Paying for brokers to get rich

AUSTRALIAN lenders pay among the highest commissions in the world to mortgage brokers, while passing on costs from the credit crisis to borrowers.

Paying for brokers to get rich

Borrowers are being urged to look away from the big banks to get the cheapest long-term mortgage rates, as they continue to pay exorbitant commissions to mortgage brokers.

Despite a squeeze on the banks' profits because of a rise in the cost of funding, lenders are still paying among the highest commissions in the world to mortgage brokers, while passing on much of the cost from the credit crisis to borrowers.

Experts say the cost to borrowers far exceeds the recent interest rate rises by the banks.

Hamish Carlisle, a former banking analyst at Merrill Lynch and now boss of direct lender quickdirect.com, which does not pay broker commissions, said: "These commission payments add an average of 0.56 per cent to the cost of Australian mortgages and are priced into all mortgages, whether the customer took their loan through a broker or not.

"Most borrowers are under the illusion that mortgage advice is free, but it is not. You might not have to give the broker any money, but the cost of their advice is priced into the mortgage rate that you pay.''

Brokers typically receive up-front commissions of around 0.65 per cent of the entire loan amount, followed by a so-called "trail'' commission of 0.20 per cent of the loan amount every year that the loan is in force.

Some banks, such as NAB, even raise the trail commission to 0.35 per cent from the fourth year onwards to try to persuade brokers not to switch the customer to a better deal from another bank.

In other words, brokers are rewarded for doing absolutely nothing, while borrowers bear the brunt of the costs. In the UK and the US, trail commissions on mortgages are unheard of.

It is estimated that commissions cost all borrowers about $2 billion a year in extra interest.
Some banks are raising commissions to try to steal business from other banks - effectively, bribing brokers to recommend their products over their rivals.

A senior executive at one bank said: "Competition is tight and margins are being squeezed, so banks need to try to pinch market share from each other.

"In times like these, you see some banks cut profit margins to wafer-thin levels to attract business with their good rates - and others ramp up their commission payments to try to get more business.''

Although it would help bank profits if they didn't have to pay mortgage brokers, the banks fear that they will lose too much of their business if they cut commission payments or stop them altogether - and with good reason.

Bank of Queensland stopped paying commissions to brokers in 2004 and now receives no business at all from the broker market.

Neill McCann, manager of home lending at Bank of Queensland, said: "Brokers used to account for 20 per cent of our business but, since we stopped paying commissions, that has dropped to nothing.

"But we have more than made up the difference by opening more branches and changing our model to manager-owned franchised branches and this is working really well. We also find that our borrowers stay with us longer because brokers aren't constantly churning the business.''

Brokers are encouraged to switch borrowers to new lenders at regular intervals because they receive the highest commissions when they give a different bank a new customer.

Brokers currently account for around 40 per cent of banks' mortgage business.

Mr Carlisle says borrowers must take matters into their own hands: "Banks won't cut the commissions because the brokers will simply refuse to sell their products.

"We charge a standard variable rate (SVR) of 7.64 per cent -- that's about one per cent cheaper than the SVRs of the big banks and would take away the pain of the past four rate rises.''