Oct 19

Do not underestimate the value of a mortgage broker in Australia

Published in new car loannew car financemortgage brokerhome loan financehome financecheap home loan by Vicky Edema
Many banks have recently taken advantage of the global credit crunch to reduce the commissions paid to a mortgage broker within a bank’s mortgage broker distribution network. Over the past 15 or so years, the majority if not all of the banks have relied on mortgage brokers to generate a significant portion of their new business. Why did the banks cultivate this distribution channel so fervently? The banks paid commission to a mortgage broker only once a home loan had settled. This was seen to be a much more cost-efficient way to generate new home loan business. By utilising the skill of a trained mortgage broker banks avoided paying on-going costs for branches and staff who were employed to process new home loan applications - many of which did not proceed to settlement. There was a huge carrying cost for the banks which was reflected in the interest rate charged to a borrower. A bank’s margin over the cost of its funds was much higher before the advent of mortgage brokers and the rise of the non-bank lenders who at last brought competition into the home loan market in the early 1990s.

The banks have now turned their backs on the mortgage broker. They have used the global credit crunch to justify cutting back the commissions they pay to their mortgage broker distribution channel. In doing so they fail to recognise or acknowledge the contribution of the mortgage broker to the growth of their home loan portfolio, or the effort of the mortgage broker in maintaining his professional standards and cementing an actual loan deal. A mortgage broker is generally required to be a member of a professional body (fees and costs involved in membership); a mortgage broker is required under professional body rules, to undergo training and be familiar with the laws governing mortgage broker activity (e.g. Anti-Money Laundering/terrorism laws, Privacy Act, Uniform Credit Code (courses covering these topics are available through such organisations as the Mortgage Finance Association of Australia (MFAA) but again the mortgage broker must pay a fee to enrol). A mortgage broker must be familiar with the terms and conditions of a wide range of loan products and as such must attend regular training sessions on product information and updates run by various institutions (another cost in travel and time away from seeing potential borrower clients). The mortgage broker today must be familiar with and access sophisticated software which he needs to ensure is regularly updated with any changes to loan products or processes.

Not only are there these business costs for a mortgage broker but in his role as a mortgage broker he might see many customers before he takes an application and submits it for approval to a bank or non-bank lender. The normal process for a mortgage broker is to promote his mortgage broking services as much as possible, follow up on an enquiry by a home visit to the borrower, take an application for a home loan, make identification checks, seek supporting information for the home loan application (PAYG slips, loan statements etc) and then submit the loan application to the borrower’s preferred lender.

The banks decision to reduce commissions paid to a mortgage broker has not been driven by a desire to reduce mortgage rates to new home buyers. There is no evidence to suggest that interest rates have been reduced in line with recent cuts to commissions being paid to mortgage brokers. Rather it would seem, the commission cuts of a mortgage broker have simply bolstered the profit coffers of the banks.
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