Big savings in overhaul of mortgage broker fees

The banking sector would reap annual savings of between $800m and $1.6bn if there are sweeping changes to mortgage broker pay.

The banking sector would reap annual savings of between $800 million and $1.6 billion if there are sweeping changes to mortgage broker pay as a result of the Hayne royal commission.

That’s the view of analysts at Credit Suisse, who conducted detailed modelling of potential changes to mortgage broker pay given issues raised at the royal commission last year.

The broking industry is on tenterhooks ahead of the Hayne final report, due by February 1, which could call for a flat or tiered fee over banks paying brokers upfront and ongoing commissions.

The Credit Suisse analysis came as new data showed mortgage brokers accounted for a record 59 per cent of residential loans in the September quarter, despite a slowing housing market.

Credit Suisse analysts expect changes to mortgage broker pay on the back of the royal commission, and tip the banks will be big winners.

“Our modelling shows annual savings of $800m-$1.6bn (excluding grandfathering) for the banks,” the analysts said in the research note.

“Of the major banks, Commonwealth Bank and Westpac benefit given their size, while ANZ benefits given its higher broker usage.

“Our read is that the commissioner is in favour of the industry moving to a flat-fee model with no trail — the Dutch model — however, there are other models in operation globally.”

Among the observations on mortgage brokers in commissioner Kenneth Hayne’s interim report were that “value-based remuneration conflicts directly with customers’ interests”.

Part of that argument centred on the fact brokers were incentivised to lend borrowers more than required because banks and lenders pay them a percentage of the loan amount upfront and an ongoing “trail” percentage annually.

The industry is, however, moving to a model where only the drawn down loan amount can attract a commission rather than the total borrowed.

Credit Suisse’s modelling included a move to a $2500-$3500 flat fee paid to mortgage brokers, and also assessed a tiered fee structure and a move to only an upfront commission being paid.

“The Dutch model results in annuals savings of $100m-$400m a year for each major bank. Westpac’s larger average loan size sees it as the relative winner, though each major bank benefits,” the research said.

“Regional banks tend to have lower average loan sizes; while they benefit from a flat fee at the lower end ($2500), the benefits are negligible at a level of $3500.”

Under a tiered structure, where there are three levels of flat fees depending on the loan size, Credit Suisse estimated the big banks would benefit by $200m-$400m every year, while the regional banks would get a $100m annual boost.

If the royal commission were to recommend banning trail commissions, Credit Suisse said the major banks would benefit by $200m-$400m a year.

Data commissioned by the Mortgage & Finance Association of Australia, compiled by a unit of CoreLogic, points out that mortgage brokers settled 59.1 per cent of home loans in the September quarter, up from 55.7 per cent a year earlier.

MFAA chief executive Mike Felton said the result highlighted the “systemic importance” of the mortgage broking industry to borrowers.

“As banks have persisted in making it more difficult to secure a loan, turning many would-be borrowers away, consumers have continued to increasingly use the broker channel,” he said.