(and what the Royal Commission means for you)
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was established on 14 December 2017. Following the enquiry, Commissioner Hayne is submitting an interim report in September 2018, and this will be followed by a final report in February 2019.
The industry will undergo reform, and the winners will be those who put ethics over outcomes. Shonky operators will probably get found out, and pushed out.
In the first round of hearings mortgage brokers were in the spotlight. The hot topic was ‘living expenses’, and cases of relying on HEM (the Household Expenditure Measure – a measure for ‘average’ expenditure levels) as a means for calculating expense habits.
Brokers had no representation at the hearings, so we were an easy target. In reality the banks are equally at fault here . . . instances of the same malpractice were found via the ‘direct’ channel, and the banks are the ones responsible for assessing and approving broker originated loans, too.
So what does all this mean for you? Should you still use a broker, and how will the finance and property markets be affected? These are the questions I’ve set out to answer today.
Should you still use a broker?
Yes, the majority of consumers (>55%) choose brokers as their preferred method for obtaining a mortgage now [1]. There is no reason this should change.
The reasons for our growing popularity are choice, service/expertise and relationship, as well as the fact that all this comes at no cost to our clients (we get paid by the banks, at no cost to our clients) – I have written a detailed piece on this, you can read it here.
It’s possible that we get paid differently in the future – a flat ‘fee for service’, rather than the current system of upfront and trailing commissions linked to loan size – however I’m opposed to this because it will just mean the banks make more money (at the expense of brokers), which is anti-competitive. Lessening competition is detrimental to consumer outcomes, which I explain in the section below.
Brokers should make recommendations purely based on responsible lending, and good consumer outcomes, not just maximum borrowing capacity, which theoretically makes them more money. This is the key to creating positive client experiences, which drive word of mouth referrals, our main source of new business.
It’s becoming increasingly difficult for borrowers to obtain finance they can’t safely afford now, anyway. Most banks are continuing to tighten policies. For example they are acknowledging less income, and they are running serviceability calculations on assessment rates of 7.25%, even although borrowers may actually only be paying 3.5-4.5% interest. These measures help to ensure that borrowers will be able to continue making mortgage repayments, even if rates were to rise substantially.
What changes should you expect?
At the very least, effective immediately, expect a higher level of scrutiny around living expenses. This will make it harder to demonstrate serviceability, and therefore harder to obtain finance.
Just last week Westpac and Bank of Melbourne announced changes where the number of living expense categories assessed will increase, and they will now require that borrowers produce more documentation to support their stated outgoings and debts.
Another change is that brokers will start being reviewed more on quality rather than on quantity metrics.
For example aggregators and banks will start paying more attention to the quality of broker application submissions, and also customer satisfaction feedback, rather than just on the number and dollar value of their loans written.
In the majority of cases this should result in more responsible lending, which everyone benefits from . . . even those who can no longer get a loan, or at least the same size loan. So I am supportive.
To the extent brokers start getting paid less, hopefully the good operators remain in the industry, and with less income/resources, they can continue delivering improved levels of service.
Failing this, the major banks will increase market share via their ‘direct’ channels, and non-major banks will suffer from weaker distribution. Less clients will benefit from the choice, service and relationships brokers provide.
We should hope competition isn’t diluted under the guise of regulatory reform.
What does it mean for the housing market?
To the extent house prices are dictated by the supply/demand of credit (which enables people to buy houses), rather than the supply/demand of housing itself, my personal view is that the abovementioned changes will absolutely impact house prices.
One shouldn’t generalise here, as there are many different housing markets around Australia, and there are also many sub-markets within markets, but all else equal, slower credit growth should in theory result in there being softer house price growth in the next phase of our cycle.
For many parts of Melbourne and Sydney, where price growth has boomed over the last five years, this isn’t a bad thing. That type of growth wasn’t sustainable, and it could have hurt a lot of people, if left untamed. I’m certainly not predicting a crash though. My personal view is that the likelihood of a crash is very remote.
In the next phase of the property cycle it will become increasingly important to buy better quality assets, in better areas, ones more likely to outperform the averages. It will also become increasingly important to finance these purchases sensibly and correctly, because the stakes are high now (property is expensive), and a turning cycle implies higher risk.
So what’s the moral of the story?
Brokers/bankers – do the right thing. Never compromise on this, even if the banks make it harder to service your clients.
Homebuyers and property investors – spend time educating yourself. Buy appreciating assets and finance them sensibly. To obtain finance deal with whomever you believe can deliver more choice, more expertise, a better experience, and a superior outcome.
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[1] “How High Could Brokers’ Market Share Go”, Mortgage Professional Australia, https://www.mpamagazine.com.au/sections/market-talk/how-high-could-brokers-market-share-go-243827.aspx (accessed March 28, 2018)
