Why I Use A Mortgage Broker

A few years ago, I considered setting up a mortgage broking business as part of the Suncow offer but the more I looked into it, the more I realised you can’t do both jobs well, so I stuck with planning.

And thank heavens I did.

Monday week ago, Justice Kenneth Hayne handed down his recommendations following the Banking Royal Commission and recommended mortgage brokers have their trail commissions removed.

Of the 76 recommendations handed down, this was by far the most nonsensical of all. Plain dumb would be a better description.

The purpose of this Moowsletter is to put a few things into perspective about mortgage broking and why I refer my clients to a broker and not a bank.

Sure, some people will read this as me trying to curry favour with a few colleagues and if that’s the case, then so be it. It certainly isn’t my intention.

The Two Big Disruptors
In the early nineties, Aussie Home Loans and later on, Wizard Home Loans, totally disrupted the home lending market long before ‘disruption’ became the over-used buzz word it is today.

Home buyers were craving for an alternative to the Big Four banks because they were tired of being touched up with extra fees and ripped off with shoddy service.

Jump forward to today and such is the popularity of mortgage brokers that, 60% of all mortgages (home and investment loans) are written by brokers. Not the banks.

There are approximately 17,000 brokers in Australia at present, most of whom are self-employed.

The average pre-tax income of a mortgage broker is $80,000 pa, a few dollars shy of the national average wage.

Trail Commissions
Trail commissions for mortgage brokers have in my opinion, got a bad wrap for the wrong reasons.

The reason the banks introduced ‘trails’ way back when was to prevent ‘churning’ because it was costing them a fortune. Originally, brokers used to get paid up front but now they get some money up front and a trail to smooth out their remuneration and prevent loan churn.

Trails and the prevention of loan churn has been good for both brokers and their clients.

And in case you’re wondering, this is how a broker gets paid…

Suppose John and Jenny borrow $500,000 to buy a home. The broker gets 0.6% ($3,000) when the buyer settles and then 0.15% ($750) in trail for each year the loan is alive, which is an average of 4-5 years.

Therefore, the broker will earn an average of $6,000 – $6,750 per loan.

And if that figure sounds juicy, consider this…

Life on the Road
Firstly, most clients expect you to visit them in their home outside business hours, cost free.

Secondly, on average, a broker needs to sit in front of 10 prospective clients to close 2. And on average, a broker can easily spend 3-5 hours per enquiry collecting and collating the requisite information just to do a ‘pre-approval’.

And then out of those pre-approvals, the broker will hope like hell the client elects to go with him or her and not use the pre-approval as a ‘negotiating’ tool with their preferred bank. Which is often.

And then, if the client does choose to get their loan through the broker, the broker doesn’t get paid until settlement…and sometimes that can be months, or even years if someone is buying off the plan.

Put simply, a broker can very easily do a heap of work for no return. No wage, no salary, nothing. They live on a diet of rejection and disappointment.

And if you do have an existing business, like Financial Planning, it’s a massive time suck and a huge distraction from what you do best.

Why I Use A Mortgage Broker
At Suncow, we believe there are two types of advisers – Butchers and Dietitians.

A butcher will sell you whatever he has on offer (banks), while the dietitian will recommend what’s best for you (independent advisers and brokers). In other words, the butcher has a bias and the dietitian doesn’t.

And its because of the butchers in our industry that we were forced into a Banking Royal Commission last year.

Here’s why…

For the past decade or so, the banks have maximised their profits by creating their own factories of financial products (investments and insurance) and then flogging them down the channels through their branches. It’s a process known as Vertical Integration.

Worst of all, bank staff have been incentivised to sell their own products at the exclusion of all else and regardless of the clients best interests (butchers). This has made their financial advice biased and conflicted with self-serving interests.

Take my word. The wrecking ball in our industry has not been commissions. It’s been the dark art of vertical integration (mostly by the banks including AMP, et.al.) and the use of incentives to drive self serving behaviours.

But here’s the worst bit of all.

Last Monday, Justice Hayne was sitting in the box seat where he could have easily ripped the asbestos out of our industry and got rid of ‘vertical integration’ once and for all. Even the banks were expecting it.

Instead, he faltered.

His recommendation to abolish brokers trails was just a cheap shot at an easy target. Removing trails will do nothing but send brokers out of business, kill off competition and send 60% of the market back to the banks only to give them more power. The worst outcome of all.

Justice Hayne completely missed the elephant in the room. Not because he couldn’t see it, he just didn’t have the ticker to take aim and pull the trigger.

And testament to his recommendations, the day after he handed them down the banks share prices immediately took off towards the stratosphere. The bankers laughed themselves hoarse all the way back to their banks.

Royal Commissions are like speeding cameras, everyone slows down until they get to the other side and then they fang it again.

This Royal Commission was no different. It was just a two-bit dog and pony show. Everything I expected.

It did nothing to remove vertical integration and protect consumers from blatant institutional bias and endless conflicts of interest devoid of transparency.

And that’s why I use a mortgage broker. I want to work with a dietitian.

I have zero interest in sending my clients to a butcher.

Have a great weekend!

Adam