Consumers will likely face more expensive loans and more time wasted at banks if the royal commission’s proposed mortgage broker rules go ahead, a top lending expert has warned.
In a landmark report, commissioner Kenneth Hayne found shocking evidence of greed and misconduct in the Australian financial sector at the expense of consumers and businesses.
The former High Court Justice called for widespread change in how mortgage brokers operate, arguing brokers should receive an upfront free from customers, rather than earning upfront commissions from banks, and ‘money for nothing’ trail commissions that they keep receiving for the duration of a mortgage.
On face value, the proposed changes sound like welcome news for consumers, but CoreData head of lending Simon Elwig has predicted unintended consequences that could leave consumers poorer and make the Big Four major banks winners. Mr Elwig said the proposed rules would hit the mortgage broker industry hard. He argued the changes would lead to fewer loans being offered by smaller lenders, leading to a less competitive home loan industry and more expensive loans for customers. The biggest blow to mortgage brokers would be getting rid of trail commissions, he said. Trail commissions are ongoing payments banks make to brokers over the life of a loan.
In his report, Mr Hayne argued the commissions were like ‘money for nothing’ for brokers.
‘Why should a broker, whose work is complete when the loan is arranged, continue to benefit from the loan for years to come?’ he wrote.
‘It cannot be that they are deferred payment of fees earned earlier when the amount paid as trail depends upon the length of the life of the loan.
‘And it cannot be that they are a fee for providing continuing services given there is no obligation for the broker to do so and no evidence of it being done.’
Mr Elwig told Daily Mail Australia the rules could drive many mortgage brokers out of the industry.
The fees make up about 40 to 45 per cent of their income, he claimed, and brokers settle 59 per cent of mortgages in Australia.
‘That would mean that you’d get a reduction in mortgage brokers, because if your income drops that much, people say, “alright, I’m getting out”,’ Mr Elwig said.
‘What that means is you would get less volume to the non-major (lenders).’
Mr Elwig said over the past five years, mortgage brokers have increasingly channeled customers to smaller lenders, creating a more competitive market.
The amount of loans brokered with the major banks by major lender AFG has dropped from 73.6 per cent in 2013 to 57.8 per cent last year, he said.
But the changes would bring the drift to smaller lenders to an end, he argued: ‘Now that will stop, that will reverse.
‘Reduced competition would affect the discounted rates currently being offered by the Big Four banks, meaning more expensive loans for consumers,’ he said.
‘The majors, at the moment (their) rates are very competitive, meaning big discounting is going on,’ Mr Elwig said.
‘The impact will be that if the mortgage brokers reduce in the market, the major banks will not need to discount as much to get their loans.
‘If they’re not discounted loans, at the end of the day the consumer is paying a higher rate than they might otherwise have done.’
And Mr Elwig said there’s another big consequence for consumers.
If there are fewer brokers, customers will likely have to spend more time shopping around for a loan.
‘What it will also mean is if there’s less brokers, a customer would have to go to more than one place.
‘They’d have to go to different banks so therefore the way things are going it’s more difficult to get a loan.
‘So a consumer, rather than go to a broker, might have to go to Westpac and get declined and then go somewhere else and have to do more work themselves.’
Mr Elwig said he did not think customers would come under greater scrutiny for their spending prior to getting a loan, because that is already happening.
There have been widespread reports of borrowers having to divulge their smallest household costs, like Netflix subscriptions and gym memberships, while applying for loans.
‘That’s already happening, that impact has already happened. It’s going to be more of the same,’ he said.
Ratings agency Moody’s Investor Service backed Mr Elwig’s argument in a statement on Monday, warning the new borrower-pays system would affect competition.
‘We expect this change will consolidate the market position and pricing power of the four major banks,’ Moody’s said.
And the Federal government has sounded a note of caution about the mortgage broker rules.
Treasurer Josh Frydenberg said moving to a customer-pays model would benefit the big banks.
‘In effect you would be putting the mortgage brokers out of business and giving that business to the big banks.
‘We don’t want to give the big banks a free kick.’
The government has not publicly supported the recommendation to phase out upfront commissions. It has, however, said it will ‘take action’ on all 76 of the commission’s recommendations.
A blow to farmers as well?
The royal commission has called for measures to make it easier for farmers to handle debts owed to banks while land is affected by drought or natural disaster.
The commission called on the banks to amend their code so they don’t charge default interest on agricultural land loans during times of drought or natural disasters.
The commission recommended banks only call in receivers or administrators for a distressed loan as a last resort. And it advocated for a national scheme of farm debt mediation.
But Mr Elwig warned of possible unintended consequences from the new rules in that banks could become more cautious about doing business with farmers.
‘They (the commission) is trying to protect the farmers. It might have an unintended consequence.
‘Banks are also, when they try and do commercial deals, they’re always risk averse.
‘So it might have the opposite effect’.
WHAT ARE TRAIL COMMISSIONS?
Trail commissions are ongoing payments banks make to brokers over the life of a loan. Brokers received a bigger commission for bigger loans.
In his report Royal Commissioner Kenneth Hayne slammed the commissions as, ‘to put it bluntly … money for nothing’.
Mortgage brokers are ‘extremely disappointed’ trail commissions have been singled out by the commission.
Peter White, CEO of the Finance Brokers Association, was quoted telling the Australian Financial Review that they are really a ‘deferred upfront fee.
‘The impact will be upfront commissions and interest rates going up,’ Mr White said.
In his report, Mr Hayne wrote of the commissions: ‘Why should a broker, whose work is complete when the loan is arranged, continue to benefit from the loan for years to come?’
In this turbulent economy climate, to find money to invest for your future, you need to make sure that your outgoing expenses are less than the income that you are receiving. You need to develop an excess that you can have free to invest.
Now before you start to think….”well I don’t have any excess left…if I was earning more money….then I would have some free”. Let me dispel this myth…and tell you that it is a known and excepted fact that the amount of money that people earn has little if any bearing on whether or not they have an excess left to invest. The only way to create an excess it to spend less than you earn, instead of spending all that you earn.
Even doctors and lawyers, who earn well over $100,000.00 per year, often end up at retirement with little more Net Worth than factory or office workers.
Why aren’t high-income earners retiring wealthy? Why don’t they end up with a greater Net Worth than someone on a low income? It is quite simple. Human nature seems to dictate that whatever anyone earns….they spend….some even spend more than they earn and charge it on their credit card.
The higher your income grows…the more you spend and the only way to get out of this cycle is to realise that it is happening, and make a concerted effort to reverse this habit….and to begin reducing your expenditures so that you can free up money to invest.
The best way to do this, is to try the 10/90 plan. This plan simply means that as soon as you receive your pay….you put aside 10% of it for investment….and then use the other 90% to live off of. Put aside the 10%, and then pay all the bills and do the grocery shopping….and then after that whatever is left over you can spend.
Most people do it the wrong way around…they pay the bills, do the shopping and spend what is left over, never leaving any left to save or invest. By taking the investment money out first you will alleviate the temptation to spend it.
The road to wealth is not determined by how much you earn, but by how you utilise the income you have and how much you save and invest.
You need to take control of your finances. One of the best ways to start having more control over your money is to find out where it has all been going, and then amend your spending habits to allow you to live within the 10/90 plan.
If you write down a list of your monthly net income, then in another column write down a list of the essential items that you have to spend money on. You should be able to work out an average for telephone, gas, electricity, insurances and rates, from your previous bills. Work out an average of how much is spent on grocery shopping and petrol. If there are any other necessary utilities include them as well. Then deduct the second column from the first – and this will give you the maximum potential savings for each month.
It can be quite startling how high this figure can be and make you wonder where all the extra money went.
Another good learning experience is to simply write down for a fortnight every dollar spent and write next to it what it was for. You will soon find that there are a lot of unnecessary expenses, often caused by impulse buying, where you have spent money on items that you neither needed or really wanted, and could easily have gone without.
When you can begin to recognise these areas, and start to consider whether or not you are spending your money wisely, before you hand it over, then you will be beginning to take control over your money and are well on the way to embarking on your investment journey, which will enable you to have a financially secure future for you and your children.
There are many worthy ways to spend your time and energy. Our society is in desperate need of people who will care about people and things other than themselves. There are many ways that adults can help leave a positive legacy for the generations behind them. One of the best ways that we as adults can care for the world we live in is to invest in the young people all around us.
Some of you are probably thinking that you are parents and that isn’t that enough of a contribution to make to the next generation? Being a parent is one of the most obvious and perhaps best ways to invest in children, but it is not the only way. All adults, parents or not, have the ability and the responsibility to make life better for children and young people. I believe we have this incredible job to do, that we have the task of spending our lives on things that make life better for others.
Taking time to invest in others requires just that time. You cannot get very far in any relationship without putting time into it. If you are parent, take the time to parent well. Take time to get into the lives and hearts and minds of your kids. Learn about the things they care about, listen to the things they are scared of or excited about. Take your kids to their favourite park or read a great book with them before bed each night. Time is one of the best ways you can invest into children. If you are not a parent, find ways to interact with children. Offer to take the kids of your friends or neighbour for an evening. Take time to play games, go for walks, eat dessert or read books with kids. Invest yourself into the future of our country.
Learning to invest in young people requires that you offer yourself. By offering yourself I mean you allow children to learn from your life. Share stories from your past, lessons you’ve learned, and things you’ve failed at. Young people love to learn how adults have done life. Invest into them by being open and honest about the way you’ve lived, the decisions you’ve made and the things you would do differently if you could start again. You might be amazed at how much kids respond to adults that are offering themselves.
Few things are as valuable as taking time and energy to invest into children and young people. Think about ways that you could share what you’ve learned about life with others.