24 Feb A world without mortgage brokers – Anna Porter
The property market has been through worse than the fallout from the Banking Royal Commission but always survives. The findings will create collateral damage on the market but a broad impact won’t be felt. Anna Porter has been looking at the fallout.
Kevin: Well, the Royal Commission into the banking industry has certainly caused a bit of a stir. And now that the final reports are out, I wonder what the wash up is going to be. What’s going to happen in the end? We’re already hearing about the impact on the brokerage market. Joining me to talk more about this, Anna Porter. And Anna is from Suburbanite. Anna, welcome to the show and thanks for your time.
Anna: You’re welcome. Thanks for having me.
Kevin: Yeah, there’s a lot to talk about in this subject, but take me through briefly what you see as being some of the fallout here from this. How’s it going to impact the industry overall?
Anna: Yeah, so I think the thing that’s really important to remember is the banking Royal Commission is not actually about property. It is about banking. Property would be seen as potentially collateral damage in this. So it will change how people fundamentally interact with property. In most cases, people need to borrow money to secure property, in a lot of instances. So that is going to change a bit. But I want to give some context on this to what happened in the history of property. We’ve had governments playing with different incentives, and fiddling with different schemes around property for decades and decades. The first home buyers scheme, international investors, a number of things where will give and take money off the table, to the tune of tens of thousands of dollars. When the stamp duty incentives and concessions came about, this was tens of thousands of dollars that first home buyers can save when buying a property. And then on the other side of it, they lost it at certain times, and it’d come and go state by state. Even new building in new estates.
Anna: Developers offer $50,000 on Amex cards, or a free car, or free holiday with house and land packages. So, it’s not a new thing to have the property market having incentives taken and removed. And when they see … Even the GFC when that happened, the property market was very quick to forget. And very forgiving. There’s a little bit of an uproar about it for a few months where people say, oh, this is changing, or the market is going to be hit. At the end of the day, the broader market does forget and forgive really quickly. So, there are going to be some fundamental changes to the banking and broking industry well into the future. And it is very, very significant. But the property market, I think will be very quick to forgive what’s happening now, and in five years time be very quick to forget.
Kevin: Yeah. Whether it forgives or forgets, it’s really a matter of adapting, isn’t it? I mean, we adapt, we still need property, we still need places to live. But I guess the ramifications for some of the aligned industries, like brokers as an example.
Kevin: Taking away, or removing the trial commission is, I would think, going to take a lot of brokers out of the market. Well, what impact do you think that will have where obviously consumers will have to go more directly with the banks?
Anna: Yeah. And look, I completely agree with you there. We’re already seeing brokers leaving the industry. Now, the last six months we’ve already had a number of brokers approach us as a business and say, can I do what you do, because our industry is really, really challenging at the moment, and will continue to be. So, that’s only going to be a bigger problem. Who’s going to win and who’s going to lose out of this? So, I think the rich are going to get richer. And the moms and dads, the everyday mums and dads are really going to struggle with these changes. So what will-
Kevin: Can I stop you there just for a moment?
Kevin: Can you explain to me why you think the rich will get richer?
Anna: Yeah. So, what’s looking at changing is the trail commissions are going to potentially disappear, and potentially even down the track, the up front commissions are going to becoming a user pay system is where this is heading. Like the Netherlands system, which was referenced a lot through these findings. So what that means is that mums and dads, when they go to get a loan, traditionally have gone to a broker who shops around their choices, their options, and they haven’t had to pay that broker for any advice, it comes from the bank. And they’ll get a lot of choice. And they’ll structure up better deals with better repayment structures and lower interest rates. What will happen is if there is a lack of brokers in the industry, or it becomes a user pay system. Mums and dads will then have to go into their bank, and they’ll walk into say a Westpac, or a Commbank, or whichever one of the big banks cities. They won’t have the ability to shop around and get as much choice in a quick, easy, accessible time frame. So they won’t be able to do as much research.
Anna: And they’ll be paying higher rates, or higher repayments, or not as quality structures, because they won’t get to play banks against each other. And now on top of that, if it’s a user pay system, fewer and fewer of the average Australians will get the advice because they won’t want to pay for it. So the wealthy people in the market at the moment, the higher end sort of capacity buyers will have the financial planners, will have the mortgage brokers, will have all those advisors on their team because they can afford it. They can access it. And they don’t mind paying for the advice because they’ve got capacity. But the everyday Australians won’t pay for that advice, and won’t have as good access to it. They will be the ones that will lose out here. And they will be the ones that won’t get the quality advice that they really need.
Kevin: Because we’re talking here about brokers. But what about the comparison sites? Where you can go on and compare interest rates across banks. I mean, they work in the same way off referrals. I would imagine that they’re also going to have to struggle, or we’ll have to start paying for that advice.
Anna: Yes. And there’s a few other ways those platforms could potentially evolve and use advertising and things like that to sort of support their subscription base and things like that to still give the advice. But get renumerated in a different way. And there are some DIY loan platforms. They’re an emerging trend. You go online and you do the whole loan process on your own online. Our experience working with the buyers through that journey is typically they’re not done very well. And mums and dads don’t really understand the process. So when they go DIY with it, there’s usually a lot of stumbling blocks, a lot of milestones that don’t get met in the timeframe they need to, and it becomes a real disaster in a lot of instances that we’ve experienced. So that’s a big problem.
Kevin: What will happen with the companies like Aussie Home Loans, as an example? I know they are a lender as well, but they’ve really built their business on the back of these referrals from banks.
Anna: Yeah. Look, the broker industry is a huge part of the industry, and there is talk that that will cease to exist if we do fully transition into the Netherlands type arrangement where there is an upfront fee at the bank, and an up front fee at the broker broker end. Even worse than that would be an upfront fee at the broker end for the consumer, and no upfront fee at the bank. So you can imagine, I go to a broker and I pay two or three or $4,000, or I go to the bank and I pay nothing. A lot of people will go to the bank. So it really does make it a very hard industry to be renumerated and renumerated well. Look, it does … There’s two sides of this argument. There is the side of the argument that if the upfront fees are kept, or a fee for service, whichever that looks like when the trails are gone, that will bring mortgage brokers in line with most other business models.
Anna: Most other businesses, the mechanic, or the restaurant, or the glass company, they don’t get paid a trail for the life of the product. They get paid an upfront fee, and is transactional, and they have to do a really good job to get the next client through the door. So, that’s one argument. The other argument is that for the industry that’s been renumerated this way so long, consumers won’t adapt to that quickly, and the transition’s going to be the problem. And will the brokers make it through the transition as an industry? It’s a really big question mark. And I think we’ll start to see a number of brokers already starting to look for roles inside banks. And the banks will have to look at putting their mobile teams together, and making that a really strong offering.
Anna: Because at the moment the unfortunate thing with a lot of the big banks is the service is not good enough. The mums and dads will lose that service that they get with the brokers, where brokers have to provide great service to get clients. Whereas a big bank, unfortunately the service when it comes to the lending side of things is a bit below par.
Kevin: Wow. Yeah. Interesting, Anna. Thank you very much for your insight there. I know you’ve looked at that in some depth. Anna is from suburbanite.com.au. One thing that’s constant, and that is change, Anna. So, I’ll leave you with that thought. And thanks very much for your time.
Anna: You’re welcome.