Banking royal commission: mortgage broker overhaul ‘a win for borrowers’

Consumer advocates claim borrowers will no longer be shunted into super-sized loans if the government adopts a Hayne proposal.

Grantley Davis at his Gold Coast car dealership. Picture: Lyndon Mechielsen

Home loan borrowers will no longer be shunted into super-sized loans with higher interest rates if the government adopts royal ­commissioner Kenneth Hayne’s proposals to end trailing commissions for mortgage brokers, consumer advocates say, amid an industry-wide revolt against the ­recommendations.

However, potential mortgage borrowers will still face a “new normal” in which the expenses and income of consumers will be far more closely scrutinised, which could leave some prospective homebuyers unable to secure loans.

The fallout from the Hayne report continued yesterday, with Australia’s car dealers incensed over a commission proposal that would require car salesmen to be licensed to sell automotive loans.

Australian Automotive Dealer Association chief executive David Blackhall said many small and ­regional dealerships lacked licences to sell credit and the recommendation, which has government support, would have uncertain implications for car-yard borrowers.

Grantley Davis, 55, who owns Southport Motors, a family-run second-hand car dealership on the Gold Coast, said he had already seen banks clamp down on car loans for customers in the run-up to the release of the report.

He anticipates a further squeeze following the commission’s recommendations.

“I’ve seen sales drop 25 per cent over the last few months,” he said.

“The lending has just tightened up and the ordinary person would get a loan but in the current climate they can’t.”

The Morrison government has treated a proposal to dump trailing commissions paid to mortgage brokers, which total close to $3 billion a year, with caution amid concerns the move would obliterate the industry and reduce competition in the market.

It faces a fight with Labor over the recommendation after Bill Shorten committed to adopt the proposal in full, as opposed to the government’s plan to grandfather current arrangements and ban new trailing commissions from mid-2020.

Shares in Mortgage Choice and Australian Finance Group, two of the country’s biggest mortgage broker networks, crashed 30 per cent yesterday amid fears the abolition of trailing commissions would destroy the brokerage business model. Finance Brokers ­Association of Australia managing director Peter White said getting rid of trail commissions could increase interest rates.

“This could force upfront commissions to rise in order to compensate for reduced revenues to brokerages, which in turn will lift interest rates and make housing affordability more difficult,” Mr White said.

Consumer advocacy group Choice said the proposals would mean customers would be getting the best deal for their home loan and not the best deal for the mortgage broker.

“Brokers make lots of promises to get you the ‘best’ or the ‘perfect’ loan but legally they just need to arrange something you can afford to pay,” Choice director Erin Turner said.

“We need laws that make them live up to these basic promises.”

The Productivity Commission’s review of competition in the financial system found brokers were earning $6000 in trailing commissions for an average home loan of about $350,000.

Because trailing commissions were gifted according to how big a loan was, consumers were sold into bigger loans.

The lucrative kickbacks from the banks also gave brokers “perverse incentives” to stop borrowers from switching banks and getting a better deal.

This “price of loyalty” to a lender cost up to $87 a month for borrowers who did not refinance with a cheaper lender — equal to an extra $30,000 over the life of a loan, the Productivity Commission said.

Mr Hayne said the “chief value of trail commissions to the recipient, to put it bluntly, is that they are money for nothing”.

CoreLogic head of research Tim Lawless said the removal of trail commissions would obviously have an impact on the industry and a potential side-effect of its removal could encourage mortgage brokers to churn borrowers through lenders.

This runs the risk that increasing upfront costs to lenders could be passed on to the borrower.

“Smaller lenders without a branch network would seemingly need to invest much more heavily in their digital channels in order to compete with the big four banks,” Mr Lawless said.

A new cottage industry of online comparison sites would likely become much more prevalent where lenders could bid for a borrower’s business.

“We want good brokers who actually get us the best deal,” Ms Turner of Choice said.