Kevin talks to Michael Lee, founder of flongle.com.au, about getting the best rate on your mortgage finance.
Kevin: One lender in particular, Commonwealth Bank, has raised its commission rates for brokers as the mortgage market heats up. A consumer survey, which was commissioned by a new mortgage contest website called Flongle.com.au, has revealed that despite significant variances in financial incentives being paid to brokers to sell Australians into their home loan, more than eight out of ten (about 86%) of Australians have no idea how much money brokers stand to make from advising them on their home loans.
I mentioned that research was done by a website called Flongle.com.au. The founder joins me, Michael Lee. Hi, Michael. Thanks for your time.
Michael: Good day, Kevin. Thanks for having me.
Kevin: Was that a surprise to you, Michael?
Michael: Yeah, I think it was. And in some ways, it isn’t. I think that if people really understood the way the industry worked, they’d perhaps be a little bit more cynical. An interesting thing has happened over time, Kevin. If we go back to ten years ago (2004), I think people were really cynical about how mortgage brokers earn their crust, because there’s a lot of focus on that stuff. It’s not such a focus anymore. People are just maybe looking for easy, quick answers, not necessarily think about it.
Kevin: Michael, tell me about the research. How many people did you talk to and where did you get them from?
Michael: It was an online survey done sourced through an independent survey group. In total, there were 1,464 respondents, so it’s not entirely tiny. They all had a mortgage or had taken a mortgage fairly recently in terms of the parameters of our scope. They had either gone directly to a lender or via mortgage brokers or used comparison websites. We’re looking right across that spectrum.
Kevin: It goes on to say that 24% of mortgage holders who used a broker were not even aware that a broker earned commission at all, but I understood it was meant to be disclosed.
Michael: Yes. I think that’s the challenge with this. The more you disclose, the more confusing it becomes. Let’s remember why people get mortgage brokers in the first place: to simplify it.
What happens is the consumer hands the decision over to the broker as a person of trust, and then the disclosure papers are really sign here, sign here, sign here. If you’ve ever taken a mortgage yourself, Kevin, you’ll know that the process is pretty paper-laden, even in this day in age, so it’s very easy to miss a single line in terms of disclosure. There’s no requirement to say, “Here it is, folks. This is how much money I’m making.”
Kevin: I guess any borrower, when they’re wanting to borrow, will tend to overlook lots of things because of the need to have the money to do whatever it is they want to do. They will overlook things.
Michael: I think that’s a fair comment. I think that’s more so when a person’s going through the process for the first time. It is a bit of a confusing and overwhelming process the first time around, which means that you’re looking for lots of different answers. The ultimate answer, though, is yes you can have the loan, so I can go and buy that investment property or my home.
This is one of the classic things about this: the purchase of your property and the loan that underpins that, which really is usually much larger in terms of costs on the property itself in the first place.
Kevin: Just to give us a bit of an idea about how big this is around Australia, how much commission is actually paid to brokers?
Michael: The disclosed commission that we can see, according to an IBISWorld report is $2.1 billion a year. That’s excluding the commissions that are paid to the lender staff themselves. So under the regulation, while the brokers are required to make commission disclosures, if they actually work for the lender – if they’re branch staff that are getting bonus incentives or anything along those lines – they don’t have to be disclosed. So there’s a bit of a black box there on those numbers.
But mortgage brokers themselves are $2.1 billion.
Kevin: Typically, how are they paid, Michael?
Michael: What you’ll see if you go to any of the big broker websites is brokers work for free because they are paid a commission. I think that’s one of those confusing points for people. What happens is they get an up-front commission, which happens as a percentage of the loan balance or draw-down at settlement.
Within six weeks or so of your loan getting done a big cheque will go back to the mortgage broker business. Typically, that’s somewhere around .6 or .7%, which if you put it across a $400,000, you’re talking a few thousand dollars. But the one that everybody often misses is that every month after that, the broker is also getting what’s called a trailing commission. It happens for the life of the loan. It means that, if you’re talking around that $300,000 or $400,000 loan mark, the initial commission might seem like $3000, but within five years, it’s probably $7,000 or $8,000 or even $9,000 and continues to accumulate.
Kevin: We’re just about out of time, but there are a couple other important points I do want to cover. How does Flongle work and how do you actually earn any income?
Michael: A really good question. Flongle is fully independent. In other words, it does work for the consumer. In the whole transaction, we keep our hands clean. That is, there’s a relatively small fee: $389. The website does its bit. We also have human help that works all the way through, so there are no kickbacks in the system at all. That’s the only way we make money.
Lenders and brokers are free to bid on the business free, which means the most competitive businesses are in there doing their best because they don’t have to pay to rank.
Kevin: So it’s a competition site, really, where people are bidding to get business?
Michael: Absolutely. It’s more than that, though. We call it a mortgage contest, but the first prerequisite is that same thing that people want to know. “Can I get the loan?” Yes. “Does it actually do what I want it to do?”
Once we satisfy those criteria, and we use a thing called Smart Match to do that – the software does it all for us – we then get down to talking about pricing. But there are pricing concessions in there. There are deals that are not being advertised. I don’t have the exact stat, but somewhere in the vicinity of 75-80% of the deals that are coming into Flongle right now are discounted on what you’ll see in the retail space today.
Kevin: Just to make it clear, you’re not out to do brokers out of business. As I understand it, you’re here to highlight which are the good brokers.
Michael: Yeah. The most competitive lenders and brokers. What this does is bring together good borrowers with good lenders or good brokers. That’s what Flongle does.
Kevin: Excellent. The website, check it out for yourself. It’s Flongle.com.au. My guest has been the founder, Michael Lee. Thanks for your time, Michael.
Michael: Thanks for having me, Kevin.