That Churning Feeling ...
Sydney Morning Herald
Wednesday July 24, 2002
When your broker recommends a loan, check exactly who will benefit most. John Collett reports.
Home loan products have been radically overhauled since deregulation, but the benefits have brought with them greater complexity, forcing people to resort to mortgage brokers to help cut through the maze.
Between 20 and 30 per cent of all new loans are written by mortgage brokers and most would agree that figure is growing.
But what borrowers need to know is that lenders pay two types of commissions to brokers for selling their home loans.
There is an upfront commission of between 0.5 and 0.8 per cent (or between $1500 and $2400 on a loan of $300,000) and an ongoing or trail commission of between 0.1 and 0.3 per cent a year on the outstanding balance of the loan.
Recently, questions have been raised about mortgage brokers' independence and whether they are ``churning" their clients from loan to loan to maximise the commissions. Borrowers need to be alert to possible churning, Bill Rankin, the lending director with mortgage broker Smartline, says.
With the interest rate gap narrowing between the big banks and new lenders in recent years there is not as strong a reason to refinance as there was a few years ago.
``It is very difficult these days to benefit by simply refinancing because of the fees involved, and there is certainly no benefit in refinancing a fixed loan because of the break costs," says Rankin.
The mortgage broking industry is largely unregulated and for this reason borrowers are advised to use only brokers who are members of the Mortgage Industry Association of Australasia.
The good news is that closer supervision is on the way, with the Australian Securities and Investments Commission asking the Consumer Credit Legal Centre to complete a report on the industry.
Meanwhile, be alert to adverse steering where a broker points you in the direction of products with higher commissions.
One way to approach this is to ask the broker outright what commissions he is getting on the individual products and why he or she suggests one product over another.
Your Mortgage Magazine's editor, Eddy McCall, says smaller mortgage brokers tend to have fewer lenders on their menu, which means a limited choice for the client. This suggests the borrower may be missing out on some of the best deals.
Most of the big brokers have 20 or more lenders on their menus, but 12 lenders probably gives sufficient spread, Rankin says.
For professional packages in particular, borrowers should be aware that some lenders have two different versions one for sale through brokers only and the other for sale through the branch network.
The difference lies largely in the eligibility criteria. For instance, the Commonwealth Bank's Gold Privilege Program, available through the bank's branch network, is open to members of specified professions and the minimum loan size is $75,000.
The CBA/Colonial Mortgage Advantage package, available only through brokers, has no professional criteria, but the borrowing minimum is at least $250,000.
NAB's National Choice Program, available only through branch networks, requires owner-occupiers to be earning at least $75,000 a year.
On the other hand, NAB's HomeSide Lending HomePlus product, available through brokers, requires borrowers to be earning at least $60,000 a year with a minimum loan size of $120,000.
Most important, McCall says, is the fact that some of the cheapest loans won't appear on any of the brokers' menus because the lenders providing those loans cannot afford commissions on such low-priced loans.
For example, RESI Mortgage Corporation does not pay commissions. Its Complete Home Loan, which has an interest rate of 5.75 per cent, is not sold through brokers.
McCall says brokers can be worthwhile, especially for those less experienced in the home loan market, but investors using a broker need to go in with their eyes wide open.
© 2002 Sydney Morning Herald
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