Four questions about mortgages the ACCC inquiry should put to the big four banks

Four questions about mortgages the ACCC inquiry should put to the big four banks

The Australian Competition and Consumer Commission conducted an inquiry into mortgage pricing as recently as last year.

Now Treasurer Josh Frydenberg has asked it to do another, broader one, in order to ensure the banks’ pricing practices are “better understood”, and perhaps also to concentrate their minds on the wisdom of fully passing on the next collection of rate cuts.

There’s a lot to better understand.

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Have the lending floodgates really opened?

Have the lending floodgates really opened?

n June the Australian Prudential and Regulation Authority (APRA) announced its first relaxation of credit controls imposed on the banks since its imposition of much tighter controls in 2017. These had been imposed to wind back a ramp in lending to property investors, to put a ceiling on interest-only lending, and to force the banks to more thoroughly consider individual borrower’s living expenses.

From APRA’s perspective, this has had the intended effect on the property market. The rampant growth in capital city property prices was controlled, and risks to the financial system implicit in highly geared investors, and even owner-occupiers holding interest-only loans in a property market “bubble”.

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Understanding fixed and variable interest rates

Understanding fixed and variable interest rates

Choosing which loan structure is best for you depends on your personal situation, possible changes in income or expenses, and your short term expectations with your property. Your overriding approach should be to understand that fixed interest rates are a risk management tool; they are not necessarily a way to save money. Do not try to second guess the interest rate market. My rule of thumb is that 80% of the time lenders will end up ahead on any fixed rate loan contract, simply because they understand money markets much better than their customers.

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Are Trailing Commissions Money for Nothing?

In what has been described as “an opportunistic attempt to to reduce competition in the Australian mortgage market”, CBA CEO Matt Comyn has disingenuously led the Royal Commission Into Financial Services Industry to form the view that Mortgage Brokers are paid trailing commissions, but not required to do any work to receive them.

an opportunistic attempt to reduce competition in the Australian mortgage market

To help Mr Comyn to better understand the industry at grass roots level, I have prepared for him the following definition of “no work”.

“The No-Work” Carried Out By Mortgage Brokers in Return for Trailing Commissions

  • Maintain a local office to service clients

  • Employ staff to help cater for post settlement service enquiries on loans under management

  • Continuing Professional Education (min 30 hours per year)

  • Maintain Professional Indemnity Insurance

  • Conduct regular client loan reviews

  • Keep the banks honest – negotiate regular interest rate reductions as a bulwark against lenders’ practices of creeping rate margins

  • Assist clients with loan increases/ restructures / loan discharges

  • Prepare client claims on loans with progressive payments (construction loans)

  • Provide financial education via client newsletters and market updates

  • Help clients with debt scenarios and calculations when they are trying to make plans for the future

  • Provide local personalised service where clients do not wish to wait in long phone queues to ask a bank call centre questions about their loan

  • Act as advocates to help clients resolve bank errors to their satisfaction

Notes:

  1. all of the above are done while a Mortgage Broker meets all the costs of running their own business including IT systems (hardware and software), communications systems, stationery, public liability insurance, staff benefits including training, superannuation and annual leave, accounting systems, services subscriptions, aggregator fees, transport, utilities, mail and couriers and marketing.

  2. Trailing commissions provide an important component of cash flow stability which help to keep broking businesses viable, and staff employed in a fluctuating market. They exist for the same reason that bank interest margins do.

  3. Not every broker will do all of the above but then neither is every company CEO as diligent or effective as their industry peers in properly managing their businesses, recognising problems and addressing them courageously and ethically in the interests of all stakeholders.

They exist for the same reason that bank interest margins do.

The events at the Royal Commission this week have been likened to throwing mortgage brokers under a bus. In fact it has become a little crowded under that bus this week.

Thrown-under-the-bus-600x400.jpg

"To throw (someone) under the bus" is an idiomatic phrase in American English[dubious – discuss] meaning to betray a friend or ally for selfish reasons. It is typically used to describe a self-defensive disavowal and severance of a previously-friendly relationship when the relationship becomes controversial or unpopular or inconvenient. (1)

  1. Wikipedia - Throw under the bus

Through a Different Lens

Through a Different Lens

The peak body for Mortgage Brokers, the MFAA has issued a strong defence of the current lending industry structure following bad publicity emanating from the Royal Commission into the banking sector. Whilst nearly all of the bad behaviour exposed by the Commission has fallen directly at the feet of the banks, some of the major banks have tried to use the commission as an opportunity to wrest back control of the lending market.

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