conflicted Remuneration” resulting in a perceived conflict of interest if the customer has a service provided (home loan broker) which is paid by another party (the bank). That’s it. It’s a legal reason, not a practical one. It’s only hypothetical. We would have loved the RC to ask 100 customers of various brokers (even unhappy ones) did they think the broker was conflicted? Or did the broker work for the bank or them - the customer? We know the answer is “I trust the broker… they work for me”. So, while in legal terms it is technically “conflicted”, prior reports and studies have seen it’s perhaps the least conflicted model available and benefits the customer. It actually works very efficiently! Same deal in real estate, whereby the agent is paid by to be represented by the vendor but is actually paid by the buyer. Yet there are no calls for a Royal Commission or an inquiry to overhaul real estate agent remuneration… and they get paid 2% + GST of the sale price… much more than what a mortgage broker gets!
10. Mortgage Broker income (Commissions) have had to be fully disclosed (by law) by brokers since 2009. I don’t believe banks disclose to customers they make $27,000 out of their average broker loan (or $32,000 for a client coming via direct channel). We don’t mind banks earning a reasonable income, and we agree we need strong banks, but we just want that same level of fairness, competition and transparency for all who work in this industry.
11. In The Netherlands’ payment model (suggested by the RC), the customers pay the broker or bank between $3,500 to $5,000 per loan. Since that started in 2007, the number of Netherlands banks decreased from 99 to 44, and the net interest margin increased from 0.6% to 1.6%. think it’s fair to say the consumer has lost out here! Do we want this model…oh and don’t forget the expenses associated with this extra fee are tax-deductible. Would our government allow for that?
12. Many banks keep offering better interest rate discounts for new customers, and don’t tell existing customers – it’s like a disloyalty interest rate. The discounts have increased by 1.1% in the last 16 years. When did anyone get a call from their bank telling them "we have reduced your interest rate on your home loan"? To the contrary Mortgage Brokers field many complaints that their banks are increasing their rates slowly over time (rate creep). Brokers keep competition alive, and help all lenders compete based on product and service.
13. Big bank home loan market share for Mortgage Brokers has gone from 80% in 2002, to about 45% in 2018. That’s competition. Even lenders like ING and Macquarie – huge international banks themselves - have about 6% each in the home loan market share, relying on brokers who introduce about 90% of their loans. These are lenders run lean businesses with low overheads, providing precisely the services some clients want.
14. Mortgage Brokers just want a fair go, and fair pay, to help the consumer with competition.
…AND Finally
Mortgage Broking is not just a job to walk into and start doing. It requires knowledge, great interpersonal skills and some mathematical ability, patience and integrity. It often helps people with difficult or complicated personal situations to buy, build, renovate, travel, marry, and step through life.
Yes, there are banks you can walk into and apply for a loan but comparing loan interest rates is barely the beginning of what a Mortgage Broker does. Anything from a simple refinance, to first home buyers, self-employed, solo parent, part time employed, recently changed jobs, changed countries, had a bad credit history, debt consolidation, investing, and many more scenarios.
Not every bank will lend to every person, and not every person suits or desires a particular bank. Often the smaller lenders may not suit someone in business, and of course bigger businesses need the strength and reach of large banks, but for the home buyers and small businesses, the time poor, Mortgage Brokers offer guidance, support, education and confidence to borrowers, while saving them money by providing access to more lenders, many of which a large proportion of Australians would not know about.
The rates (commissions) of payments that the banks pay to Mortgage Brokers, do not vary much, and if they do, it is not something that brokers concern themselves with. That’s because the best result for our clients helps us to build our business as they tell their friends through word of mouth. This is the best form of advertising! We are small business operators… we don't have million-dollar advertising budgets and every dollar in our pocket is as important as every dollar we can save our clients.
Regardless of what the Royal Commissioner perceives as a potential conflict, it is his perception not ours. We stand by our claims that we cannot afford to mess with the lives and welfare of our clients. Adversely changing the commission structure from where it is today will have serious consequences for every Australian.
Factoring in the above, we appeal strongly to your good sense to resist any changes to the broker remuneration model, instead opting to work more closely with industry to ensure all members abide by a code of ethics. We feel that a collaborative approach is the solution – not turning the industry on its head. Nobody will benefit from that…bar the Big 4 Banks!
Best Regards,
Reuben Brown
Principal- Horizon Mortgages
(I wish to acknowledge Mario Camerlengo for his amazing input in helping get this article put together. I have simply made my own additions and revisions to it)
HORIZON MORTGAGES — Reuben Brown
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