What do borrowers think about getting a mortgage? Annie Kane outlines some of the key findings from the Consumer Access to Mortgages Report.
Ever since I’ve been in this industry – nearly three years now – there has been an unrelenting focus on the way the broker market works, particularly in relation to the way brokers are paid.
ASIC kicked off the proceedings with its remuneration review, looking at how the broking market works and trying to determine what a broker-introduced loan looks like. In hot pursuit of the ASIC report was Stephen Sedgwick’s Review into Retail Banking Remuneration that looked at sales commission and product-based payments across the finance industry.
While there have been several smaller reports since then, the largest one to impact the broking industry to date has been the report from the Royal Commission into Misconduct in the Banking, Financial Services and Superannuation Industry. While this report pulled from thousands of submissions from those in the banking industry and heard from consumers that had been victims of misconduct from the finance sector, there has been little work done around what borrowers actually want, or value, when securing a mortgage and what they think about the way brokers are remunerated.
To finally understand what consumers think of the mortgage process, The Adviser last year appointed Momentum Intelligence to undertake research of its own to put to rest the debate around what it is consumers really want when getting a mortgage.
The Borrower Experience Survey asked broker and bank customers about why they used a broker or went directly to a lender, what their experience and sentiment was around broker commissions and, importantly, what their satisfaction levels were with the distribution channel they used, among other topics.
As well as being promoted to borrowers across relevant Momentum Media brands, including Smart Property Investment and Nest Egg, the survey was disseminated further by brokers who kindly shared the survey with their clients.
In total, 5,782 respondents completed the survey, the largest response we’ve ever had to a survey of this kind. The responses were collated and formed the backbone of a new white paper, the Consumer Access to Mortgages Report.
The key objective of the final white paper is to establish whether borrowers have benefited from the growth of the mortgage broker channel and the impact of
the current broker remuneration model on consumer outcomes. It also considers what impact a change in broker remuneration would have on the viability of the third-party channel and, ultimately, how that would impact borrowers.
The following are some of the key findings from this white paper and build on themes raised during the launch event on 31 January.
Speaking at the event, Alex Whitlock, director at Momentum Intelligence, said that understanding the borrower experience when securing a mortgage was critical, given that change could potentially be implemented to change the broker channel, which now accounts for nearly 60 percent of all new loans.
“There has been considerable scrutiny on how the behaviour of the financial services sector has impacted Australians, and this is long overdue. The customer, and their needs, should be front and centre for every institution and their intermediaries,” he said.
“Mortgage distribution is quite rightly in the spotlight as part of the royal commission, particularly when it comes to the impact of commissions on the borrower outcome.
“To support this, Momentum Intelligence surveyed borrowers to gain a unique and valuable insight into their experience and ultimately their level of satisfaction.
“The findings of this survey have major ramifications for both borrowers and brokers, and should be considered with great weight by legislators before any recommendations are made,” Mr Whitlock said.
In the Borrower Experience Survey, mortgagors were asked which channel they used to secure their most recent mortgage. They were then asked how satisfied they were with their experience.
Notably, the survey showed that mortgage broker clients were overwhelmingly satisfied with their experience. Ninety-six per cent of borrowers who had used a mortgage broker in their most recent experience were either “satisfied” or “very satisfied”. Moreover, the majority (84 per cent) of broker clients said they were “very satisfied” with their last experience.
This contrasts to the direct channel – with only 67 per cent of borrowers that had secured a mortgage directly through a lender saying they were either “satisfied” or “very satisfied”, and just over a quarter (25.8 per cent) saying they were “very satisfied” with their experience.
Building on this, the survey asked respondents which channel they would use if they were to take out another mortgage in the future. Close to 96 per cent of borrowers who used a broker said they would do so again, while less than a third (31.40 per cent) said they would directly go to a lender again. Interestingly, more than 63 per cent of direct-to-lender mortgagors said they would switch to using a broker for their next mortgage.
To understand what drives a mortgagor to a particular channel, the Borrower Experience Survey asked respondents why they had gone to their channel of choice for their home loan.
Broker clients largely did so because they believed that they would be most likely to get the best loan for their needs (59.5 per cent) and believe they will have access to the wider choice of products that are available (45.4 per cent). However, for the direct channel, these figures were only 44.6 per cent and 31.4 per cent, respectively – showing that direct-to-lender borrowers are aware that they will only get a limited choice of products for their home loans.
Momentum Intelligence outlined in the white paper that when understanding the implications of the current remuneration structure on consumer outcomes, it is important to consider the attitudes, perceptions and priorities of borrowers in relation to the issues raised.
The Borrower Experience Survey therefore outlined that a broker is typically paid a commission by the lender and does not receive a base salary. Noting that the primary source of income for a broker is lender commission, the survey asked borrowers what their thoughts were on this structure and whether they would consider paying a broker a fee.
These questions were specifically asked given the commentary that had been put forward by Mr Sedgwick around fees for service, and the royal commission had also raised the suggestion of whether brokers could move to a borrower-pays fee-for-service model to ensure that their remuneration is not perceived to be, or actually be, conflicted.
Given that CBA CEO Matt Comyn also told the royal commission that he believed a consumer-pays model was “the most attractive model”, The Adviser asked Momentum Intelligence to identify whether consumers would pay for broker services – and what amount they would consider paying, if any.
Findings from the Borrower Experience Survey indicate that nearly 80 per cent (78.6 per cent) of borrowers who have used or intend to use a mortgage broker “have no concerns with this structure”. Further, respondents who had provided further detail on this answer outlined that they did not feel that the products recommended had been influenced by the level of commission paid by the lender.
Less than a fifth (17.9 per cent) of respondents indicated that they had “some level of concern” with the broker remunerations structure, while 3.6 per cent said they were concerned with it. Overall, those who were concerned with the structure generally pointed to a concern that the broker could be influenced to recommend a certain lender’s product to them.
However, Momentum Intelligence noted that it was important to consider that this questionnaire was conducted while the royal commission was ongoing and that broker remuneration was the focus of several of the hearings.
On top of this, Momentum Intelligence highlighted that there is limited evidence to suggest that mortgage brokers actively pursue lenders who provide the highest rate of commission.
In fact, Momentum Intelligence’s Third-Party Lending Reports, printed annually in The Adviser, show that brokers do not tend to consider commissions when choosing products. According to these reports, commission structure and remuneration are consistently ranked in the bottom 26 per cent of attributes that brokers say influence their decisions when selecting a lender.
Instead, the factors that consistently influence a broker’s selection are the lender’s product policy, product pricing and turnaround times. Each of these factors are directly related to ensuring the application and lodgement processes are handled efficiently and effectively to maximise the likelihood of the borrower’s loan being approved in a timely manner. This approach is consistent with the fact that mortgage brokers rely on referrals and repeat business from their existing clients by providing a high quality of service.
Indeed, this could indicate that rather than a true conflict of interest, perhaps there is merely a perception of conflict due to a lack of understanding of how brokers recommend lenders.
Given the debate around the feasibility of a consumer-pays fee-for-service model, Momentum Intelligence asked respondents who have used, or intend to use a broker in the future, whether they would be willing to pay a fee for the service. Nearly two-thirds (58 per cent) said they were not willing to pay a broker a fee.
While two-fifths of respondents said they were willing to pay a fee, the vast majority were only willing to pay a nominal fee. Just 11 per cent were willing to pay a maximum of $1,000 for a broker’s service, 3.5 per cent up to $2,000, while only 1 per cent were willing to pay up to $5,000.
A common theme uncovered from these responses was that while they prefer to use a mortgage broker, they would be unable to afford to pay a fee-for-service if it was mandated.
Momentum Intelligence wrote in the report: “If the average upfront commission of $2,003 was to be converted to a fee paid by the borrower, only 3.5 per cent of consumers surveyed would pay an amount at or above this threshold.
“Therefore, if a ‘consumer-pays’ fee-for-service was mandated, if all else stays the same, 96.5 per cent of consumers who currently use mortgage brokers would not be willing to pay a fee equivalent to the average upfront broker commission received from a lender.”
Given that the average broker currently earns around $86,000 (according to Deloitte’s recent Value of Mortgage Broking report), it would seem very unlikely that brokers would be able to afford to run their businesses (and pay their staff) on a reduced income.
Indeed, you could go one step further and suggest that this could, in effect, decimate the industry – reducing the size of the industry from 14,200 active brokers to a measly few hundred.
Given the findings of Momentum Intelligence’s Consumer Access to Mortgages Report, a fee-for-service model would restrict the ability of borrowers to access mortgage brokers.
“While it is worth considering the impact of fee-for-service on the mortgage broker industry, it is of critical importance to consider how a major shift to the proprietary channel could impact the overall health of competition in the mortgage market.
“Based on this survey and the analysis above, a large majority (58 per cent) of existing mortgage broker customers (96.5 per cent) would no longer use the mortgage broker channel. By default, that would mean returning to the lenders with the biggest branch networks.
“This would significantly reduce the reach of smaller banks and lenders that have been able to compete with the major banks via the mortgage broker channel,” the report reads.
“A reduction in competition and subsequent diminishing market share for smaller lenders would empower the biggest institutions to increase their margins and reduce their product range.
“There is a danger that a marketplace dominated by the major banks would result in higher interest rates, tighter lending policy and fewer mortgage products for Australian borrowers,” it concludes.
The findings provide much-needed empirical evidence of the impact that any potential shift to broker remuneration could have on the broking industry and competition in the Australian mortgage landscape generally.
Given that the ACCC’s recent mortgage pricing inquiry warned that the five largest banks were sometimes “synchronising” mortgage pricing activity in reaction to macro-prudential measures that therefore undermined competition, having a strong broker network is key to ensuring stronger competition.
Moreover, seeing as the royal commission was charged with identifying (and reducing) misconduct in the banking sector – with a particular focus on the bigger banks – giving them more unchallenged power would seem like a counterproductive move.
But there could be hope. Treasurer Josh Frydenberg has suggested that the government response to the royal commission report would consider competition.
Speaking to an audience at The Sydney Institute on 22 January, Mr Frydenberg said that the central tenet of the government’s eventual response to the final report would be “restoring trust in the financial system by delivering better consumer outcomes”.
He continued: “This requires a culture of compliance and accountability, regulators that are fit for purpose and an acknowledgement by the sector that people must be put before profits. All of this must be achieved without inadvertently strengthening the position of incumbents or unduly restricting the flow of credit or other vital financial services that Australians need and the economy relies on.”
If this premise is applied to broking, one hopes that this would protect the current remuneration model. Moreover, the Treasurer cited Commissioner Hayne’s interim report suggestion that more regulation may not be the most suitable path to take.
He said: “Commissioner Hayne makes the telling observation that ‘much more often than not, the conduct now condemned was contrary to the law’. He makes clear that while behaviour was poor, misconduct when revealed was insufficiently punished or not punished at all.
“This raises the issue as to whether new laws are required or whether existing laws simply need to be better enforced.
“Simplification may be, according to the commissioner, a better route rather than adding ‘an extra layer of legal complexity to an already complex regulatory regime’,” Mr Frydenberg concluded.
We hope that the government will consider the potential ramifications of changing broker remuneration, as highlighted in the Consumer Access to Mortgages Report.
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.
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