Terry McCrann: They won round one, but mortgage brokers are on a hiding to nothing

Mortgage brokers have won the first round by persuading the government to scrap plans for a ban on trailing commissions. But in two months, it will count for nothing, writes Terry McCrann.

Mortgage brokers and, even more importantly, borrowers have won the first round: the current federal government won’t take up the royal commission’s invitation to destroy the industry and send all borrowers back into bank branches.

The victory though is meaningless; the clue is in that word current government.

With all due respect to Treasurer Josh Frydenberg, what he says about almost anything now is completely irrelevant.

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Indeed, in two weeks we are going to go through the remarkable — and in the modern era, unique — exercise of analysing in great detail a Budget that will already be dead, dead, dead.

In two months, Bill Shorten will be prime minister and Chris Bowen will be treasurer.

In terms of mortgage brokers, the only thing that matters is what they say a Labor-Green government will do.

It really matters because what they say they will do they will do. They will either have an outright majority in the Senate or so close to one that they would only need one or two votes from the rabble in the middle to get things done.

Yellow Brick Road founder Mark Bouris lobbied hard for the federal government to scrap its plan to ban trailing commissions for mortgage brokers. Picture: Kym Smith

Contrast that with the current government. It doesn’t even have a majority in the lower house; and the Senate? Fuggedaboutit.

This makes weird the effort put in by the broking industry to get the government to change its collective mind on its initial response.

The government, remember, had initially planned to accept the royal commission’s proposed ban on commissions paid by banks.

And it renders even more utterly bizarre the hollers of congratulation and high-fiving from brokers when Frydenberg announced the government would continue to allow so-called trailing commissions and review it all in three years.

Bluntly, this government isn’t going to be reviewing anything in three months, far less in three years.

The only policy that matters is Labor’s. And right now it is to ban trailing commissions but allow banks to pay brokers a lump-sum commission of no more than 1.1 per cent of the loan.

If push came to shove, everyone could probably make that work; although “making it work” would have to involve turning that upfront commission into a de facto reverse form of a trailing commission, so that a significant part of it is “clawed back” by the bank if the loan is repaid quickly.

Chris Bowen will be the treasurer within months, Terry McCrann says.

Either that, or the borrower would have to pay the commission either upfront, or progressively over the life of the loan in the form of a higher interest rate: that is to say, a de facto trail commission.

It’s just basic reality. Somebody has to pay the costs of the broking industry; and that somebody is going to be the borrower one way or another.

The justification — the quid pro quo — is that the explosive growth of mortgage brokers since the mind-1990s has delivered big savings to borrowers even after including the costs of their commissions.

The competition to sign up borrowers, first set running by John Symond at Aussie Home Loans, has cut the interest rate a borrower would otherwise have paid by around 1.25 to 1.5 percentage points.

That figures is net after allowing for the extra charged by the bank to pay the broker commission.

On a $400,000 loan, that would be saving the borrower around $500-600 a month; on a $600,000 loan more like $750-$900 a month.

The banks haven’t being doing it out of the goodness of their collective banking hearts.

They were forced into it by competition. But they’ve also made it work in a win-win-win way.

The broker channel can deliver borrowers efficiently and they save on direct staff costs in comparison with the “old days”, when all loans were done in the branch.

John Symond was a trailblazer in the Australian mortgage broking industry. Picture: Darren Ornitz

Mortgage trailing commissions, though, have a bad name because of what’s been happening with financial advice: where commissions were paid and continued to be paid even though the advice had stopped, or worse, the advice had been bad or fundamentally conflicted and either way cost the client serious money.

In mortgage broking, the trailing commission is just a one-off fee for a very specific service — selecting the best mortgage, including but not only the best interest rate, and getting it for the client.

The “trail” is only to spread the fee instead of hitting the client with it in one lump upfront.

The proof of its value is in the fact that these days, something like 60 per cent or mortgages are done through brokers, and not directly with a bank.

Unlike with super, it is entirely the borrowers choice; and borrowers have very affirmatively voted with their feet.

It would be best — for borrowers — if Labor took the extra step and promised to continue to allow trailing commissions.

But the industry — the banks and the brokers — must also come up with new rules that address concerns about conflicts and overselling.

The mindset must be to deliver mortgages to customers not, as present, to deliver customers to mortgages.