Mortgage brokers charge fees that are excessive and do not necessarily lead to cheaper loans, according to big investment bank.
- UBS says mortgage brokers get a $4600 commission on an average loan, while brokers say the figure is half that
- Total broker costs is the equivalent of almost a quarter of the cost base of big banks entire personal and consumer banking businesses
- Brokers face an uncertain future due to robo-advice and bank cost cutting
Research from UBS’s highly rated bank analysts, led by Jonathan Mott, found mortgage broker commissions added 0.16 per cent – or $4,600 – to the cost of the average home loan.
The work was based on a recent report from the Australian Securities and Investments Commission into mortgage brokers, which found total commissions in 2015 added up to $2.4 billion.
This was made up of $1.4 billion in upfront commissions and $1 billion in trailing commissions, and represented an 18 per cent increase on a similar study in 2012.
By way of comparison, ASIC found financial planners charged between $200 and $700 for simple advice and between $2,000 and $4,000 for more comprehensive advice.
Mr Mott said mortgage brokers’ fees were disproportionately high for advice provided on a simple product.
“We believe these payments are an illustration of excesses built into the financial system following a 26-year economic boom,” Mr Mott wrote.
“While a mortgage is a large financial commitment, it is a simple, commoditised product.
“Options are relatively limited – fixed v variable, interest only v principal and interest, offset account – while APRA’s focus on ‘sound lending practices’ ensures there should be little difference in underwriting standards or size of loan offered across the banks.”
UBS numbers wrong: brokers
The Mortgage and Finance Association of Australia said UBS had got its figures wrong.
“It appears they have taken the total commission paid to brokers last year – which includes upfront and trail – and divided them only by the number of mortgages written by brokers last year,” MFAA chief executive Mike Felton said.
“This means they are comparing commissions on all loans written by brokers in the past 30 years to just the number of loans written last year.
“This has given them a commission per mortgage that is about double what it should be.”
Brokers have been under pressure not only from the corporate regulators at ASIC, but also an Australian Bankers’ Association report which found greater transparency was needed in the sector to reduce the risk of selling the wrong products to borrowers.
Both the ASIC and ABA reports found that, while there were conflicts of interest inherent in the current system, brokers could deliver better outcomes for consumers and help keep prices down by providing competition in the market.
However, the ABA report authored by former Australian Public Service Commissioner Stephen Sedgewick and ASIC’s document both recommended an overhaul of the payment structure for brokers.
This included banning volume-based incentives, temporary increases in commissions to boost sales and so-called “soft-dollar” payments.
MFAA’s Mike Felton said the upfront commissions were a cost carried by the lender and not passed onto the consumer.
“The broker channel is an efficient way for lenders to originate loans as they do not carry the salary and branch costs associated with writing these loans,” he argued.
“Working with a customer to secure a mortgage is extremely complex and often requires months of work from a broker – not to mention years of service following as the broker supports the customer for the life of the loan.”
However, Mr Mott argued that, while the banks pay the commissions, those costs are factored into the bank’s cost of funding and have been a driving factor in mortgage repricing in recent years.
“These costs are borne by all mortgage customers,” he said.
“We estimate mortgage broker commissions add 16 basis points per annum to the cost of every mortgage in Australia, irrespective of whether the mortgage was broker or proprietary originated.”
Brokers face threats from robo-advice and bank cost cutting
Mr Mott said the motivation for his research was that, while banks are heavily analysed, little attention is paid to brokers and how much they cost, with the level of commissions not disclosed by the big banks.
“Rather than being expensed, mortgage brokerage is a contra-revenue that is deducted from net interest income,” he said.
“We believe many people may be surprised at the level of commissions paid to mortgage brokers.”
“We find it astounding that the total commissions paid to mortgage brokers was equivalent to 23 per cent of the cost base of the entire major banks’ personal/consumer divisions in 2015.”
Mr Mott noted the situation was unlikely continue, with brokers facing new threats from the digital world, as well as banks needing to deal with higher costs and a new tax impost.
“Advice for a commoditised, single product such as a mortgage can be easily provided by robo-advice,” he argued.
“We believe the current quantum of economic rent being extracted by the mortgage broking industry is unrealistic and is likely to fall dramatically in coming years.”
Mr Mott said he expected benefits to be passed on to the customer, which would be one way of offsetting the anticipated loan repricing in response to the bank tax announced in the federal budget.