Never a dull moment in Real Estate. This week the industry was on the news again, thanks to the Royal Commission’s recommendation to abolish upfront and trail commissions to the Mortgage Broking Industry – which are currently paid by the banks. This is the not-so-successful UK model and the model introduced in New Zealand In 2004, but repealed years later giving brokers the choice of either a high upfront fee and no trail OR less upfront fee and ongoing trail. If adopted in Australia, the impact will be long lasting and profound for Real Estate, the economy as well as each and everyone of us. I must admit, as an investor, homeowner with a large mortgage, and a father of 2 children coming into adulthood shortly, I am worried about it all and this is why…
Make no mistake… the biggest impact of the RC’s recommendation to change the model so that borrower’s pay an upfront fee instead, is on the 20,000 professionals the industry employs, and their families. I am sure this has been a tough week for all of them with a lot of sleepless nights and I suspect this uncertainty will continue for months until resolved. They have all vouched to fight these recommendations and I have no doubt they will, as I am also certain there will be a lot of support along the way from the rest of the industry and the public.
Why are mortgage brokers worried? Because most of the current operators – especially the small businesses – will be forced to close simply because borrowers will not want to pay the upfront fees, opting instead for the “convenience” of the free service the banks offer. Mortgage Broking, is an industry that has gone from strength to strength in recent years, currently accounting for over 61% of all new loans! My view is that these numbers are only going to increase, simply because of the convenience and results Mortgage Brokers can deliver! 61% and counting, has the Banks worried because of the tremendous amount of power the industry now possesses hence why shares of major Banks jumped and shares on listed Mortgage Broking businesses plummeted at the announcement of the recommendations!
There is evidence to suggest that if the recommendations were to go ahead from the 1st of July 2020, the industry would quickly shrink to only a handful of businesses who manage to survive by catering to the select few who could afford the cost. With fewer and fewer providers, the rest of the public would be left on their own to fend for themselves in a David and Goliath battle they can never win.
If the recommendations were to go ahead, the Mortgage Broking Industry would shrink. Without options, the public would be left to fend for themselves in a David and Goliath battle they can never win!
I just want to make one thing clear. The general belief is that the banks are NOT necessarily looking to eliminate the Mortgage Broking industry altogether. What they hope, is to control and contain it’s growth. The truth is that Mortgage Brokers serve a very useful function for the Banks and that is the function of bringing in new customers. They also, to a lesser extend, take care of that very important – and often neglected – customer facing and administrative function which large organisations always struggle with. Mortgage Brokers it seems, are quite useful to the banks, except for the fact that they cost them money either directly through commissions (1.6B-2B a year to be exact) or by constantly negotiating and putting pressure on them to lower the standard rates – which is a great benefit to all of us!
Mortgage Brokers perform a very important function for the Banks: They bring in new customers. The issue is that it comes with a cost they would rather do without! It’s also a matter of Mortgage Brokers constantly forcing Banks to lower rates through negotiations and renegotiations.
To better appreciate the real life impact of the RC’s recommendations on the general public (current and future borrowers), we need to look into the function and value Mortgage Brokers bring to the table. We need to understand that the job of a Mortgage Broker, requires them to constantly research the loan market. From what I’ve seen, there are countless product/lender combinations at any one time, all of which have subtle – but often important – variations, including different fee structures and rates. For clarity, I am not referring to the “advertised rates” here, the rates one can find on a Bank’s website. I am referring to the rates a Bank would be willing to offer someone, IF they knew what was possible and who to ask. ‘What is possible’ relates to each Bank’s DNA and ‘who to ask’ are those decision makers none of us ever see. This is knowledge that we could never develop, regardless of how many hours we devoted on researching the publicly available records and various forums and chat rooms.
Mortgage Brokers have a great understanding of the lending market as a whole, including variations amongst the countless loans, but also the rates banks would be willing to offer.
What is a Bank’s ‘DNA’? It is their “culture”, preferences, current priorities, processes and their inherent “strengths and weaknesses”. It is the tacit knowledge a Mortgage Broker develops through their dealings with a Bank, knowledge that doesn’t exist on a Bank’s website or any of the brochures. Mortgage Brokers understand the inner workings of the banking system and each and every Bank, and know what each Bank’s priorities are at any given time. They know for example that a particular institution’s current strategy is to go after first home buyers or first time investors… They know which Bank would be more favourable to a long time investor and so on. The reason I know this, is because I have heard many times my Mortgage Broker say things like… “there is no point going to such and such bank right now as we would be wasting our time”. When I try to secure credit as cheaply, quickly and as painless as possible, this type of information is worth its weight in gold! Literally!!!!
Mortgage Brokers understand the DNA and priorities of each Bank at any given time. This knowledge makes life a lot easier and delivers outcomes that a member of the public would never be able to achieve.
But where the real advantage one gets by having a good Mortgage Broker in my opinion, is in the relationships they seem to have… At the heart of a Mortgage Broker’s success, is their ability to cultivate and build relationships with the specialists and the decisions makers within the banks. These are members of staff that the general public would never see or speak to. I’ve always imagined them to be some type of actuarial geniuses, hidden in secret rooms in the basement, looking at charts all day long and making multi million dollar decisions for us mere mortals! The reality is probably far from that, but to me that’s what it always felt like so I will stick with that vision.
Having a Mortgage Broker therefore on your side, one that can identify then negotiate rates and conditions directly with the decision makers, is invaluable. It’s a task that would be impossible for any of us to do as a member of the public EVEN IF WE SOMEHOW WERE ABLE TO FIGURE OUT WHO THESE ACTUARIAL GENIUSES WERE! Just imagine for a second, calling in to negotiate a better rate… I’ve been dealing with the Banking sector for 30 years and worked for one for over 5, but in all honesty, when it comes to loans, I wouldn’t have the slightest idea of what ticks a Banker’s box. Getting a favourable decision from a cold call to someone I’ve never spoken to before, sounds like a scary proposition…. “Hello, I am Chris and I am ringing to renegotiate my $500,000 loan. What kind of deals do you have at the moment?”… Scary… Neither practical OR possible, but amusing to entertain for the purposes of this article!
Mortgage Brokers have contacts and relationships with the real decision makers within the Banks. These are relationships which the public could never develop but which are very useful to have when negotiating or renegotiating your loan.
So where does that leave us in a world without our Mortgage Brokers? I guess the only viable option would be to turn the clock back to the days we used to visit the nearest of the local branches or called the 1300 loans department number for help. The days that there was no shopping around and you went directly to the Bank you had the best affiliation with! Those were the days we were keeping our fingers crossed that our Bank had the best deal for us and there was nothing better out there! We accepted the Terms and Conditions we were given and, not knowing any better, we were just grateful to have our loan approved!
That’s exactly what all of us used to do and we were never happy with the service we were receiving from the front line staff. It was clear that they didn’t have the required specialist knowledge or authority to make any decisions. Every time I went down that path, it took weeks longer to resolve even the simplest queries. My assumption at the time, was that front line staff ALSO didn’t have direct access to the specialists or decisions makers! If a Mortgage Broker is one layer removed from the decision maker, I can safely assume that the person on the 1300 line is most likely 2, 3 or 4 layers removed from them! I can still vividly remember the heartaches I would have, trying to get my loan approved via my local Kingsgrove branch, all while eagerly hoping to secure our dream home. Not pretty and I’d hate to go back to that…
I still remember the days I went down the local branch to secure our loan and it was a really bad experience! I hope we don’t have to go back to that!
To be fair, Australia needs a strong banking system. We need our banks to be in good financial position to help our economy grow. But equally, we also need competition. Competition is good for everyone as it keeps businesses on their toes. Businesses thrive under strong competition and unfortunately, the opposite is equally true: Lack of competition has regularly killed market leading business, with numerous examples of management teams of household names falling asleep at the wheel… Nokia and Kodak are 2 such examples. Sure we think Banks are safe, but the truth is they are not… the digital era is here. Geographical, political, technology and entry barriers are disappearing at the blink of a eye. Without the Mortgage Brokers working on behalf of the Banks in the community, the real estate industry will grind to a halt and the banking industry will also suffer. Loans will become more expensive and take longer to process. A LOT LONGER if my own experience was anything to go by. As a result, there will be less money to go around which will impact further the current embattled real estate industry but also the economy in general. Wrestling back control and saving $200m a year sounds like a great outcome for a Bank, but what good would it be if it was at the expense of the economy?
Without Mortgage Brokers working in the community like they are today on a customer facing role, the real estate industry could grind to a halt. Loans would become more expensive and take longer to process.
As I am closing my article, I can’t help but wonder if there is another way… Could a better outcome be achieved for all if the Banks, instead of trying to contain the Mortgage Broking Industry, found a way to work more cooperatively and harmoniously with them for the benefit of the consumer???? One would think so.
Who we are:
NextGen Property Mgmt (www.nextgenpm.com.au) is a boutique Real Estate licensed agency that specialises in property management. NextGen Property Mgmt does NOT has a sales team unlike most other agencies that specialise in Sales and have Property Management as a side business. Our area of focus is residential property and we operate in Inner and South West Sydney, as well as St George. NextGen was created from its infancy to cater for investors as it was founded by investors who quickly realised that in a highly regulated industry like Real Estate – competence, expertise, care and service by property managers varies greatly. As an investor, you need to have trust for and feel valued by your property manager. You need to know that your property is being looked after with minimal disruption and you are getting maximum return for your investment. At NextGen we understand that because we are investors living busy lives ourselves, so our promise to you is that you will no longer have to worry about your most valued asset because we will make sure to take care of it as if it is our own. If you want to learn more about us just click here to organise a time for a chat. Or call us on 0414 494 840. We would love to hear from you and to share our story.