“I have kids”: Mortgage brokers could lose 75% of income as royal commission reality sets in

mortgage brokers

Independent mortgage brokers say they will be driven out of business by an impending overhaul of their industry sparked by banking royal commission recommendations.

Andrew Vaughan, an independent broker operating in Manly, Sydney, tells SmartCompany he will lose about 75% of his income if trail and up-front commissions are abolished in the coming years, as commissioner Kenneth Hayne has advised.

“I run a very successful business, but I can tell you right now if they get rid of our commissions I will absolutely be out the door in two seconds,” he says.

“It defies all logic.”

The royal commission has advised major changes to revenue model for the industry recommending borrowers, rather than lenders such as banks, pay brokers to address concerns about perverse incentives.

Hayne recommended the changes be implemented over two-to-three years, first with the abolishment of trail commissions, and then up-front commissions.

But independent brokers say they’ll be much worse off under a borrower-pays model where consumers fork out an estimated $2000 in fees upfront.

Vaughan, who was listed as one of MBA’s top 100 brokers in 2017, closing $72 million in residential loans, is a sole operator making an average of $5,000 in upfront commission and about the same in trail commissions over the life of a loan.

“They’re talking about 75 per cent of my income … if they get rid of trail, I don’t think it will necessarily mean the end of the mortgage broking industry, but as far as getting rid of upfront commissions, that’s absolutely the end of the industry,” Vaughan says.

Another small-business broker who asked not to be named over fear of commercial reprisal from the banks says mortgage brokers were becoming a political football ahead of the next election.

Labor has said it will implement all of the royal commission’s recommendations, including those related to broking, while the coalition has agreed to ban trail commissions but not up-front fees.

“The royal commission lost focus on its principal aim: to deal with the banks,” the broker says.

“I’m a one-man shop, I have kids, I have a mortgage.”

Mortgage broking is a $2 billion industry in Australia, according to IBISWorld data, with brokers working on the majority of home-loan deals signed in the market.

Peter White, managing director of the Finance Brokers Association of Australia (FBAA), claims the overhaul could “destroy” as many as 20,000 small businesses across the country.

The FBAA, who claimed mortgage brokers were sleeping easy ahead of the report being released earlier this week, now describes the report as “crazy”.

Mortgage brokers provide competition and choice, and give borrowers lending options that most people are just not aware of, and these options enable borrowers to get better outcomes,” he said in a statement.

The independence of mortgage brokers came under the spotlight during the royal commission, following earlier Productivity Commission concerns things such as trail fees were compromising brokers ability to deliver consumers with the best mortgage outcomes.

“In home loan markets, the mortgage brokers who once revitalised price competition and revolutionised product delivery have become part of the banking establishment. Fees and trail commissions have no evident link to customer best interests. Conflicts of interest created by ownership are obvious but unaddressed,” the commission said last June.

Consumer group CHOICE has rejected the assertion from brokers the changes will reduce competition, driving consumers into the hands of the major banks, saying good brokers will be buoyed by reform.

“These changes to mortgage broking are really positive and good mortgage brokers who want the best for us [consumers] will be rewarded,” said Emily Turner, director of campaigns and communications at CHOICE.

NOW READ: Hayne balks at calls for SME-lending reform and deputises ASIC as code cop

NOW READ: Royal commission: Ombudsman disappointed with lack of scrutiny over banks “aggressive behaviour” toward SMEs

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Simon
Simon
1 year ago

Can we stop calling CHOICE a consumer group?

They don’t represent consumers, they represent their own commercial and financial interests. There is no issue with that, they are a business like any other and will advertise and market whatever will make them (and their sponsors) the most money – but they do NOT represent consumer interest.

Colin Spencer
Colin Spencer
1 year ago

Labor Party vs Commercial Enterprise. Be careful what you wish for. Ignorance of the outcome of pursuing those who make a profit from providing a service will be no excuse, when the enterprise has vanished. Who suffers most then? The consumer.

Michael Stapleton
Michael Stapleton
1 year ago

You know, if the service provided by Mortgage Brokers is as valuable as they claim then consumers will pay for it. If it is not valuable then consumers won’t pay for it.

Gotta love the capitalists who don’t understand capitalism.

Don’t you think a fee for service mortgage broking model would bring competition to that industry as well. That’s a good thing, right, for the consumer, right?

Reckon the smarter mortgage brokers are already working out how to change their business model…they’ll leave the complaining ones in the dust.

Grab the opportunity.

Marty McDonald
Marty McDonald
1 year ago

The cost to distribute mortgages is significant. The productivity commission noted without brokers lenders like ING and Suncorp etc would ALL have to open hundreds of branches each to retain current market shares. Brokers offer these smaller lenders a shopfront to sell their loans and process the loan applications neatly packaged up to be decisioned by the lenders. They act for lender in this regard and should be paid accordingly. The fee for service from the borrower is built into the cost of distribution. The current model works well. More supervision from ASIC and regular auditing of files to weed out fraud should have been the simple answer.

Rashid
Rashid
1 year ago

About time, the only people jumping up & down are mortgage brokers. 30 years trail commission for doing nothing ?! Doesn’t matter how you dress it up, trail commission is a rort.