Although many brokers celebrate the government’s decision that to scrap the royal commission suggestions, one broker believes the industry would be better off without mortgage-commissions.
Mitchell Johnston, founder of Welcome Home Financial Advice, sent an open letter to the mortgage industry stating that brokers would have more opportunities to offer greater value to their clients if they eliminated mortgage commissions.
Johnston said that the removal commissions will not impact competition in the lending market. He claimed that brokers will continue relying on lenders, contrary industry opinion.
The mortgage industry is dominated by the big four. These four banks hold 75% of new business despite all the competition that the brokering industry has brought to the market over the last 25 years. He said that this was not the best way of ensuring long-term success for our customers.
Johnston said that the industry shouldn’t depend on commissions for healthy competition. The Australian Competition and Consumer Commission is responsible for monitoring anticompetitive behaviour.
Although keeping commissions will increase power over the sector for big banks, it would make it difficult for smaller lenders stay afloat because of higher upfront costs.
“Brokers will, without trail, be looking to ‘churn’ their clients more frequently. A slightly lower rate and a perception of a ‘free service’ mean many consumers will let them. This might seem like a good thing for competition, but you can only see the short-term. He stated that it is easier to see the potential damage if you look at the long-term.
Johnston also argued that a consumer-pays model would instantly benefit consumers — a decline in interest rates is one of the upsides. Johnston stated that a $500,000 loan with interest rates of 0.2%5% per annum and a term of five years could be reduced by eliminating commissions.
“Lenders may withhold some profits. Others will see the potential for marketing through our channel, and may offer this discount to customers who have reached out to an intermediary broker. Others will share it. This is how markets work, he said.
Johnston stated that there are many benefits that borrowers can take advantage of that will allow them to decide on the price of broker service. One example of this is the facilitation mortgage broker.
The company could operate on a low-cost and high-turnover model. I would envisage this type of company would cost the consumer anywhere between $300 – $1000 to take the information from the client and submit it to a lender – most likely one offering ‘broker introduced’ rates,” Johnston said.
To assist borrowers, a lending specialist would be available. This service is more expensive and specializes in non-conforming loans.
Johnston also predicted that the number of financial advisors will increase to be able to help clients with their home loans as well as their overall financial planning.
Johnston states that these are only a few options available to consumers and brokers if commissions are banned.
He said, “We cannot continue to tell people, just because it’s $500,000, that we get twice the income from loans of a million dollars, than we do from loans of $500,000.” The complexity of a submission is based on the client’s personal situation, not their loan size,” he said.